Back to school: banks turn to colleges for help on climate risk

Financial institutions are renowned for poaching the brightest students from top universities to fill the ranks of traders, quants and software engineers. But now Wall Street firms are sending their employees back to school: to learn the ABCs’ of climate risk.

Last week, UK-based Standard Chartered announced a four-year partnership with Imperial College London so it could swot up on the subject. The college is home to the Centre for Climate Finance and Investment, which researches how capital markets are reacting to global heating. StanChart wants three things out of the tie-up: top quality research on the long-term threats of climate change, the ability to co-opt Imperial as an advisor on short-term issues, and for the college to train its staff on climate risk management.

StanChart is not alone in calling private tutors in. HSBC has collaborated with the University of Cambridge to develop in-house sustainability training. Over 2,300 employees attended trainings in 2018. Last year, over 800 were trained on climate risk “to strengthen engagement with customers”.

Also in 2019, AllianceBernstein partnered with Columbia University to educate its risk managers on the financial impacts of climate change, so they could factor these into their investment decisions.

Hindsight, not foresight

The hunt for such alliances is a de facto admission that financiers just don’t get climate risk and that the institutions they work for aren’t equipped to educate them on it solo.

Sure, dealing with risk is Wall Street’s bread and butter, but my sense is that firms lean towards managing the last risk which devastated their businesses, rather than looking to the next one.

Take Wells Fargo. Operational risk failings led staff to fleece customers and commit other acts of skulduggery. Following the uncovering of these bad practices – after losses had been incurred – the bank went on a hiring spree, tapping up 3,200 new recruits from outside the firm between 2016 and 2018, including a Chief Compliance Officer and Head of Regulatory Relations.

Wells Fargo now has a revamped risk function, robustly staffed. Yet operational risk had been widely telegraphed as the next risk threatening banks for years. The Basel Committee – the banking industry’s standard-setter – first initiated a work stream on the topic in the late nineties. JP Morgan’s “London Whale” scandal in 2012 was a live case study of the costs of underestimating operational risk. Both the theory and evidence warned that this risk could metastasise and corrode the bank if left unchecked. Yet Wells Fargo either did not or could not absorb the lessons.

The thing about climate risk is that by the time it triggers losses (and arguably it has done so already) it’ll be too late for lessons to be learned. Banks and asset managers that haven’t reduced, hedged or insured their climate-related exposures will face cascading losses, likely growing in magnitude year on year. A fat lot of good scrambling for climate risk management recruits will be then.

True, certain institutions are looking forward rather than back. JP Morgan puts natural disasters – which will grow more devastating and frequent as climate change manifests – in one of its six “buckets” of risks. A clutch of banks, including StanChart, have appointed a head of climate risk.

Still, a LinkedIn search for US-based “climate risk” jobs in financial services yielded 169 results on February 23, and for “sustainability” jobs 4,664.  An “operational risk” job search yields over 10,000.

Perhaps only a select few financial institutions, like those named above, have truly embraced the need to tackle the next risk posed by climate change and are hiring accordingly. More charitably, perhaps many don’t know what they’re looking for in a potential climate risk management team.  Hence Wall Street’s entreaties to academia’s ivory towers.

Kids these days

Still, how good are schools at supplying graduates that can meet financial institutions’ risk management needs? It turns out that colleges’ record on filling skill gaps in financial services is patchy at best. Back in 2012, the chief quantitative analyst (quant) at Danske Bank derided the influx of graduates to his profession as “muppets” who lacked problem-solving skills. In 2017, Gordon Lee, a member of the quant analytics group at UBS, told Risk.net that some graduates struggled to tie their book-learning to the nuts and bolts of a bank’s trading business.

There’s also a sort of circular dependency at play that may frustrate the supply of forward-looking risk managers. Risk.net’s Quant Guide 2020 underlines the importance of alumni networks in advising university faculties on top finance courses. This means that hot issues and trends within financial institutions are relayed to academics, who then factor these into course design.

But climate risk is a topic that originated outside of the financial industry that is still finding its way in. The Global Association of Risk Practitioners (Garp) ran a survey of 27 large financial institutions last year and found that one-third of board members had not seen papers on climate risk. Furthermore, only 15% of respondents believed their current strategy was resilient to further climate change. Just half were found to use scenario analysis to assess their climate-related exposures. As the trade body concluded: “a good start, but more work to do”.

If climate risk is still at a nascent stage within financial institutions, to what extent can professionals working within them explain to schools what they need from would-be recruits? They can’t. That’s why StanChart, HSBC and others have approached centres of climate change research directly – to address this blindspot.

Regulatory incentives

One development that could inject some urgency into the financial sector’s hunt for climate risk officers is regulation. When banks are faced with reams of fresh rules to follow, the call goes out for warm bodies who can help them toe the line. The introduction of the Basel III bank capital framework, for example, caused a stampede for regulatory compliance officers. French banking giant BNP Paribas increased compliance staff by 40% in the five years to 2015.

Mandatory climate stress tests, imposed by financial watchdogs, may convince firms of the need to staff up and better educate their employees. In Europe, fresh mandates on sustainable finance adopted by supervisors and the advent of the European Union taxonomy for sustainable activities may have a similar effect.

But the slow pace of regulatory change means this is no guarantee. Hiring specialists is costly, and financial institutions may not see the need for extensive climate risk teams unless and until binding rules are forthcoming.

This could be another factor driving institutions to partner with academic institutions. Perhaps they’re yet to be convinced of the need to go on a recruitment spree. In the interim, part-outsourcing climate risk analysis to schools may be a cost-effective way to get started.


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This column reflects the views of the author alone and are not those of the financial publications with which they are associated.