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Climate Risks Push Banks Into a Race Against Their Regulators

Yalman Onaran

(Bloomberg) -- Big banks know they’ve got limited time to figure out how to account for the growing risk of climate change -- before regulators do it for them.

A network of 54 central banks and industry supervisors formed in 2017 is looking for ways to develop a new framework for climate risk management in the financial sector. Many of the group’s members are also on the Basel Committee on Banking Supervision, which sets global capital requirements.

“Corporations can’t wait for regulators to do something. We have to get there first,” Piyush Agrawal, chief operating officer of Citigroup Inc.’s U.S. banking unit, said at a panel discussion in New York on Thursday.

In their first report last April, the central banks recommended regulators monitor climate risks as part of financial-stability assessments and improve data collection and corporate disclosures. While those recommendations are non-binding, other international bodies might move toward new requirements for banks, according to Madelyn Antoncic, a former executive at Lehman Brothers Holdings Inc. who was treasurer of the World Bank from 2011 to 2015.

The Basel committee could conceivably impose higher risk weightings for loans to companies that harm the environment or give capital relief to banks for green lending, she said. The U.S. Federal Reserve will probably join the climate risk network soon, Fed Chairman Jerome Powell said Wednesday.

“The public has every right to expect, and will expect, that we will assure that the financial system is resilient and robust against the risks of climate change,” Powell said.

Antoncic and Agrawal participated in the panel discussion organized by the Global Association of Risk Professionals, a trade group that earlier this month said it would start offering a sustainability and climate risk certificate to industry executives. It would be awarded after specialized training and an exam, just like the group’s certificates for financial risk managers and energy risk professionals.

Mispricing Risk

Analysis of climate change in the banking industry typically revolves around two main issues: the risk of climate-related disasters causing losses for financial firms, and the difficulty of incorporating environmental concerns into business decisions, such as lending.

“It’s all about mispricing of assets and mispricing of investments,” said Ryan Bohn, co-head of Americas climate risk advice at Ernst & Young LLP. “We need to incorporate green issues into these prices.”

Several panelists complained that there wasn’t enough data to properly price either. Agrawal said climate predictions vary so widely it’s impossible to use them in financial risk models. The potential outcomes range from capital being entirely wiped out to no impact on capital at all, he said.

Rating clients based on their environmental records is likewise tricky, in part because of the “green-washing” many companies employ, said Ken Abbott, a former chief risk officer for Barclays Plc.’s U.S. unit. There still aren’t reliable yardsticks to measure companies’ or countries’ green credentials, he said.

“China is the biggest user of electric cars, but also the biggest producer of electricity from coal,” Antoncic said. “And to mine the rare earths to make the electric-car batteries, they’re polluting and wasting water terribly. There’s too much pretending to be green while polluting the environment out there.”

The risk professionals’ group recently surveyed financial firms about their views on climate risk. While more than 80% of respondents said their companies had identified climate-related risks and opportunities, only 15% felt their strategy was resilient to further climate change.

“Everybody’s talking about it, but we’re not there yet” when it comes to incorporating climate risk into risk models or valuations, said Christopher Donohue, a managing director at the risk-professionals association.

Because everybody is paying attention to the subject, climate scientists will probably be the next group of people to be hired by banks, Citigroup’s Agrawal said.

“You can’t make sudden shifts in strategy when you think about such big issues,” he said. “Change will come, but slowly. It’s a long-term journey with many variables.”

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, Daniel Taub

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