Accurately managing climate risk: Why is urgent action required?
The climate is the average of weather conditions observed in a certain region over a long period of time. Such weather conditions include aspects such as temperature, precipitation, humidity, wind and atmospheric pressure. The climate is affected by factors such as the geographical location, topography, proximity to seas and flora.
Climate risk is a wide concept encompassing all the potential negative impacts of climate change on nature, businesses and society. Due to increasing human-induced greenhouse gas emissions, rising global temperatures are resulting in significant impacts on weather, natural ecosystems and human life by causing changes in the climate system.
By including the economic, social and environmental dimensions of these negative impacts, climate risk poses a threat that can affect all segments of society.
While "Physical Risks" are defined as acute and chronic conditions caused by the severity, frequency and impact of natural events resulting from climate change, "Transition Risks" are defined as economic and social changes occurring during the transition to a low-carbon economy.
So what is to be done to manage the climate crisis accurately? Why is the financial sector of critical importance in this regard? Based on global developments and publications on climate crisis management, we scrutinize this matter.
Combating the climate crisis is a shared responsibility of all
Sadly, climate change has consequences not only for the environment, but also for society and the economy. It can deepen the social inequalities, adversely affect public health, and cause loss of life and property through extreme weather events. Especially low-income countries with poor infrastructure, island countries and fragile regions such as coastal areas are more vulnerable to the impacts of climate change.
Climate risk is crucial for many aspects, including the protection and sustainability of wildlife, economic stability, financial development and fulfillment of investor expectations. Therefore, accurately understanding the climate crisis and its impacts compromises the core of the steps to be taken to protect our future. Understanding climate risk comprehensively allows all actors ranging from individuals to large companies, from investors to governments, to deliver conscious decisions and develop effective solutions.
Especially major companies are required to carefully analyze the potential impacts of climate change on their operations, supply chains, assets and finances. Such analyses allow companies to develop strategies to adapt to climate change and minimize risks. On this occasion, companies can take steps such as improving energy efficiency, investing in renewable energy sources or reducing their carbon footprint.
Investors are also attaching further importance to sustainability criteria and prefer to invest in companies taking climate risk into account. Thus, proper management of climate risk is critical both for the protection of wildlife and for ensuring economic and financial stability. Combating climate crisis is a responsibility of all and we can only build a sustainable future by acting with awareness and collectively.
Following the Paris Agreement, efforts to prevent the impacts of climate change have gained momentum
Managing climate risks effectively is crucial for a sustainable future and maintaining economic stability. To better understand the impacts of climate change and find solutions, scientists and policymakers continue their research. In this regard, the Paris Agreement, to which Türkiye is a signatory along with 175 other countries, has taken an important step by targeting a global temperature rise of 1.5 degrees, if possible. Türkiye has committed to achieving the Net Zero Emission goal by 2053 and has demonstrated its determination to play its part in the combating climate change. Various measures such as investing in renewable energy sources, increasing energy efficiency, preventing deforestation and promoting sustainable agricultural practices are being taken in our country in line with this goal.
Financial sector is crucial in the combating the climate change
As emphasized by the Paris Climate Agreement, aiming to strengthen global socioeconomic resilience against the threat of climate change, the transition to a low-carbon economy and the achievement of the global goals set in this context shall only be possible with the active participation of the private sector and the support of the financial sector. Policies and strategies developed by the Ministry of Environment, Urbanization and Climate Change include measures that financial institutions must also comply with. Banks in particular have an important role to play in promoting renewable energy investments and increasing energy efficiency.
At the international level, initiatives such as the Financial Stability Board (FSB) and the Task Force on Climate-Related Financial Disclosures (TCFD) encourage financial institutions to be more transparent in assessing and reporting on climate risks. European Union initiatives such as the European Green Deal and the Sustainable Finance Action Plan mandate Turkish banks to take climate risks into consideration so that they can compete in global markets. This calls for financial institutions in Türkiye to play an active role in the combating climate change and invest in a sustainable future.
An important step from the European Commission
The European Commission released a statement in March this year titled "Managing Climate Risks - Protecting People and Prosperity". This statement, based on the results of the European Climate Risk Assessment, highlights the vision of increasing social and economic resilience to changing climate conditions to manage the climate crisis and argues for supportive measures to ensure that all actors, from local governments to the private sector, fulfill their responsibilities related to climate risks.
resilience to changing climate conditions to manage the climate crisis and argues for supportive measures to ensure that all actors, from local governments to the private sector, fulfill their responsibilities related to climate risks.
The statement emphasizes that actions to build resilience to the climate crisis are required to be risk free and that these actions must be taken systematically. The statement also identifies four main categories of action:
- Improved governance
- Better tools for empowering risk owners
- Harnessing structural policies
- Right preconditions for financing climate resilience.
This statement issued by the Commission is regarded as an important step in emphasizing the necessity of the measures to be taken by the member states in the management of increasing climate risks and identifying the focal points of solutions.
What do we do at QNB for the climate crisis?
As QNB , we closely follow domestic and international regulations, best practice guidelines, authority publications and data sources regarding the measurement, management and reporting of climate risk. We aim to be fully prepared for the potential impacts of climate change and contribute to a sustainable future.
By integrating the climate risk perspective into our credit and risk policies and procedures at QNB , we define our road map for the effective management of climate risk in line with our strategic goals. While following this road map, we are applying advanced risk management tools to better understand and prepare for the potential impacts of climate change.
Since 2022, we have been closely monitoring the portfolio development trend by calculating the carbon footprint of our loan portfolio. This measurement is of great importance as a starting point in determining and implementing our carbon reduction strategies and road map.
We perform stress tests to comprehend and manage uncertainties related to climate change. These endeavors are applied to test the resilience of the Bank's business strategies and financial performance and to identify vulnerabilities under different scenarios, rather than to provide precise forecasts. Financial impacts to which our bank can be exposed are estimated in the short, medium and long term by assessing different levels of adversity, such as physical risks and transition risks.
As the financial sector, we play a critical role in managing climate risks and building a sustainable future in line with Türkiye's 2053 Net Zero goal. By complying with both domestic and international regulations, we adopt proactive strategies to effectively measure and manage climate risks. Our approach not only complies with regulations, but also strengthens our long-term financial sustainability and investor confidence.
As the effects of climate change are becoming increasing visible, we acknowledge the importance of implementing an urgent action plan for a sustainable future. That is why we encourage green investments by using sustainable financing instruments and manage climate risks effectively. This way, we aim to contribute to the sustainable future of both our country's economy and our world.
We assume responsibility for sustainability and becoming #1 With The World.
Source: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52024DC0091
https://climate.copernicus.eu/copernicus-2023-hottest-year-record
Zeynep Aydın Demirkıran
Head of Risk Management
