June 20, 2020 / VOLUME NO. 110
The Biggest Risks

Environmental concerns have long commanded the World Economic Forum’s Global Risk Report, including the 2020 edition that came out Jan. 15. Extreme weather, “climate action failure” and natural disasters all made the top 10 concerns in both likelihood and impact.

Infectious disease was the No. 10 risk in terms of impact. It didn’t appear on the top 10 likeliest risks.

Hindsight, they say, is 20/20. For many banks and their customers, the coronavirus pandemic has demonstrated the interdependence of health care and the economy.

That understanding could serve as “a catalyst” for bank boards to recalibrate how they think about interrelated risks — big and small, likely and unlikely, says Kristen Sullivan, who leads sustainability reporting, assurance and compliance services for Deloitte. Adopting an environmental, social and governance framework, or ESG, could help.

“We see the dependence on society and on the environment, and how disruptions can compromise or put that dependence at risk. It’s only been amplified through this current disruption,” she says. “What are the ways you can more systematically consider risks and disruptors that can impact you as a business?”

In the same way that the economy fell into a recession in response to stay-at-home orders, and states weigh how to reopen while keeping infection rates low, banks may need to consider the likelihood and impact if environmental risks intersect with social concerns.

Already, the biggest banks have reconsidered their capital markets and funding activities in industries that generate negative environmental externalities or contribute to social harm, including firearms manufacturers, thermal coal developers, Arctic oil production and private prisons. They have also taken steps to formalize diversity and inclusion goals increasing representation among all levels of leadership to incorporate different viewpoints, reach different audiences and combat groupthink.

For now, ESG disclosures in proxy statements or in their own dedicated reports seem limited largely to bigger, exchange-traded banks. And even though there is little standardization of metrics, note analysts at Keefe Bruyette & Woods, they expect more banks to join the trend of ESG disclosures and actions.

•  Kiah Lau Haslett  / managing editor for Bank Director
/ ideas, insights and perspectives on BankDirector.com
Last year’s financials mean nothing in the 2020 environment. Banks are using technology to take a fresh look at credit risks in light of Covid-19.

“Everything that you thought when you underwrote a loan is no longer true” Sean Hunter, OakNorth

•   Amber Buker  / program director, FinXTech Connect
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