The IFC has launched an initiative to help banks integrate climate risk into their decision-making processes and build resilience against the impacts of climate change on their businesses and on loan portfolios.
The multilateral development bank International Finance Corporation (IFC) has unveiled a new initiative aimed at helping European banks build capacity in climate resilience, and better integrate climate and sustainability measures into their management.
The Climate Risk Management and Paris Alignment Lab (ClimaLab) initiative consists of a two month-long online accelerator programme, which the IFC says will enable banking institutions to develop the knowledge and skills necessary to understand and manage climate risk in their loan portfolios, explore opportunities for sustainable investments, and design strategies for their net zero transition.
Speaking to Impact Investor, Liliana Pozzo, manager of advisory services for the financial institutions group in Europe, Latin America and the Caribbean at the IFC, and the manager responsible for the initiative, said: “The EU takes climate risk, including how it affects the banking sector, very seriously. They have issued guidelines to help financial institutions understand and stress test against climate risk as well as plan for the future. But in our discussions with financial institutions, we realised the banks really didn’t know how to address what the EU was requiring of them and hence, we developed ClimaLab to help them.”
Andriy Zaripov, project lead across several IFC climate projects in Europe including the ClimaLab initiative, said that financial institutions in non-EU member countries within the IFC’s scope, were also coming under pressure from their own regulators to integrate climate risk in their decision-making.
“Some local regulators have started to move in the direction of the EU. In other countries, the banks want to get ahead of the curve as they know that regulation is coming in the near term.”
The programme is being aimed at banks in European countries where the IFC operates, including the Western Balkans, Caucasus, Poland, Bulgaria, Romania, Croatia, Ukraine and Moldova as well as the banking subsidiaries of banks headquartered elsewhere in Europe.
ClimaLab is also being launched in parallel in IFC-supported countries across Latin America and the Caribbean and has been funded in Europe by the Dutch government.
Pilot programme
The initiative is currently being piloted with BasisBank in Georgia, Evocabank in Armenia, OTP Bank in Moldova and NLB Banka in Kosovo, where Zaripov said interest in the programme was very high.
“These banks are looking at the European Central Bank (ECB) and anticipating that similar regulations will hit their countries sooner than expected. They want to be prepared and are extremely committed to the programme,” Zaripov said.
The first official cohort will start in November and the programme will welcome new cohorts every six months. Following completion of the programme, the IFC will continue to monitor and be on hand to assist banks in the integration of climate-related risk measures over a period of several months.
Mitigating financial losses
According to the World Bank, from 1980 to 2022, weather and climate-related events across the EU caused total losses of about €650bn, or around €15.5bn per year, and losses to financial institutions have also been significant. The World Bank’s global research shows that non-performing loan ratios are estimated to increase by 0.37 percentage points after severe climate and environmental disaster episodes.
Pozzo said the programme helped banks acknowledge that climate risk as well as natural weather phenomena had a direct impact on the performance of their assets and collateral.
“They need to understand and plan for that risk,” said Pozzo. “If they don’t, the danger is that when one or more of their portfolio businesses default on their loans due to the impacts of a climate-related event, they may have less risk appetite to lend to a particular sector or geographical region in the future, which could negatively affect the financial services offered to these.”
Modular programme
Developed by the IFC and Management Solutions, an international business consulting firm, the programme consists of six modules, each with a set of actions that participants are asked to implement ahead of the next module, and includes both group and individual training sessions.
“After the banks have completed their ‘homework’, we run bilateral sessions with each one to discuss individual concerns and provide a forum for asking questions pertaining to the specific challenges they have encountered,” explained Zapirov.
This, Zapirov said, offered the banks practical experience that they could then apply across their whole loan portfolio.
“It also allows them to view their portfolios from a different angle and uncover sustainable investment opportunities offering solutions to climate risk.”
The first five modules include a module providing an overview of best practices in climate risk management in line with the Paris Agreement goals; a reporting and disclosures requirements module; a self-assessment module based on ECB best practices to develop a climate risk framework; a module focusing on materiality assessment for physical risks related to climate change; and a module aimed at identifying and analysing transition risks. In the final module, financial institutions are asked to present their climate risk management and net zero transition roadmaps.
Interested banks can still apply for the November programme and future cohorts.
