Climate X Reveals Banks' Climate Adaptation Shortfall

A new report from Climate X, a leader in climate risk data analytics, has shed light on a critical issue facing the global banking sector: the widespread failure to adequately prepare for climate-related disruptions. 

The study, which ranks 50 of the world's largest commercial banks on their climate adaptation maturity, reveals that a staggering 88% of these institutions are falling short in their efforts to climate-proof their operations and those of the businesses they finance.

The report, titled ‘The Top 50 Banks in the World Tackling Adaptation (2024)’, comes at a time when the financial sector is grappling with the increasing impacts of climate change on global economies. From extreme weather events to longer-term environmental shifts, the business landscape is undergoing a transformation that demands a robust response from the banking industry.

European Banks Lead, US Institutions Lag

The study highlights significant regional disparities in climate adaptation engagement. European and UK banks, influenced by more stringent regulatory frameworks, performed better on average than their counterparts in North America and Australia. 

Standard Chartered PLC (UK), Banco Santander SA (Spain) and UniCredit SpA (Italy) emerged as leaders in the ranking, demonstrating more advanced engagement with climate adaptation strategies.

In contrast, US banks exhibited a notably low level of climate adaptation maturity. Among the lowest-ranked institutions were Morgan Stanley, Goldman Sachs Group Inc., Capital One Financial Corp and US Bancorp.

Lukky Ahmed, CEO of Climate X, emphasises the urgency of the situation: “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.”

Methodology and Key Findings

The ranking employed a unique methodology designed to evaluate banks' adaptation maturity through 17 qualitative indicators grouped into three categories: Think (strategic alignment and risk assessment), Do (implementation of adaptation measures) and Track (monitoring and reporting).

Climate X analysed the most recent public disclosures from each institution, focusing primarily on their annual reports. 

A Large Language Model (LLM) was used to determine how well the banks aligned with the indicators, offering a high-level view of their preparedness for climate adaptation challenges.

Kamil Kluza, COO of Climate X, notes: “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 Importance of Climate Adaptation in Banking

As climate risks intensify, the role of banks in financing resilience and adaptation is becoming increasingly crucial. While mitigation efforts have historically received the majority of attention – particularly regarding the reduction of carbon footprints – adaptation is vital to protect the economy from the inevitable impacts of climate change.

The report underscores the need for banks to take on a leadership role in driving adaptation financing, particularly as the economic costs of climate inaction rise. This involves not only assessing and managing their own climate-related risks but also developing products and services that support resilience in the broader economy.

Ahmed emphasises the strategic imperative for banks: “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.”

To support the financial sector in addressing these challenges, Climate X has also published the Operation Manual, a guide designed to help financial professionals identify, assess and manage climate risks. 

This resource acts as a 'bible' for the industry, summarising key characteristics of physical climate risks and their impact on banking, and offering actionable tools and insights for building climate resilience.

**************

Make sure you check out the latest edition of FinTech Magazine and also sign up to our global conference series – FinTech LIVE 2024. 

**************

FinTech Magazine is a BizClik brand.