Transition Risk Management for Commercial Banks

Risk management and financial disclosure of transition risk has become a mandatory fiduciary duty for financial institutions worldwide as investors require them to disclose climate-related financial risks. As such, it is imperative for banks to assess transition risks in their loan portfolios and find mitigating solutions to those risks. Banks should identify the best-fit valuation models or metrics to assess financial risk from their carbon-intensive assets.

The transition risk integration process involves a series of steps: assessment, quantification of financial impact, integration, and reporting. This is a lengthy process, and requires a bank to first build up its internal capacity, employ custom- fit technical tools, and establish a task force to implement the steps. Although a bank employs a third party to perform the whole process, an internal capacity to oversee the procedure is highly recommended for accurate results. The whole process ultimately includes seven steps from assessment to reporting.