Keynote: Advising Financial Institutions on Climate Risk

Chartis Research — ClimateRisk50 2024 · 7 November 2024 · Keynote panel

In November 2024, Chartis Research launched their inaugural ClimateRisk50 — a vendor ranking and market landscape report assessing the major players in climate risk analytical technology. As part of the launch programme, I joined a keynote panel on climate risk modelling and its impact on banking portfolios, alongside Namish Sharma, who leads risk modelling streams (climate risk, fixed income, stress testing, economic capital) at HSBC, with the discussion moderated by Sid Dash of Chartis.

The full thirty-minute discussion is below. Underneath, I’ve pulled out the points I most wanted to land in the conversation. Quotes are lightly cleaned for readability — verbal filler removed, substance preserved.

How I came into climate risk modelling

I opened the panel by walking through the arc that brought me here — climate science, then the real economy, then risk modelling.

“I began my career as a climate researcher studying climate models in Antarctica and in Canada. My first experience with real-economy decarbonisation was with GFANZ — the Global Alliance of alliances on banking and the financial sector — where I contributed to writing reports and to their data collection process. That pivoted into the privilege of working with President Macron and Michael Bloomberg to launch the NZDPU, the Net-Zero Data Public Utility, an open data platform with a lot of financial disclosure data, where I worked on the data model. I’m here today hoping to shed some light on the data struggles, but also on the transition from that climate research to a real-economy lens.”

On regulations and asset valuations

Sid asked Namish how regulations are reshaping market prices and asset valuations, and how well banks have built modelling frameworks around them. Namish covered the regulatory complexity in depth — different countries, evolving guidelines, the long-term horizon. My addition focused on where the brunt of the risk actually sits:

“Whether it’s increased operating cost to businesses due to compliance and new environmental regulations, or decreased demand for carbon-intensive products from the consumer side, it eventually impacts the banks. Very often the bottom line is that banks are bearing the brunt of this risk across so many of these sectors.”

“When it comes to valuations — especially market prices — you really need to have that holistic view, and modelling is where it comes in. You have to know what your assumptions are, where your main material risks and opportunities lie, and have that reverse approach: this is the output, this is what is most valuable to me, and how am I calculating the impact back from there.”

On the role of regulators

The conversation turned to whether regulators can help close the data gap — particularly the granular asset-level data climate modelling needs. My argument was that policy works best as a catalyst with a feedback loop, not a one-shot pronouncement.

“Regulators are in an interesting vantage point. They have insight across sectors, across industries. What they need to do is come together and collate what they think are key risks across different sectors, and communicate that as transparently as they can. They need to create benchmarks and a road map to transition — because when we’re saying ‘these are targets 50 or 40 years from now,’ those are very long timelines, and without interval benchmarks it’s harder for an entire economy to transition.”

“Making policies in the wild obviously isn’t going to solve the problem. When you have a feedback process — a policy is proposed, there is a review process, and everyone takes an active role in that review — that is what’s pushing a lot of the research forward. We always tell our clients: when we know a policy is going to come in in two years, start now. Then you know what the impact is to your value chain, and you have feedback ready when the advisory period opens up.”

“Policy is the catalyst for transition modelling. Policy will not set the ambition of transition modelling — that’s where banks come in, that’s where the people who provide funding come in. But policy is the catalyst to push it forward.”

On how companies adapt — and how banks support them

The longest section of the panel was about how businesses actually respond to climate risk, and what role banks play in helping their clients navigate it. I framed it around three drivers that I see in the work I do, then dug into where banks fit in.

Three drivers of corporate action

“There are three main drivers I’ve noticed. The first is regulatory pressure and policy demands — that’s the catalyst for companies to at least start their journey. The second is pressure from peer groups: companies want to be at par if not a step ahead of everyone else in their industry. The third, which I argue is probably the most direct impact, is investor pressure or market pressure — these are your direct key stakeholders.”

Banks as centralised hubs

“Banks are the centralised hub for either climate modelling or for communications. They are the ones in the position to even help those hard-to-abate sectors that are straddling right now, and what they can do is mobilise funds for transition. Banks are enablers — they can push the transition in the direction that is beneficial to them and to the entire economy.”

“Banks have a unique vantage point. They are, in fact, the only ones with that view into private markets — which is something we tend to forget when we talk about regulations and policies. Yes, public markets matter, but private markets are the ones that also need to push the needle forward.”

Engagement, not the secret sauce

“The main thing banks can provide is the engagement piece — clarifying what their clients need to do. Once that’s done, they can actually enable that real-economy transition. When banks speak, businesses move. It’s not about giving up the secret sauce of how you’re doing investments. It’s about being more open and transparent as a channel — saying: ‘these are the material risks across this sector, these are the companies or industries that will be impacted, this is what impacts me as a bank, and ultimately what’s going to impact you as the client.’”

Hard-to-abate is where the action is

The bit I most wanted to land was about where the funding actually needs to flow.

“When we think about green energy, we agree — wind farms are beautiful, amazing, excellent investments, high yield, compounding benefits. But when you look at all the steel, the sprockets going inside your windmill — hard-to-abate sector — who is actually going to mobilise to help those bits? You have all of your tiny players, which banks have visibility on. There are great creative tools already: blue bonds, sustainability-linked loans, R&D financing for low-carbon innovations. The transition isn’t just going to happen from more solar farms or bigger grid capacities. It also has to come from going into the very hard manufacturing sectors, the hard tech sectors.”

The Girl Scouts test

I closed with the line I always come back to with clients:

“It’s not just about being a green bank — it’s about addressing the risks and opportunities that are financially material to your client. If there’s nothing else you take away, I always tell my clients: just remember this is like Girl Scouts law — be honest and fair, be strong and courageous, be responsible for what you say and do, respect authority, respect yourself, and use your resources wisely. That, in a sense, is what a lot of transition modelling comes down to right now.”

• 🔗 About the report: chartis-research.com → ClimateRisk50 2024