Climate Change: Success starts from the top
The Task-Force for Climate-Related Financial Disclosures (TCFD) has fast become the global standard for reporting climate-related risk and opportunities.
As the UK looks to ‘build back better’ from the Covid-19 pandemic and regulators strengthen their position on tackling the devastating impacts of climate change, banks can use the TCFD framework to underpin their response and drive the transition to a low-carbon economy. As critical agents in the allocation of capital in the economy, banks are positioned to play a pivotal role in directing the trillions of funds required to meet environmental goals.
In March, BCS Consulting released our second Global Progress Report for the banking sector to assess the trends and level of maturity of TCFD disclosures made by banks to date. We will be publishing a series of blog posts covering our main findings and recommendations across all four pillars of the framework: Governance, Strategy, Risk Management, Metrics and Targets.
This first post will explore our analysis of climate governance and how banks can improve their response to the TCFD’s two recommended disclosures to ‘Disclose the organisation’s governance around climate-related risks and opportunities’:
- Describe the board’s oversight and consideration of climate-related risks and opportunities
- Describe management’s role in assessing and managing climate-related risks and opportunities
How are banks doing?
Encouragingly, the maturity of reporting on ‘board oversight’ and ‘management’s role’ has substantially increased since 2019, with 76% and 74%, respectively, of disclosing firms in the advanced and intermediate stages (see figure 1 and 2).
Figure 1: Describe the board’s oversight and consideration of climate-related risks and opportunities
Figure 2: Describe management’s role in assessing and managing climate-related risks and opportunities
For UK-regulated banks, the maturity of Governance disclosures has been supported by the requirement to comply with the PRA’s Supervisory Statement 3/19: banks were required to assign responsibility for managing the risks arising from climate change to an appropriate Senior Management Function (SMF) under the Senior Managers Regime (SMR) by October 2019.
In response to this, we have seen banks disclose key responsibilities across the first and second line of defence in relation to the management of climate risk, and formal senior management responsibility typically being assigned to the Chief Risk Officer or Chief Financial Officer.
Additionally, we see that banks frequently include organisational charts to show the interaction between committees and their specific responsibilities, detail the frequency of meetings, and provide descriptions of activities carried out such as reviews of climate strategy implementation progress, climate risk portfolio analysis, external engagement initiatives, and environmental policies.
Beyond embedding board oversight and executive engagement, disclosures demonstrating best practice reference how sustainability targets are linked to compensation, detail training undertaken by the board and executives and outline their sustainability and climate expertise to support climate change oversight.
A key challenge in developing governance disclosures is the lack of rich guidance available on minimum board expectations in relation to climate risk. Further industry guidance and emerging climate risk regulatory requirements will be important to formalise board engagement expectations across the sector, ensuring they are proportionate to the materiality of the risks identified. However, UK-regulated banks that are lagging in their development of climate governance will need to act fast given the PRA’s expectations to “embed the consideration of the financial risks from climate change in their governance arrangements” by end-2021.
How can banks reach the next level?
Institutions that are starting to implement the TCFD recommendations should focus on setting the ‘tone from the top’, by placing an emphasis on board engagement, setting clearly defined governance structures, and building expertise of senior executives.
|Clearly define governance structures for management and escalation of climate-related matters.||Conduct a review of existing risk management governance framework to establish how best to embed climate risk management in the firm.|
|Describe the key executive responsibilities in relation to climate management and provide evidence of key decisions and actions taken.||Establish an accountable executive for climate risk, define associated responsibilities, and document decisions through appropriate governance forums.|
|Conduct training for the board and senior management (executives) on climate-related issues to increase knowledge and set the agenda for the organisation to implement capability effectively||Identify knowledge gaps, introduce appropriate training for key senior stakeholders, and measure progress of roll-out.|
Institutions that have already started to embed TCFD, can focus on aligning incentives to climate performance, building board-level climate expertise, and providing more specific examples in disclosures to help shape industry norms and bring further clarity across the industry.
|Reference examples of the climate-related metrics and targets that are being reviewed by the board and senior management.||Include in disclosures examples of dashboards that are used in risk monitoring processes and governance forums.|
|Review remuneration policies of the board and senior management to incorporate management of climate-related issues – and disclose how this is administered.||Link performance against climate-related objectives to the variable remuneration of executives and board. Disclose how performance objectives account for climate.|
|Drive climate strategy by cultivating climate expertise among board members through upskilling, career progression, and recruitment.||Define minimum board training requirements, implement extensive training for board members, and consider setting a target for the proportion of the board with climate expertise.|
Disclosure of climate risk governance under TCFD is improving, but there is still significant room for enhancement across the industry.
Our recommendations provide banks with practical next steps to implement climate governance as outlined by the TCFD based on their current level of maturity. With PRA expectations for the end of the year in mind, demonstrating these steps would support organisations’ response (see PRA Dear CEO letter: Managing climate-related financial risks).
Ultimately, as banks continue to implement their response to the climate emergency (shaping strategy, strengthening risk management, setting smart metrics and targets), the board and senior management need to be bought in and leading the charge.
Bold and swift action is necessary to foster a resilient financial system and develop the transition to a low-carbon economy.
This must start from the top.
For further information on Governance, Risk Management, Strategy and Metrics and Targets disclosure findings, best practice and recommendations please see our full report.
 Assessment of market coverage and maturity analysis conducted for banks endorsing as of June 5th, 2020 based on disclosures made as of December 30th, 2020. Assessment of industry best practice examples conducted for banks reporting as of December 30th, 2020.
 See annex d. of the full report for report methodology, including definitions of assessment stages.
 See page 37. Of the full report for examples
 PRA Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’.