Inside Climate Disclosures 16 (Part I): Citi (2018)
A deep-dive into Citi's TCFD disclosure
***Citi published its first TCFD report in November 2018. It is scheduled to publish its second by the end of 2020. This edition of ‘Inside Climate Disclosures’, therefore, consists of two articles. The present article reviews Citi’s 2018 disclosure. A subsequent article will cover Citi’s 2020 disclosure. This should enable readers to see how the bank has progressed its TCFD implementation over time***
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Citi’s first standalone TCFD report offers a ‘best in class’ disclosure of a climate scenario analysis. The bank describes in exhaustive detail the methodology, models, scenarios, assumptions and portfolios assessed, complementing the narrative with informative graphics and tables. Omitted, however, are details of the scenario impacts on the bank’s own exposures, meaning readers know everything about the analysis except its final results. Other TCFD recommendations are addressed in uneven detail. The bank’s climate governance is well-explained and ordered. In contrast, the risk management section is light on substance.
ICD assessment (Citi 2018)
*The disclosure states: “Citi sees an opportunity to help clients become more climate resilient by providing financing solutions for climate adaptation”
**“Citi’s definition for the short- and medium-term is consistent with the accepted definition of credit horizons for term lending, which ranges from 1 to 5 years. Citi does consider longer time horizons as well, sometimes up to 100 years, which is very different than the time horizon for Citi’s loans, when assessing climate change impacts and potential future risks”
***Citi’s piloting of scenario analysis techniques is credited with teaching it “how to set up our systems to undertake … climate-related stress tests”
****No exclusion policies are described within the confines of the TCFD report. But these are included in additional documents incorporated by reference
TCFD recommendation: “Disclose the organisation’s governance around climate-related risks and opportunities”
Citi’s disclosure neatly breaks down climate-related governance at the board, senior management and business unit levels. In line with TCFD recommendations, specific committees and individuals with climate responsibilities are named, along with the targets and initiatives they monitor.
Oversight of climate issues at the board level is facilitated by the Nomination, Governance and Public Affairs Committee (NGPAC). The committee’s charter is incorporated by reference in the disclosure, which states that one of its duties is to: “Receive reports from and advise management on the Company’s sustainability policies and programs, including the environment, climate change and human rights”. The NGPAC is also charged with overseeing Citi’s $100 billion Environmental Finance Goal.
At the senior management level, the individuals charged with climate responsibilities are the Director of Corporate Citizenship and Global Head of Sustainability. The Director of Corporate Citizenship reports up to the NGPAC at least once a year on pressing citizenship and sustainability issues. The Global Head of Sustainability oversees Citi’s Sustainable Progress Strategy and works across teams “to enable the development and implementation of climate-related metrics and targets”. How the Global Head of Sustainability interacts with the board, Director of Corporate Citizenship and other senior management stakeholders is not described, however.
An Environmental and Social Advisory Council is the executive-level committee charged with providing “guidance on environmental and social issues related to global business activities, including advising on the Sustainable Progress Strategy”. The group counts among its members personnel from banking, risk, and Environmental and Social Risk Management (ESRM) teams, among others, and meets around three times a year.
Citi’s disclosure also highlights a number of functions below senior management level with specific climate-related responsibilities that “[ensure] ownership of sustainability goals throughout the company”. The groups named are: the Corporate Sustainability team, ESRM team, Corporate Realty Services group, and Enterprise Supply Chain team.
TCFD recommendations do not ask firms to disclose the governance of climate issues beyond the board and senior management levels, but Citi’s transparency is helpful to users of its report, as it evidences how climate risk governance responsibilities are well dispersed throughout the firm.
Though comprehensive in scope, Citi’s governance disclosure could have been improved with a clearer description of how the various teams and individuals interact and report to one another — perhaps through the device of an organisation chart.
TCFD recommendation: “Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning where such information is material”
TCFD recommendations ask banks to describe climate-related risks and opportunities identified over the short, medium and long term and how these impact their business, strategy and financial planning. Firms are asked to describe any climate-related scenarios they use to measure these risks, too.
The dedicated strategy section of Citi’s TCFD disclosure takes the form of a short narrative describing its five-year Sustainable Progress Strategy and a discussion of its ability as an institution to adapt to a changing climate. The latter includes a description of relevant short-, medium- and long-term time horizons used to organise risk assessments, in alignment with TCFD recommendations. However, the specific climate-related risks and opportunities associated with these time horizons are not disclosed.
Citi writes that it identifies potential climate impacts on its business and strategy through scenario analysis, the description of which is featured in a dedicated section of the TCFD report. It is perhaps the most comprehensive disclosure of a climate scenario analysis among the institutions featured in the ‘Inside Climate Disclosures’ series.
The bank explains that its scenario analysis was conducted in concert with the UN Environment Programme Finance Initiative (UNEP FI) phase I banking pilot group, which set out to pioneer transition and physical risk assessments and better equip the banking sector to fulfill TCFD recommendations. In describing its scenario analysis at length in its disclosure, Citi explains it hopes to “help other companies consider how to undertake this analysis”.
Users of climate-related information benefit too, since they can refer to Citi’s study as a benchmark for measuring other disclosures. Indeed, the recent TCFD Playbook put together by UNEP FI and consultancy EY used sections of Citi’s scenario analysis disclosure as examples of best practice that other banks could emulate.
The scenario analysis disclosure is split into two segments, covering transition and physical risks.
First, the transition scenario analysis. Citi describes the underlying methodology used, organised across three modules: transition scenarios, borrower-level calibration, and portfolio impact assessment.
The models, scenarios and tools used are also recounted in detail. Significantly, the bank describes the processes used to determine the selection of these variables, too. This is helpful for understanding why certain approaches are favoured over others.
The disclosure states that Citi settled on the REMIND-MAgPIE model from the Potsdam Institute for Climate Impact Research for the transition scenarios and a tool developed by Oliver Wyman — used by all members of the UNEP FI group — to estimate “scenario-implied probability of default and expected loss to the portfolio under different transition scenarios”. Citi limited the scope of the exercise to its utilities portfolio and oil and gas portfolio. The time horizon of the scenarios extended to 2040.
Three REMIND scenarios were employed for the analysis, covering 1.5°C, 2°C and 4°C warming targets. This exceeds TCFD ‘strategy’ recommendations, which ask banks to consider “transition to a lower-carbon economy consistent with a 2°C or lower scenario”. The model’s underlying assumptions — on socioeconomics, energy demand, and policy — are all disclosed, some with helpful infographics, giving readers a clear understanding of their inner workings. Again, this is a useful disclosure for the purposes of benchmarking scenario analyses and comparing across banks.
Indeed, the only aspect of the scenario analysis for which data is scant concerns the ultimate results. The disclosure of the scenarios’ effects on Citi’s portfolio is limited to high-level qualitative statements.
For instance, in relation to the analysis of its oil and gas exposures, all Citi reveals on the 2°C scenario is that the transition impact to its North American portfolio would be “limited” in 2030 and 2040. For the 1.5°C scenario, it limits its disclosure to explaining how certain clients “could see a downward migration of their scenario-implied credit ratings by one to two notches.”
Citi could have augmented this disclosure by including metrics or graphics illustrating the change in credit ratings across assessed exposures, similar to Bank of America. This would have given users a more thorough and precise understanding of the impacts to its portfolio than narrative reporting alone.
The structure of the physical risk analysis disclosure mimics that of its transition-focused counterpart. The methodology is described first, followed by the scenarios, tools and data sources, plus what’s in scope of the exercise. Three types of physical risks are covered: cyclone, excessive heat, and storm surge, and one exposure type: power plants.
The exposure of power plants to these climate hazards are illustrated in colourful screenshots from Bloomberg MAPS, a “consolidated climate data and asset-level global power generation” dataset. These are visually interesting, but offer little in the way of useful data as to Citi’s physical risk exposures.
As with the transition analysis, the findings of the physical risk assessment are lacking in detail. Citi explains that under the 2°C scenario, productivity of the power plants scrutinised “may decline between 9.5% and 15.1% due to physical climate risks, with an average decline of 11% by 2040”. Under both 2°C and 4°C scenarios, Citi concluded these and other impacts would reduce the scenario-implied credit ratings of over half of the utilities by one notch. But there was no disclosure of what this meant for its portfolio, or quantification of projected losses.
The absence of quantitative disclosure likely reflects the fact that Citi’s scenario analysis capabilities were at an early stage at the time of writing. The TCFD itself suggests firms adopt a five-year implementation path, with the depth and specificity of disclosures increasing each year in a stepwise fashion. This being Citi’s first standalone TCFD report, the absence of detailed quantitative information, then, is no surprise.
TCFD recommendation: “Disclose how the organisation identifies, assesses, and manages climate-related risks”
Citi’s description of its process for identifying and assessing climate-related risks (the first of the TCFD ‘risk management’ recommendations) is wrapped up in its scenario analyses disclosure (see ‘Strategy’).
As for its process for managing these risks, Citi cites two initiatives: its $100 billion Environmental Finance Goal and its Environmental and Social Risk Management (ESRM) policy.
Citi states that its financing goal supports climate resilience, adaptation and mitigation efforts. These are described as helping clients directly and indirectly reduce their own climate risks, which in turn should dampen the bank’s own exposures.
As concerns the ESRM policy, Citi writes that this contains a climate risk management framework for project financing, plus sector-specific policies for high-risk industries: such as coal mining, forestry, oil and gas and palm oil. Further details are laid out in the ESRM and environmental finance sections of its annual Global Citizenship reports, incorporated by reference in the TCFD report.
In addition, the disclosure states that the climate scenario analysis provides Citi with “a better understanding of how to engage with clients in various sectors on climate-related transition and physical risks and opportunities”.
As for its own operations, Citi describes how its business continuity teams are charged with preparing the bank to deal with extreme weather events and other physical climate risks that could disrupt its activities.
These separate disclosures do not evidence that Citi has fully integrated climate into its overall risk management, as per TCFD recommendations. Nor do they show that Citi characterises these climate-related risks in the context of traditional banking industry risk categories, including credit, market, liquidity and operational risk.
However, in the coda to the report, Citi states that it is “working with internal quantitative analysis and modeling teams to develop a plan for internal integration of climate risks and opportunities into existing models and tools”. This evidences the bank’s commitment to evolving its approach to be more in line with that envisioned by the TCFD.
TCFD recommendation: “Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material”
Citi’s disclosure contains a range of TCFD recommended-metrics and targets on climate-related risks as concerns its own operations, and its progress towards fulfilling these, too.
It also features a table detailing its scope 1, 2 and 3 emissions. The scope 3 emissions disclosure is limited to those produced through business travel and by the thermal power plants under Citi’s control.
The disclosure does not offer any data on the bank’s financed emissions, a summary of the carbon-intensity of its portfolio, or any breakdown of carbon-related assets. Therefore, it fails to fulfill the bank-specific TCFD recommendation which asks firms to “provide the metrics used to assess the impact of (transition and physical) climate-related risks on their lending and other financial intermediary business activities in the short, medium, and long term”.
Since publication of the TCFD report, however, Citi has signed up to the Partnership for Carbon Accounting Financials (PCAF), alongside Wall Street rivals Bank of America and Morgan Stanley. Its membership of this group should facilitate reporting of its financed emissions in subsequent reports.
The metrics segment is rounded off with a breakdown of Citi’s environmental financing by sector, and the estimated amount of carbon emissions abated through these investments. As of the publication of the report, Citi had allocated $57 billion out of its $100 billion Environmental Finance Goal.
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