How can financial services firms embrace proportionality for climate risk management?

Tailoring risk management practices to the size, complexity, and risk profile of an institution is essential for ensuring that climate risk efforts are both meaningful and manageable.

Flexible and modular approaches to data, models, and scenarios

Climate risk is complex and uncertain. It spans long time horizons, involves non-linear impacts, and depends on evolving policy, technological, and societal responses. Given this, firms need to adapt their data sources, models, and scenarios based on their specific needs and capabilities.

For smaller or less complex firms, this might mean starting with qualitative assessments or using publicly available climate scenarios (e.g. from the Network for Greening the Financial System). Larger firms may develop bespoke models that integrate granular geospatial data, sector-specific transition pathways, and advanced climate science.

Leveraging existing credit risk models

Aligning with one of the most pragmatic aspects of proportionality by leveraging existing credit risk models rather than building entirely new systems from scratch is key. Many firms already have robust frameworks for assessing creditworthiness, portfolio risk, and capital adequacy. These can be adapted to incorporate climate-related variables, such as carbon pricing, physical risk exposure, or transition risk indicators.

This approach saves time and resources whilst also ensuring consistency across risk management practices. Firms can more effectively embed it into decision-making by integrating climate risk into familiar tools and processes. It also facilitates buy-in from internal stakeholders who may be more comfortable with incremental changes than wholesale overhauls.

Importantly, this does not mean ignoring the unique characteristics of climate risk. Rather, it means enhancing existing models with climate-relevant inputs and stress-testing them under relevant climate scenarios. This hybrid approach balances innovation with practicality.

A risk-based focus on the most vulnerable and material exposures

Proportionality also means being risk-based, focusing efforts where they matter most. Not all exposures are equally vulnerable to climate risk. For example, a bank’s mortgage portfolio in flood-prone regions or an insurer’s underwriting of fossil fuel infrastructure may carry significantly higher climate risk than other parts of the business.

By prioritising the most material exposures, firms can allocate resources efficiently and generate insights that are directly relevant to their risk profile. This targeted approach is especially important for smaller institutions with limited capacity, allowing them to demonstrate meaningful progress without being overwhelmed by the scale of the climate challenge.

A risk-based approach also aligns with regulatory expectations. Supervisors increasingly emphasise the importance of materiality assessments and expect institutions to focus on exposures that could have a significant impact on their financial health or reputation.

How can we help?

As climate risk becomes a defining challenge for the financial sector, proportionality offers a path forward that is both ambitious and achievable. We have created our tool CliMate, which supports firms adopt flexible, modular approaches, leverage existing models, and focus on the most material risks. In doing so, firms can also integrate climate considerations into their decision-making process in a way that is both effective and sustainable.