ACTION REQUIRED: Transition Risks in the Face of Climate Change

transition risks & climate change, the invictus group

As global greenhouse gas emissions soar to unprecedented levels and the world grapples with the urgent need to address smoking skies, the implications for financial institutions, including community banks, cannot be ignored. Transition risks stemming from policy and legal changes, technological advancements, market shifts, and evolving consumer and investor sentiment are poised to reshape the business landscape. By proactively addressing these risks, community banks can safeguard their financial health and emerge as leaders driving positive change in the climate crisis.Regulators often refer to physical risks from climate change, which encompass damage to property, infrastructure, and disruptions caused by climate-related events. Transition risk, on the other hand, examines the challenges faced by businesses and financial institutions as they navigate the transition to a low-carbon economy. This risk highlights the need for proactive adaptation and strategic planning to ensure organizational resilience in the rapidly evolving economic and environmental landscape.

Community banks have a unique role to play in supporting their local communities through climate risk management. By understanding and addressing transition risks, banks can contribute to the overall sustainability of the communities they serve. This involves managing risks related to climate change, energy, health, housing, legacy pollution, transportation, water and wastewater, and workforce development. These are the eight categories of burden defined by the United States Council on Environmental Quality, as used in their Climate and Economic Justice Screening Tool. By actively identifying these risks through ClimateRisk Analytics developed by Invictus Group, banks can help protect their customers, businesses, and the broader community from the economic effects of what the UN now warns is a global boiling

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The indicators of burdens are used in sensitivity analysis, based on lending footprint, to identify key risk factors for a given community. As an example, a hypothetical bank in West Virginia holds 4.7 million dollars in deposits that rank at a High sensitivity to transition risk, and 3.9 million ranking at a Very High sensitivity. The majority of this weighted vulnerability score is impacted by high energy and health concerns. Energy burdens are defined as high percentile rankings for the cost of energy or the amount of PM2.5 in the air, fine inhalable particles capable of carrying harmful toxins into the lungs. Health burdens are defined as high percentile rankings for asthma, diabetes, heart disease, or low life expectancy. Facing these burdens, communities such as those in West Virginia are highly susceptible to transitions such as policy changes and technological advancements in an attempt to combat health and energy concerns. 

Taking a proactive approach not only secures a bank's financial future but also fosters positive community impact. Community banks that prioritize climate risk management become trusted partners for customers seeking alignment with their values. In a world facing climate challenges, these banks can lead the way towards a sustainable and prosperous future for themselves and the communities they serve. By embracing climate risk management, community banks can indeed become superheroes in the fight against the climate crisis.

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Transition Risks for Community Banks in the Face of Climate Change