Physical risks resulting from climate change can be event-driven (acute) or result from longer-term (chronic) shifts in climate patterns. The management of our physical risks incorporates both risk assessment and controls at our offices, by our staff, and in our processes, which is part of our wider approach to business continuity and crisis management, as well as our credit and market risk assessment and controls relating to financial exposures to affected counterparties and assets.
Non-Financial Risk Management
Our Non-Financial Risk Management (NFRM) division comprises an in-house intelligence team, which measures and tracks country and city-specific risks including meteorological, climatological, hydrological, and geophysical risk to our assets and operations. Indirect risks driven by climate change are also assessed. lllustrative key risk indicators are shown below:
- Climate change scenarios indicate rising risk of natural hazards (drought, flooding)
- Climatic conditions generally increase the likelihood of an epidemic
- Location is exposed to (tropical) cyclones
- History of flooding events at our locations or key vendor infrastructure
- History of structural damage to buildings and infrastructure from storms
- Plausible natural disasters cause critical infrastructure outages (airports, airspace, roads, electricity)
- Power supply fails for more than one day, for example, as a result of extreme weather
- Water scarcity is a current or future risk
- Large populations and/or critical infrastructure are near risk areas of flooding or wildfire
- National organizational and financial resources to respond to a natural disaster are limited
Quantitative analysis and assessment of environmental and climate-related risks, trends, and patterns is supplemented by qualitative reporting and geospatial intelligence. The latter focuses on providing risk-type control functions and risk owners with internal and external geospatial data sets that map climate change and potential environmental impacts in relation to the bank’s assets and operations.
These risk assessments inform strategic location planning and scenario design for testing and exercising crisis management, notably:
- Country or city-wide outage
- Loss of primary office facility
- Loss of business application
- Significant staff unavailability
- Loss of vendor (supply chain)
Country or city-wide outage exercises focus predominantly on improving resilience and reducing operational concentration risks. Off-shore centers and/or cities supporting critical functions are assessed, and NFRM findings and recommendations are shared with business lines. In 2017, we conducted outage risk reviews in London, New York, Manila, Tokyo and Mumbai, with scenarios identified for their likely outage timeline (i.e. in Manila, a major typhoon could impact operations over a one to two week timeline).
Robust business continuity and crisis management plans are in place to minimize disruption risk. We also ran crisis invocations related to environmental and climate change incidents across our regions in 2017. People and/or work strategy plans were implemented and minimal disruption to operations were encountered.
Credit and Market Risk Management
Physical risks are also considered in the assessment of credit and market risk exposures to sectors and assets that may be heavily impacted by acute events (such as insurance companies who underwrite climate-related risks). Where specific transactions or counterparties are assessed as having material exposure to such risks, this is taken into account in risk decision-making.
Overall, we maintain a diversified portfolio from a geographic and industry perspective to mitigate against the risk of outsized losses resulting from risks, including physical climate-related risks.