Climate-related disclosures banks must have in financial risk reports

Climate risk management is identifying, assessing, monitoring, managing, and reporting on climate and environmental risks by banks. PHOTO | POOL    

By AKINYEMI AWODUMILA More by this Author

Climate risk management is identifying, assessing, monitoring, managing, and reporting on climate and environmental risks by

banks, including evaluating their impact on the internal capital adequacy assessment (ICAAP) process to develop mitigation strategies.

In practice, banks evaluate the impact of physical and transition climate-related risks on financial risks such as credit risk, liquidity risk, market risk, among others.

In addition, banks are required to redesign their loan origination and monitoring processes to incorporate ESG (environment, social, and governance) risks in the various loan processing stages, such as loan application, credit evaluation, collateral valuation and assessment, pricing, approval, monitoring, reporting, recovery, and account closure.

Another critical step is for banks to perform environmental scenario analysis and regular stress testing on their loan portfolio to monitor and manage the impact of climate risk on their loan portfolio for credit, liquidity, and capital adequacy risks.

Climate stress testing also considers the impact of climate risk. Banks should ensure their climate risk management process is well integrated into existing risk management frameworks.

To ensure the required data for reporting is easily accessible, banks should develop a data strategy and management to capture ESG risks comprehensively. It will enable banks to respond efficiently to regulatory reporting and other stakeholder demands for information. For sustainability reporting or non-financial reporting, banks should apply a double materiality lens covering financial and impact materiality.

The sustainability reports should include information on the processes for identification and management of climate risk and opportunities, including the key performance indicators applied by the bank, such as greenhouse gas emissions (scopes 1, 2, and 3), energy consumption, physical and transition risks, and the green products and services offered by banks.

Additional disclosures are contained in the Task Force on Climate-Related Financial Disclosures (TCFD) framework.

The TCFD disclosures are organised across four pillars: governance, strategy, risk management, and metrics and targets. The pillars have also been adopted by the IFRS Sustainability Disclosure Standards, IFRS S1—General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 —Climate-Related Disclosures, issued last June.

The writer is a Partner at Deloitte East Africa. He is an author who writes and speaks widely on corporate reporting.