The PRA and the Financial Policy committee said, in a statement on priorities in light of the impact of the current global lockdown, that it will delay the launch of its climate biennial exploratory scenario, which will test the resiliency of the largest financial firms’ business models to the physical and transition risks from climate change, until at least mid-2021.
Central banks worldwide have been involved in the debate over climate change and the impact on the financial system. To date, the BoE has led the way in encouraging banks and insurers to assess exposures to global warming and new risks which can come with the move towards a low-carbon economy.
So, what does this mean for commercial finance leaders, which would have also been making boardroom-level plans for the impending stress tests?
Firstly, a short postponement of the Bank’s stress tests is completely understandable, given the realignment of central banks all over the world to refocus financial policies and double down on help to try to manage the economic fallout of the lockdown.
But secondly, and just as importantly, the climate emergency is not going away, and will return to the top of the BoE’s agenda very soon, meaning that vital plans at commercial finance organisations must continue to be made.
There are many commentators talking about a new normal; McKinsey go one step further by frequently referring to a next normal. The climate emergency and the transition to the low-carbon economy will feature heavily in boardroom discussions as lenders plan for what this next normal will look like. Commercial finance leaders can’t afford to detract from planning for the key operational priorities now, as the importance of climate risk to the sector and its clients will only continue to grow.
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The impact of climate risk and the successful transition to a low-carbon economy will be the next normal for the way in which the global finance industry must be rewired to operate. BoE stress tests will be implemented and this is going to mean people, processes and technology need to be recalibrated to ensure commercial finance leaders are resilient and can meet new key performance indicators.
The global transition to this new economy means getting ahead of and planning for a moment in time which will be crucial to how banks, insurers and commercial finance organisations operate successfully in the future; leadership teams at lenders need to be all over the key data and metrics which will define this.
The ability to pivot operations, plans, forecasts and teams in response to new metrics will dictate the industry leaders who will thrive.
A move to digital boardrooms will drive this new operational mindset. CXO leaders at forward-thinking commercial finance organisations will want the latest data-driven metrics in front of them in real time, so they can see and report back on how their organisation is progressing on the road to a transitioning and complying with new KPIs.
Executive leaders across the financial services industry will expect to be able to respond to the changing business agenda, by accelerating their most important decision-making through genuine digital transformation.
Take, for example, a board meeting where a commercial finance leader’s business strategy is being discussed and the direction the organisation should take to respond to new legislation relating to the new low-carbon economy. With multiple routes available, how should a decision be made? A digital boardroom will provide the answer.
Such a decision-making platform allows anyone in the room to perform complex scenario modelling and build strategic plans as they discuss potential outcomes with data. A commercial lender considering the development of a new way of working to comply with new stress tests focused on their resilience, needs to answer a number of questions before moving forward – what and where are the resources needed to step up? Will the new transition require investment in people? Would it be more economical to hire additional staff, upskill existing employees or outsource certain aspects completely? What is the impact from other potential shifts in the economy in future?
Today’s turbulent environment means that executives must be able to plan, adapt and react with speed. Data silos across the organisation must be broken down to gain a holistic view of lenders’ performance in line with the new BoE stress tests. Connecting commercial finance leaders’ operational planning activities, joining up functional transparency, and enabling the accurate simulation and testing of scenarios in digital boardrooms has never been greater in order to comply.