A recent report from Climate X, a prominent climate risk data analytics firm, has brought to light a pressing issue that global banks are facing: the lack of adequate preparation for climate-related disruptions.
According to the study, which evaluated the climate adaptation maturity of 50 of the world’s largest commercial banks, a staggering 88% of these institutions are failing to sufficiently climate-proof their operations and those of the businesses they support.
The report, titled ‘The Top 50 Banks in the World Tackling Adaptation (2024)’, arrives at a time when the financial industry is contending with the escalating impacts of climate change on the global economy. From extreme weather events to long-term environmental changes, the business landscape is evolving in a way that necessitates a strong response from the banking sector.
Regional Disparities in Climate Adaptation Engagement
The study also points out significant variations in climate adaptation engagement among different regions. European and UK banks, influenced by stricter regulatory frameworks, generally performed better than their counterparts in North America and Australia.
The ranking identified Standard Chartered PLC (UK), Banco Santander SA (Spain), and UniCredit SpA (Italy) as leaders in climate adaptation strategies. On the other hand, US banks showed a lower level of climate adaptation maturity, with Morgan Stanley, Goldman Sachs Group Inc., Capital One Financial Corp, and US Bancorp among the lowest-ranked institutions.
Lukky Ahmed, CEO of Climate X, stresses the urgency of the situation, stating that climate adaptation is no longer optional for the financial sector but a necessity. While some banks are taking steps to prepare for a more volatile world, the majority still have a long way to go.
Methodology and Key Findings
The ranking utilized a unique methodology that assessed banks’ adaptation maturity based on 17 qualitative indicators categorized into three groups: Think (strategic alignment and risk assessment), Do (implementation of adaptation measures), and Track (monitoring and reporting).
Climate X examined the most recent public disclosures from each bank, primarily focusing on their annual reports. A Large Language Model (LLM) was employed to gauge how well the banks aligned with the indicators and their readiness for climate adaptation challenges.
Kamil Kluza, COO of Climate X, points out that while the methodology offers a comprehensive view of banks’ adaptation progress, it also reveals significant gaps in transparency and action. Most banks do not establish adaptation impact metrics, and only a few have clear lending strategies to support communities and businesses affected by climate-related disasters.
The Importance of Climate Adaptation in Banking
As climate risks grow more severe, the role of banks in financing resilience and adaptation becomes increasingly critical. While efforts to mitigate climate change have traditionally received more attention, adaptation is essential to shield the economy from the inevitable impacts of climate change.
The report underscores the importance of banks taking a leadership role in promoting adaptation financing, especially as the economic costs of climate inaction continue to rise. This involves not only evaluating and managing their own climate-related risks but also creating products and services that bolster resilience in the broader economy.
Ahmed stresses the strategic necessity for banks to incorporate adaptation into their decision-making processes and develop offerings that support resilience. Delaying action will only lead to more severe consequences, not just for the banks themselves but for the entire economy.
In an effort to help the financial sector tackle these challenges, Climate X has released the Operation Manual, a comprehensive guide for financial professionals to identify, assess, and manage climate risks effectively. This resource serves as a valuable tool for the industry, summarizing key aspects of physical climate risks and their impact on banking while providing actionable insights for building climate resilience.