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COMMENTARY

When dealing with big risk becomes a big opportunity

MORE than ever, large financial institutions are finding themselves at the forefront of the fight against climate change. While alliances between nations have crumbled and the Paris Climate Agreement put into question, companies are under increasing pressure to bridge the gap, tackle critical issues and help spread proven policies globally. This is not just a risk but rather an opportunity.

The discussion about the role of banks in society has been fuelled by changes in expectations across stakeholder groups with regard to the services they provide, be it lending, trading or investing. For example, there is growing demand from millennials for sustainable investments, and more and more money managers are looking to integrate environmental, social and governance factors into their investment decisions and products.

The financial sector has a special responsibility - and a great opportunity - to facilitate and drive change that matters. This is especially true for a global wealth manager like UBS. Having a robust framework in place to understand and address environmental and social risk has become a key element in protecting both clients' and the bank's own assets - and it also makes perfect business sense.

Banks have been very proactive, although at different levels, in responding to these developments. When the Financial Stability Board's Task Force on Climate-related Financial Disclosures released its recommendations in June 2017, calling on companies to disclose the impacts of climate change on their businesses, we supported it, both in its development and because of our long-standing climate actions.

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RAISING UNDERSTANDING

In April this year, 16 leading banks including UBS from four continents, convened by the UN Environment Finance Initiative, published a jointly developed methodology to increase banks' understanding of how climate change and climate action could impact their business. Another good example is the Roundtable on Sustainable Palm Oil (RSPO) of which UBS is a member. With RSPO we already go beyond current law. Singapore has defined guidelines based on the RSPO handbook, which shows that private sector initiatives, if properly executed, can pave the way to a less legalistically-driven, more hands-on approach when dealing with environmental and social risk issues.

Private sector initiatives based on voluntary action can be more effective than laws, which are often imposed only once the damage is already done. Such initiatives have proven to be very effective in translating important societal developments into banks' mainstream risk management functions. This is not just about avoiding risk, it is above all an opportunity to manage risk prudently by developing forward-looking industry standards and benchmarks before they become regulatory requirements such as climate-related stress tests to pre-empt a regulatory requirement similar to today's financial stability stress tests.

But these and other laudable initiatives that include some of the biggest global banks will not have a sufficient sustainable impact unless other banks join in. The 2018 UN Climate Change Conference would be a good opportunity to step up and further empower such initiatives.

If the financial sector wants to stay attractive for clients, investors, employees and other stakeholders, sustainability needs to become a cornerstone of every bank's business. This, in turn, requires a more closely connected approach on environmental and social risk issues based on increased coordination and common best practice. Divided, the best efforts to change our world to become more sustainable will fail. Only through cooperation and partnership between private and public initiatives on a local, regional and truly global scale will we be able to create a better, more balanced and sustainable future.

  • The writer is group chief risk officer, UBS Group AG