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Managing Climate Risks for Credit Unions

May 5, 2022

As climate change continues to impact the world, there is a growing recognition that physical and transition risks threaten credit unions and the wider financial system. Credit unions need to be aware of these risks and opportunities and incorporate them into their business and financial decision-making. Stakeholder awareness of these risks has grown substantially over recent years too, with regulators, policymakers, employees, and civil society asking financial institutions to disclose their climate-related financial risk management capabilities and take steps to improve them.

Recent months have seen financial regulators, in particular, lay out their expectations of financial institutions’ climate risk management. In Canada, the Office of the Superintendent of Financial Institutions (OSFI) said it would introduce a draft guideline with its climate risk management expectations of federally regulated financial institutions later this year. The regulator also announced it will require federally regulated financial institutions to issue climate risk reports based on the Task Force on Climate-related Financial Disclosures (TCFD). In the US, the National Credit Union Administration, which regulates federal credit unions, announced as part of its 2022-2026 strategic plan an effort to evaluate whether credit unions are addressing climate-related risks.

The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for credit unions to both manage their climate risks and to fulfill growing stakeholder expectations. The TCFD framework is being used to underpin new climate risk management and disclosure rules by financial regulators and other reporting standard setters. Because of this, it makes sense for credit unions to get familiar with its four pillars: Governance, Strategy, Risk Management, and Metrics and Targets.

1. Governance: Implementing oversight and accountability

Strong climate governance is essential for credit unions to effectively respond to the challenges brought by climate change. Credit unions are beginning to approach climate change similar to other major business risks. The TCFD recommends that credit unions establish a formal climate oversight function, implement senior management responsibilities, and adapt remuneration practices to achieve key climate strategy and risk management goals. With appropriate climate governance, credit unions can engender the conditions that make bold climate action possible. 

Manifest Climate’s knowledge of common industry practices shows that features of advanced climate governance include board-approved position statements, ongoing education, and strong expertise related to climate risks and opportunities at the board and management levels. As purpose-driven organizations, credit unions are well suited to position themselves as partners to their local communities for mitigating and adapting to climate issues.

2. Strategy: Building a roadmap for navigation

Critically, credit unions must identify and assess the climate-related risks and opportunities they are exposed to. This goes for their business operations, as well as their financial activities. The Strategy pillar advises organizations on identifying and assessing their exposures to climate risks and opportunities and putting together a clear plan in response. Developing a strategy for navigating climate risks and opportunities requires looking at ‘What If’ scenarios that show how climate issues might impact credit unions’ strategic and financial planning, which can be used to better prepare these institutions for the physical and transition risks to come. Credit unions must also identify how they will transition their activities to thrive in a low-carbon and changing climate.

3. Risk Management: Developing robust processes

The third pillar of the TCFD framework is Risk Management. Risk Management focuses on the processes and frameworks used to identify, assess, and manage climate-related risks and opportunities. 

 Manifest Climate’s experience shows that climate-related data collection is critical to building effective climate risk management processes at credit unions. Institutions require both internal data on operational and financial assets, as well as data from third-party partners to support the identification, assessment, and management of climate-related issues. 

4. Metrics and Targets: Measuring exposures and performance

The last pillar of the TCFD is Metrics and Targets. Credit unions are guided by this pillar to identify and deploy the appropriate financial and non-financial metrics to measure their climate-related exposures and monitor progress against strategic goals. 

The TCFD lays out a number of metrics to advance credit unions’ climate objectives and manages their climate risk exposures. Like all financial institutions, the TCFD asks that credit unions calculate and disclose the GHG emissions produced by their own corporate operations and, more significantly, those tied to the businesses and communities they finance. Annual climate-related reports from Wall Street lenders to rural credit unions are increasingly disclosing their ‘financed emissions’ — often calculated using the standard established by the Partnership for Carbon Accounting Financials (PCAF), a financial industry-led group committed to harmonizing the assessment and disclosure of these emissions.

Targets are being used to set key objectives to build climate resilience and improve financial institutions’ climate impact in the real economy. Net zero by 2050 target setting on financed emissions are becoming table stakes for large financial institutions, with four of the five largest Canadian banks having rolled out targets for selected lending portfolios in recent months.

Want to get started? 

If you are a credit union embarking on a climate journey, and are uncertain about how to properly approach the challenge, we can help. At Manifest Climate, we support alignment with the TCFD recommendations. In fact, we have structured a large part of our offerings around the framework. Climate action is an economic, social, and environmental imperative. It begins with an understanding of your organization’s climate maturity. We can help. We’ll work with you to turn climate disclosures into actionable steps.

We are a climate intelligence SaaS platform that combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver best-in-class climate guidance at scale. We provide an easier, faster, and more cost-effective way for organizations to build climate competency, stay on top of key climate trends and the climate-related performance of peers, understand how to improve their climate actions and disclosures, and build resilience to the impact of climate change on their business. Wherever you are on your climate journey and whatever you want to achieve, we can help.