Climate X: Are Banks Prepared for Climate Change?
Banks aren't prepared for climate-related disruptions.
That's what Climate X, a forefront player in climate risk data analytics, has brought to light in a study assessing 50 of the world's leading commercial banks regarding their ability to adapt to climate change.
Alarmingly, 88% of these banks are underprepared in safeguarding their operations and the businesses they support against climatic adversities.
Titled ‘The Top 50 Banks in the World Tackling Adaptation (2024)’, the report arrives amidst growing concerns in the financial industry over the repercussions of climate change, ranging from catastrophic weather events to progressive environmental changes, all of which necessitate a cohesive and resilient response from the banking sector.
US banks are lagging behind
The findings reveal a pronounced geographical divide in banks' commitment to climate adaptability. European and UK-based banks have shown superior performance, largely due to stricter regulatory demands, outpacing their North American and Australian counterparts.
Leading the rankings:
- Standard Chartered PLC (UK)
- Banco Santander SA (Spain)
- UniCredit SpA (Italy)
Conversely, American banks lag significantly, with Morgan Stanley, Goldman Sachs Group Inc., Capital One Financial Corp and US Bancorp being among the least prepared. Lukky Ahmed, CEO of Climate X, calls attention to the critical nature of the issue: “Climate adaptation is no longer a choice for the financial sector – it's a necessity. Our ranking demonstrates that while some banks are beginning to take steps to prepare for a hotter, more volatile world, the majority have a long way to go.”
Examining the findings
The study's innovative approach employs 17 qualitative indicators categorised under strategic alignment, adaptation implementation, and progress monitoring. By analysing the banks' latest public disclosures, primarily their annual reports, a Large Language Model (LLM) was utilised to gauge their alignment with these indicators, offering an overview of their readiness for climate adaptation challenges.
Kamil Kluza, COO of Climate X, highlights: “The methodology we used gives a comprehensive picture of how these banks are progressing in their adaptation efforts. However, it also reveals significant gaps in transparency and action. Most banks are not setting adaptation impact metrics, and few have clear lending strategies that support communities and businesses hit by climate-related disasters.”
The crucial role of banks in climate adaptation
As climate threats grow, banks play an increasingly vital role in funding resilience and adaptation. Despite a historical focus on mitigation, adaptation is essential for protecting the economy against the inevitable effects of climate change.
The report emphasises the importance of banks stepping up as leaders in adaptation finance, especially as the economic tolls of climate inactivity soar. This entails not just assessing their climate risk but also creating financial products and services to support economic resilience.
Lukky stresses the strategic need for action: “It is vital that banks incorporate adaptation into their strategic decision-making processes and develop products and services that support resilience. The longer they wait, the more severe the consequences will be, not just for them, but for the entire economy.”
Helping the financial sector tackle these hurdles, Climate X has released an Operation Manual to serve as an essential guide for financial experts to identify, evaluate and manage climate risks, ultimately aiding in the development of climate-resilient strategies.
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