Review of 2020

The top five articles from Climate Risk Review in 2020

A Happy New Year to all Climate Risk Review subscribers! Thanks to each and every one of you who signed up to the newsletter in 2020, shared it with your colleagues, and reached out with your ideas and suggestions for making it better. Because of your support, Climate Risk Review is now among the top 10 paid climate newsletters on Substack.

An especial ‘thank you’ to the newsletter’s paid subscribers, whose investment in Climate Risk Review has provided the means for expanding the publication beyond its humble roots. I’ve lots of plans for new editorial content for this year, plus special climate risk data tools for paid subscribers to play around with. Make sure you become a paid subscriber to avoid missing out:

The Weekly Round-up will return with a special bumper edition on Friday, January 8. The next newsletter for paid subscribers, on the IFRS Foundation’s consultation on new sustainability reporting, will be out Monday, January 4.

Below, I’ve included a rundown of the top five Climate Risk Review articles of 2020 so those thinking about becoming paid subscribers can get a taste of what’s available. Subscribers can browse the archive to read any and all back issues at their convenience. As always, feel free to reach out at louie.woodall@climateriskreview.com with any suggestions, advice, or questions.

Best regards,

Louie


1) Black boxes, green swans

Hunting down “green swans” — the climate risks that could upend the global financial system — should be the overriding mission of firms and supervisors alike. But do they have the right tools for the job?

That’s the question posed in a study by researchers at ETH Zurich’s Center of Economic Research. The paper represents the first concerted effort to analyse the baffling array of climate risk gizmos produced by think-tanks, universities and private companies, and to try to determine what tool features lead to top-quality and “decision-relevant” results.

2) Faulty climate targets imperil more than banks’ sustainability credentials

The effort to create a climate-friendly financial system risks emulating the fate of the Tower of Babel. Advocates may be united in their desire to subordinate the flow of capital to the goal of a net zero carbon future. But they are divided by fundamental disagreements over how financial institutions affect change in the real economy, and what targets and measurements most honestly reflect their contribution to decarbonisation.

3) Exclusion illusion? How to improve negative screening

Negative screening, whereby companies are excluded from a firm’s portfolio if they don’t meet preset environmental criteria, is the initial step taken by many financial institutions working to implement a climate risk management process. It’s popular among top lenders, too. The consultancy Mazars found that 73% of 30 leading banks had exclusion policies in place to reduce their involvement in carbon-intensive sectors, and that 59% of this group made them more stringent in 2018. 

To limit global heating, it’s essential that the money fountain sustaining the fossil fuel sector is shut off — so these figures look encouraging. But as always, the devil is in the detail.

4) Revealed: Europe's most climate-sensitive banks

It’s tough to hide from public scrutiny as a European bank. Post-crisis reforms to financial industry oversight ushered in so-called ‘transparency exercises’, which are conducted each year by the European Banking Authority (EBA). The result of each is a rich dataset containing detailed information on loan exposures, capital, profitability and more at a country and bank-by-bank level. The results of the latest exercise were published in early December, covering 135 banks in 27 countries.

It’s a veritable treasure-trove of information, and one that can be mined for insights into the EU banking sectors’ loan exposure to climate-related risks with a little effort. Careful parsing of the data using the EBA’s own loan-level classification system even allows for a ‘ranking’ of countries and banks by their holdings of high transition risk sector exposures.

5) ‘Green lemons’: climate data and information asymmetry

To be “sold a lemon” is to be tricked into buying something worthless. Though the saying originated as a slang term, it was co-opted by more rarefied circles after the 1970 publication of US economist George Akerlof’s now famous paper: “The Market for Lemons: Quality Uncertainty and the Market Mechanism”. This described the now-famous “lemons problem” — one that climate-sensitive investors are coming face-to-face with today.


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