Internal and External Reporting
Risk governance demands rigorous reporting. This requires that the second line of defense, the risk management team, set targets, monitor exposures, and report progress to senior management, specifically the risk committee.
Individual governments will announce climate plans and roll out new regulations that are designed to fulfill their commitments to the UN’s ‘Conference of the Parties’ (COPs). These commitments are self-set targets that each country creates, monitors, and reports on at regular intervals.
The plans themselves are a blend of mitigation and adaptation measures, designed to fortify the economy, in terms of physical, energy, and food security. Each jurisdiction has a specific starting point and will consequently green their economy at different rates in different sectors. These differential rollout speeds present unique challenges for banks and reporting.
Climate risk management at banks rests on a system of scenarios that are tailored to reflect the potential damage to underlying obligors’ credit profiles by region. It is essentially a forecast of the additional credit risk that banks will be asked to account for, with risk capital, as each regional climate ambition is realized. Ultimately, these scenarios need constant adjustment, as priorities shift and sectors are put under the sustainability microscope.
This presents banks’ risk governance committees with the challenge of properly framing the scenarios being used, targets being set, and progress towards them. The committee must tether the ‘green’ ambitions of the bank to existing credit risk metrics for them to work together and current credit rules such as Risk-Weighted Assets (RWAs) computation do not act as capital barriers to ‘greening’ of the balance sheet.
Banks’ strategies must be laid out and set in terms of how they sit alongside loan books and current risks they create while forecasting expected changes in risk capital, using clear climate-orientated scenarios and adjustments to reflect shifting regional priorities. These must then be reported in a manner that is intuitive and consistent for internal and external use within the risk management section of the annual sustainability reporting.
GreenCap is a solution that enables banks to create strategies in the form of scenarios that are built to mirror the priorities and costs of known climate planning. The system provides reporting against these scenarios at every level, from analyzing the current loan book, using the scenarios, to monitoring progress towards agreed targets.
Communication is built into the design of GreenCap. We present clear, intuitive reports that graphically show the bank’s position and expected increases in risk capital. Using these reports, the third line of defense is in a position to ensure that their banks’ public commitments are aligned entirely to current risk assessment and reporting requirements.
From the first line of defense and decisions made by lending officers, through the second line and risk limit enforcement, to the third line and rigorous risk governance, GreenCap is designed to augment existing practices, seamlessly adding climate risk as a category dealing with the ‘known unknown’ credit risks that are inherent in the type of paradigm shift that is required.
In short, GreenCap is the keystone that bridges the regulatory gulf between a bank’s current position in the brown economy to its future as a mainstay of a greener one.