The new group shows how financial institutions are evolving their approach to climate-related regulation and the opportunities it affords
Climate-conscious banks are a clubbable bunch, as evidenced by the number of climate-specific alliances they have joined since the Paris Agreement was signed. While most of these groupings appear to serve the same overarching purpose, each has its own specific set of objectives and occupies a particular niche in the expanding field of climate finance and climate risk management.
The most recent addition to this menagerie of alliances is the Climate Risk Consortium (CRC). Set up by the Risk Management Association (RMA), a banking industry-led body headquartered in the US, the CRC has 19 North American lenders on board to date — including Bank of America, RBC, and Wells Fargo.
This being 2022, the formation of another climate alliance may be little to fuss over. However, the new grouping stands out from the crowd for two reasons: one; the character of its parent body, and two; the nature of its stated objectives.
By and large, climate alliances are the brainchildren of quasi-governmental entities, like the UN-convened Net Zero Banking Alliance (NZBA), or collaborations between institutions, often with nonprofit support — like the Ceres Investor Network. What’s distinctive about the CRC is that the RMA is anchored in the financial risk management profession. Not only that, the Association has a track record of fashioning risk management products to serve its more than 26,000 members across 1,600 financial institutions. These include tools like RMA Model Validation, which banks can use to affirm their risk models are operating in line with regulatory expectations.
In short, the RMA is a risk management service provider rather than an advocacy group, making the CRC qualitatively different from climate alliances formed before. Yes, the UN Environment Programme Finance Initiative (UNEP FI) has rolled out climate risk methodologies and portfolio alignment tools to serve the market with the input of banks. However, these have been designed to help firms engage with the existing UNEP FI climate alliances and/or to assist with climate scenario analysis, which fulfills a wide array of functions across institutions. Where the CRC could differ is in establishing climate risk methodologies, standards and maybe even products specifically for financial risk managers — created by the banking industry, for the banking industry.
The participating firms should benefit by being in the room where this new climate risk toolbox is being created, and getting a head start on the practices it promotes. Other RMA members, however, may be able to reap the fruits of their labors if this toolbox is productized. This is especially true of second- and third-tier banks that may lack the resources to establish climate risk standards and operationalize practices on their own. Going one step further, the CRC banks could also individually build their own products and services to work on top of what they cook up as a group. They could then sell these to other institutions — opening up whole new revenue streams. A similar gambit may be being played by those banks involved in open source climate data projects OS-Climate and ESG Book.
That’s the character of the parent body covered, but what of the CRC’s stated objectives? First and foremost, the CRC “will advance practices for member banks and the broader industry by assessing current efforts and developing consistent taxonomy, frameworks, and standards for climate risk management” — in other words fulfill the role of service provider, as described above.
Secondly, the CRC says it “is engaging with regulators and other key policy makers to help inform ongoing policy considerations specific to a changing climate”. It is this objective which makes the fact that the 19 founding members of the CRC are all North American significant.
A few weeks before the official launch of the Consortium, the Office of the Comptroller of the Currency (OCC) — the primary US bank regulator — released draft principles on climate risk management for large institutions. This month, Canada’s Office of the Superintendent of Financial Institutions (OSFI) said it would publish its own climate risk draft guideline for federally regulated firms later this year, something that had been expected since it launched a climate risk consultation in early 2021. Clearly, after lagging their European and Asian peers for so long, North American supervisors are finally limbering up to introduce climate risk regulatory expectations of their own. These in turn could lead to binding climate risk requirements later down the line.
One way the formation of the CRC can be understood, then, is as a reaction to this regulatory momentum. By banding together, the 19 institutions may believe they are better able to exert influence on the rulemaking processes of the OCC and OSFI then they would alone.
Another interpretation of the CRC is that it acts as a North American counterweight to the European-dominated climate alliances that have come before, which may be seen by some institutions as insufficiently in tune with the specific US and Canadian regulatory contexts. After all, of the 101 NZBA members, just nine are US institutions, and eight Canadian. True, the RMA has members worldwide, who are open to join the CRC. Still, it is interesting how mid-sized US banks like Fifth Third and US Bank are members of this grouping but not the NZBA. Yes, it may be because these institutions do not want to, or feel incapable of, signing its commitment statement. But it may also be because with the CRC, they feel they are in better company.
Because of these characteristics, whatever the CRC achieves it has already made waves as the pioneer of the next wave of climate alliances — one which, in the fast-evolving regulatory context, places the interests of banks themselves first and foremost.