"Sooner or later, you’ll have to face the fact that climate and environmental risks are part of your job, too."
"Banks are at the heart of society. We finance all kinds of economic activities, and that has a significant impact on our customers’ lives," begins Joris van Erp, Sustainability and Risk Manager at De Volksbank. "That gives the sector considerable influence over how society is shaped – which is a big responsibility. We can choose not to fund certain things. This could be because they harm human rights or the environment or because the changing world creates new risks. Sustainability risk is about the latter; climate and environmental risks form part of that."
More sustainable business model
But what are climate and environmental risks? Van Erp: "Risks that are caused by climate change (global warming) and environmental harm. Climate change and environmental harm will cause physical damage in the coming decades. Examples include floods, forest fires and droughts: these are the physical risks that climate change and environmental degradation bring."
"Society will have to undergo a transition to minimise the physical damage caused by climate change and environmental harm. That will include aspects such as sustainable business models, solar panels, wind turbines, alternative transport... These are massive economic shifts. They create not only opportunities, but also risks, which we call transition risks. For example, a company's business model - the one making money today - may simply no longer work in 20 years' time due to legislation or mounting social attention. The time has already come for such companies to start the transition to a different - more sustainable - business model. That costs money. Put simply: both climate change and environmental harm pose transition risks as well as physical risks. Taken together, we call them climate and environmental risks."
Joris van Erp (de Volksbank)
Supervisors are also on their toes
Why is it so important for banks to include climate and environmental risks in their risk management? Van Erp: "Because the risks to customers are increasing. As a result, the credit risk for banks are also set to increase dramatically. If banks do not change the risk model on which they lend money, they will find themselves with more and more customers getting into payment difficulties. Supervisors are also keenly aware that the impact of climate change and environmental harm will be enormous and are setting out what they expect of banks. Banks themselves have to clearly consider which countries and sectors they operate in, what kind of bank they are and what kind of customers they have, and, very importantly: where and how the responsibilities for climate and environmental risks are placed in the organisation. And finally, banks must also report on this: show the outside world what they are doing."
The four animations that banks have made together for their colleagues only cover climate and environmental risks and how they can be incorporated into banks' processes and organisations. The idea is that everyone who works at a bank should watch the animations. Why? Van Erp: "Sooner or later, you’ll see that climate and environmental risks are part of your job, too." Taking the right approach to this is the challenge of our lifetime. That way, not only the customer but also the sector will be well prepared for the future."