Many banks yet to set Net Zero targets despite needing to embed climate risk into strategy

Most banks and building societies (94%) say they are on track to meet or beat the end of 2021 deadline for embedding their climate risk programmes, according to a survey conducted by PwC UK this summer. 71% of respondents stated that climate risk is already embedded in the firm’s long-term corporate strategy. In addition, 70% report to be in the process of defining metrics to quantify their exposure to climate risk.

However, just 29% of UK banks and building societies have set a science based or net zero climate target.

The survey, which investigated the preparedness of 17 PRA (Prudential Regulation Authority) regulated banks and building societies of varying sizes, sought to understand how firms were progressing in implementing climate risk plans and processes. The figures come ahead of the 2021 Bank of England climate risk stress test, which seeks to explore any gaps firms may have in their exposure to climate related risk.

The Biennial Exploratory Scenario (BES) will see the UK’s largest banks, as well as the financial system more broadly, tested against different climate scenarios to understand their likely exposure.
Jon Williams, partner, Sustainability & Climate Change, PwC UK said: “Despite the Covid-19 pandemic, firms and regulators are keen that the climate risk agenda continues to progress. Both the Bank of England and the Prudential Regulation Authority have clearly set out that climate change brings financial risks that need to be managed now.

“However, our survey shows that even though there remains a great willingness to address this issue, more needs to be done to turn this into feasible action. Respondents told us that a lack of data is a key challenge in correctly understanding the possible climate related risks and although it’s clear that respondents are looking ahead to develop a strategic approach to climate risk they first need to build the foundations, and time is running out.

“In recent years, we’ve seen firms make great strides in identifying and managing climate-related risks but there is still much to be done By working together with the regulators and their customers, banks and building societies can continue to make progress in a way that ultimately advances the overall goal of an orderly transition to a net zero future.”

All respondents indicated that gathering accurate, decision-useful data to inform their risk management activities was a critical challenge, and many have encountered difficulties in selecting and calculating the right metrics to monitor risk. In addition, nearly half of the firms surveyed are yet to translate initial analysis of their exposures into assessment of the risks created by climate change. These challenges have made it difficult to meet requirements in more complex areas of risk management, notably scenario analysis, which only half of the respondents to our survey have managed to undertake.

Moreover, our study suggests that there does not appear to be a noticeable correlation between maturity of programmes and the size and level of resources available to firms. Respondents of various sizes and resources were united by common difficulties in establishing the ‘building blocks’ of their programmes on which a more sophisticated framework can be developed.