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Climate risk and asset management

How boards should respond to emerging supervisory expectations

This report explores, at a practical level the various ways in which climate risk may affect asset managers, and how regulators expect board members to challenge and oversee their firms’ management of climate risk across a number of key areas. These include governance and culture, strategy and business model, conduct, disclosure and the risk of “greenwashing”, identifying and integrating climate risk, asset transition risk, and stewardship. We also provide example board-level challenge questions in each of these areas, and examples of positive and negative indicators that we think supervisors are likely to look for as they assess whether an asset manager is responding adequately to the risks of climate change.

Financial services regulators worldwide are moving quickly to ensure that banks, insurers and asset managers identify risk exposures from climate change and establish strategies and adjust business models to manage them. Asset managers hold a unique position in the climate risk debate because of their role in capital allocation and their stewardship and custody over many trillions in financial assets. Asset managers are, therefore, uniquely positioned to manage and mitigate the catastrophic effects that climate change could have on the economy and society.

The report covers the following key areas, that we expect to be the areas of greatest current focus for regulators:

  • Governance and culture – the extent to which asset managers demonstrate a board-led culture that encourages serious consideration of climate risk issues across the organisation.
  • Strategy and business model – how asset managers’ strategies and business models are affected by climate risk.
  • Conduct, disclosure and the risk of “greenwashing” – the importance of transparency around climate risks, the types of conflicts that may arise in the process of capturing climate risk, and the potential for greenwashing.
  • Identifying and integrating climate risk – how asset managers identify climate risks and integrate these into firm risk frameworks.
  • Asset transition risk – the challenges asset managers face in adjusting portfolios or funds that are invested in companies that may end up with “stranded assets” due to climate related events.
  • Stewardship – the investor and regulatory expectation that asset managers will use their voting powers to influence the shift to a more sustainable economy

Climate risk and the role of the asset management industry is a critical priority for financial services regulators globally. Building supervisory confidence in how they are stepping up to this challenge is therefore a pressing need for asset management boards. Our new report is intended to help asset managers step up to this leadership role in a manner that meets regulatory expectations.

About the Centre for Regulatory Strategy, EMEA

The Deloitte Centre for Regulatory Strategy is a powerful resource of information and insight, designed to assist financial institutions manage the complexity and convergence of rapidly increasing new regulation.

With regional hubs in the Americas, Asia Pacific and EMEA, the Centre combines the strength of Deloitte’s regional and international network of experienced risk, regulatory, and industry professionals – including a deep roster of former regulators, industry specialists, and business advisers – with a rich understanding of the impact of regulations on business models and strategy.

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