Climate Risk Management: CROs at the Forefront, But Organizational Clarity Lags

As climate change presents increasingly significant financial risks, Chief Risk Officers (CROs) are taking a leading role in managing these challenges. However, a recent benchmarking exercise reveals a fragmented organizational picture, with varying team sizes and a diffused sense of ownership across financial institutions. While climate risk is a top concern for boards and CROs, translating awareness into effective action remains a key hurdle.

The Growing Responsibility of CROs

Climate risk is rapidly ascending the list of priorities for financial institutions. According to a recent survey by EY, climate and environmental risk remain a top-three risk for both boards and CROs in the next 12 months. EY reports that CROs are increasingly focused on managing these risks, but the level of concern about environmental risk specifically has slightly decreased over the past year, falling from 49% to 37% when considering a three-year outlook.

Risk.net’s inaugural Climate Risk Benchmarking exercise highlights the central role CROs are playing. The study found that 81% of banks identify their Chief Risk Officer as accountable for climate risk. Risk.net

Varied Team Sizes and Resource Allocation

Despite the increasing accountability placed on CROs, the resources dedicated to climate risk management vary significantly. The median size of central climate risk teams is four full-time employees, with a signify average of eight. However, the range is wide, stretching from teams of 50 to those with zero dedicated personnel. This disparity suggests that organizations are at different stages of integrating climate risk into their overall risk management frameworks.

The Challenge of Organizational Ownership

A common theme emerging from the Risk.net benchmarking is the issue of diffused ownership. The phrase “everyone owns climate risk” often translates to “no one owns climate risk.” This lack of clear accountability can hinder effective risk mitigation. The responsibility for managing climate risk often extends beyond the CRO’s office, encompassing sustainability departments and business units.

Superannuation Sector Specifics

The superannuation sector faces unique challenges in addressing climate risk. Baringa notes that CROs in this sector are already navigating complex regulatory changes and member expectations regarding performance and sustainability. Climate risk adds another layer of complexity, requiring expertise in areas beyond traditional risk management. Australian regulators, including APRA and ASIC, are increasing their scrutiny of climate-related financial risks and disclosures, with fresh reporting standards like ISSB climate-related reporting set to be adopted by major financial institutions.

Looking Ahead

As regulatory pressures and stakeholder expectations continue to mount, the role of the CRO in climate risk management will only become more critical. Organizations need to move beyond simply assigning accountability to the CRO and focus on building a clear, integrated framework for managing climate-related financial risks. This includes investing in dedicated resources, fostering collaboration across departments, and ensuring alignment between climate risk management and overall business strategy. The need for standardized climate risk modeling and data transparency, as highlighted by Risk.net’s climate news and analysis, will similarly be paramount in the coming years.