Climate X: Most Global Banks Struggle with Climate Risk Adaptation

A recent report from Climate X, a leading authority in climate risk data analytics, has highlighted a pressing challenge within the global banking industry: the widespread inability to sufficiently prepare for disruptions related to climate change.

This study evaluates 50 of the largest commercial banks worldwide based on their readiness to adapt to climate-related issues, revealing that an alarming 88% of these institutions are not doing enough to safeguard their operations and those of the businesses they finance against climatic threats.

Titled ‘The Top 50 Banks in the World Tackling Adaptation (2024)’, the report arrives at a time when the financial sector is increasingly confronted with the ramifications of climate change on economies across the globe. From severe weather events to gradual environmental alterations, the business environment is shifting in ways that require a proactive response from banks.

European Banks Excel, US Banks Lag Behind

The research highlights notable regional differences in climate adaptation efforts. Banks in Europe and the UK, operating under stricter regulatory guidelines, generally outperformed their counterparts in North America and Australia.

Leading the ranking were Standard Chartered PLC (UK), Banco Santander SA (Spain), and UniCredit SpA (Italy), showcasing superior engagement with climate adaptation initiatives.

In stark contrast, US banks scored poorly in climate adaptation maturity. Among the lower-ranked institutions were Morgan Stanley, Goldman Sachs Group Inc., Capital One Financial Corp, and US Bancorp.

Lukky Ahmed, CEO of Climate X, stressed the urgency of the situation: “Climate adaptation is not optional for the financial industry – it is essential. Our ranking shows that while some banks are beginning to prepare for a hotter and more unpredictable world, most still have significant work ahead.”

Study Methodology and Key Insights

The ranking used a distinctive approach involving 17 qualitative indicators classified into three categories: Think (strategic alignment and risk assessment), Do (implementation of adaptation strategies), and Track (monitoring and reporting).

Climate X examined the latest public disclosures from each bank, focusing mostly on their annual reports.

A Large Language Model (LLM) was utilized to assess each institution’s alignment with the indicators, providing a comprehensive overview of their preparedness for climate adaptation obstacles.

Kamil Kluza, COO of Climate X, commented: “The methodology we employed offers a detailed insight into how these banks are making strides in their adaptation initiatives. 

“However, it also uncovers considerable deficiencies in transparency and action. Most banks lack metrics for measuring adaptation impact, and few possess clear lending strategies that aid communities and businesses affected by climate-related disruptions.”

The Vital Role of Climate Adaptation in Banking

As climate risks escalate, the importance of banks in facilitating resilience and adaptation becomes ever more critical. While efforts to mitigate climate impacts have historically drawn the most attention—particularly concerning carbon footprint reduction—adaptation is essential for shielding the economy from the unavoidable consequences of climate change.

The report emphasizes the necessity for banks to take a leadership stance in promoting adaptation financing, especially as the economic fallout from inaction on climate change continues to grow. This requires not only managing and assessing their own climate risks but also creating products and services that bolster resilience in the wider economy.

Ahmed highlights the strategic importance for banks: “Banks must integrate adaptation into their strategic decision-making and develop products and services that enhance resilience. Delaying action will only amplify the negative consequences, not just for themselves but for the entire economy.”

To assist the financial sector in navigating these challenges, Climate X has also released an Operations Manual, serving as a guide for finance professionals to identify, evaluate, and manage climate risks. 

This resource acts as a comprehensive reference for the industry, detailing key aspects of physical climate risks and their implications for banking, while providing practical tools and insights for fostering climate resilience.