Will the Banker Become a Climate Activist?

Abstract

Currently, banks lack proper understanding and incentives to manage climate-related financial risks and translate them into credit decisions. In this chapter, I will discuss how this scene gradually could change within the banking industry, mainly driven by regulators and rating agencies and potentially sudden market revaluations of climate-related risks. The chapter illustrates how banks, by using well-established methods, further developed by rating agencies could integrate climate factors into the credit decisions and become concerned consumers of corporate climate information. But the banking sector could face challenges in order to properly recognize and integrate climate-related risks in their risk management practices. Three such challenges are highlighted. Firstly, banks face practical difficulties when combining approaches to understand climate-related risks and translate them into quantitative measures of financial risks. Secondly, the current lack of relevant corporate climate information will create a challenge for banks to get relevant data for their models. Finally, a broader risk concept, which includes sustainability aspects could challenge traditional financial logics and create strong resistance on a psychological level. The chapter concludes that changes in banks’ day-to-day credit risk management and disclosure practices, as a response to regulatory demands to better include climate-related factors, could gradually change the risk concept, as perceived by the banking industry.