Climate risk management is increasingly salient for boards of banks and insurers. In this publication, we outline key challenges for boards when discharging their responsibilities, given the uncertainty around the manifestation of climate risks.
Although the expectation that risks should be assessed and managed is uncontroversial, climate risk has unique properties that substantially complicate these processes. Risk modelling in the financial sector is predominantly based on historical data that is extrapolated to the future. The premise underpinning such models, that the future looks like the past, does not hold in the face of a changing climate.
Climate risks must therefore be 'quantified' by means of scenarios, which correspond to transition pathways. The selection and specification of these scenarios is, therefore, thus forms the basis of firms' climate risk management frameworks and boards' business and strategic decisions. The reliability of these assessments and the adequacy of management actions based on them is highly contingent on the materialisation of a specific scenario.
The publication has been written by Mariken van Loopik and Tjalling Waterbolk (De Brauw Blackstone Westbroek) and Thom Wetzer (University of Oxford).