Q&A with Andrew Newton, Executive Director Strategic Risk at SMBC

We regularly sit down with significant figures from the risk management industry to get their perspective on key trends within the market. For this report, we spoke to Andrew Newton from SMBC about climate risk management.

Hi Andrew. Could you tell us a bit about your background, as well as your current role and how it relates to climate and environmental risk management?

I’ve been in corporate banking for many years, working in both front-office credit and credit approval functions. I started my current role in risk management in 2018.


The credit roles required me to assess and write credit applications covering large, complex transactions with the benefit of an in-depth understanding of the more traditional risks facing our clients. This experience provided a perfect foundation for my two principal roles within risk management: writing the bank’s ICAAP and overseeing its approach to climate change.


My first involvement with climate change regulations required me to prepare a presentation to the board of directors relating to the PRA Consultation Paper “Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change”. This provided valuable insight into the regulator’s thinking, the enormity of the challenges facing banks and the considerable amount of work required to address the financial risks of climate change.


How important do you see environmental risk management being to risk functions over the coming years?

Climate change cuts across all risk disciplines, and it is important that staff throughout an organisation, from the board through to the most junior new entrant, have an appreciation of the risks.


In my own experience of interviewing interns, climate change and our approach to it is an important consideration for them, either as a result of their own concerns or simply because they want to be involved.


Currently, banks are still organising themselves to address the risks from climate change. However, I believe that, in time, the assessment of climate risk will become business as usual, requiring new policies, procedures, analytical capabilities and internal structures – either as a standalone unit and/or as part of existing risk functions.



What do you consider to be the biggest environmental risks and opportunities affecting the industry?

Prior to the pandemic, climate change was regarded as a key risk facing banks.  Obviously, banks are having to contend with the financial effects of Covid-19, but they are keeping focus on the potential impact of climate change on their future business. This is because of both an increasingly tight regulatory landscape and the transition and physical risks that are present today.


It is worth noting that the industry has a shortage of harmonised data sources and presentation standards that are required to build risk management and appetite frameworks. While this current shortage of data is acknowledged by the regulators, they equally expect banks to work around this over time.


That said, banks can make a difference through the provision of green and sustainability-linked loans, covering both corporate and personal lending products.


Given that some estimates project we will need $100 trillion of investments in sustainable infrastructure by 2030 to transition to a low-carbon economy, this represents a huge opportunity for banks.


Are there particular areas of a business or the wider industry that are most affected by environmental risk?

While the industry is exposed to the full range of climate-related risks, the degree of exposure to transition and physical risks is dependent upon the make-up of a bank’s portfolio.


For example, large UK lenders will be exposed to physical ‘postcode risks’ in their mortgage portfolios, whereas some international banks across the EMEA region have purely corporate portfolios, where physical risks are less of an issue than transition risks. However, those banks are open to other risks through their corporate portfolios, such as reputational and legal risks.


What have been the biggest challenges you’ve faced during implementation? How were these overcome?

A key challenge for us has been human and data resources.


We have established a project team to address these requirements, which is led by our recently recruited Head of Sustainability Strategy. The project team comprises staff with a good understanding of climate-related risks, and they are proving invaluable in developing an understanding of climate-related challenges across the region.


We are also considering external sources to develop our understanding of both the challenges we face and the opportunities we can explore. As this project evolves, resourcing remains a key focus.


As far as data requirements are concerned, there is not yet a common standard or common provider capable of covering all the data needs of all banks. To address this, we created our own process to capture data.


Do you believe environmental risk will have a big impact on staffing and the mix of skills required in risk teams?

I think banks will require both additional training for existing staff and new external staff with the specific skills required to implement regulatory expectations, such as stress testing and client engagement. The quantum of the requirements will likely be driven by how banks arrange their teams.


As climate-related risks are relatively new to the industry, a combination of understanding regulatory requirements together with the ability to demonstrate evidence of practical implementation of new, related initiatives would also be desirable.