Climate risk management

Actions for Risk and Compliance functions

Actions for Risk and Compliance functions

Climate risk management

TCFD guidance recommends that transition plans describe the risks that organisations face from the transition to a low-carbon economy. More broadly, investment managers are required to manage and disclose material risks, such as those which arise from climate change²⁵. As they do so, they should consider the different ways in which climate risk affects their asset classes and strategies, for example, across equity, debt, and real estate.

A credible transition plan will help investment managers with their work on climate risk management by reducing exposure to transition, liability, litigation, and reputational risks.

Investment managers can leverage their risk management frameworks to support the net zero transition. To do so, investment managers should ensure that their overall business strategy, transition strategy and risk management framework are aligned. The TCFD advises organisations to test the achievability of the transition plan and associated targets using multiple climate-related scenarios. Investment managers should look at multiple time horizons to understand how their business and the wider environment will evolve. They should then ensure that their risk appetite statement is consistent with their transition strategy.

Training on the transition plan and climate risks and the implications for products and the distribution chain will be necessary across the firm to help fill knowledge and skills gaps. Tailored training for specific teams may be helpful.

Box C: Example sources of climate risks for investment managers
Physical risks	Extreme weather events damage property or affect supply chain management leading to lower revenues and/or property values.
	Extreme weather events, global warming and changing weather patterns affect market and credit risk of investments, leading to changing client or fund demand.
	Extreme weather events, global warming and changing weather patterns affect economic growth, monetary policy, lifestyles, saving rates, or fund demand.
Transition risks	Business risks due, for example, to the investment manager not adapting sufficiently to changing stakeholder and/or investor preferences and expectations, or by adapting too quickly.
	Changes in Government policy, consumer preferences, or technology affecting market and credit risk of investments, leading to changing client or fund demand.
	Changes in Government policy, consumer preferences, or technology affecting economic growth, monetary policy, lifestyles, saving rates, or fund demand.
Liability, litigation, and reputational risks	Mandate breaches e.g., for investment strategies which promote or target climate characteristics.
	Failure to comply with climate regulations.
	Failure to meet transition plan targets or commitments within the required timeframe.
	“Greenwashing” of product or entity disclosures, either deliberately or inadvertently.
	Failure to meet the expectations of clients or stakeholders or potential for criticism from interest groups or NGOs.

Actions for Risk and/or Compliance

Support the business in identifying climate risks, including from the transition to a low-carbon economy, and in integrating climate risks into the risk management framework. Dashboards will need to track climate risk exposure and emissions across portfolios and firms’ own operations to assess progress against the transition plan.

Ensure the strategy on climate risk management is aligned with the transition plan outcomes and is consistent with the risk appetite statement (e.g., this might cover appetite to invest in certain markets, or concentration limits).

Support the business by providing oversight of climate-related scenario analysis and stress testing. Scenario analysis should be done both at the entity level (e.g., to test the achievability of the transition plan and associated targets) and the fund level (e.g., to evaluate how climate scenarios might affect the future value, income, or credit rating of investments).

Support the business in developing policies on where actions to integrate climate considerations into investment decision-making might represent a change to fund or mandate objectives and necessitate the relevant regulatory process.

Identify gaps in knowledge, skills and experience on climate change and related risks within Risk and Compliance and put in place a plan to address them, for example, through periodic training sessions. Risk and/or Compliance may also want (or need) to consult climate specialists where appropriate. Compliance should monitor completion of any mandatory training.

Engage with relevant industry groups to understand best practices in relation to climate risk management.