Weekly round-up: April 12-16

The top five climate risk stories this week

**Special request** One of this week’s big stories is New Zealand introducing a law requiring banks, insurers and institutional investors to disclose the impacts of climate change on their businesses. The NZ government claims this is a “world first”, but a thread on LinkedIn shows this is in dispute — with France’s 2015 TECV law having a convincing prior claim. Which country deserves recognition as the first to introduce such a law? And what distinguishes the two laws in your eyes? Share your thoughts in the comments, by sending an email to louie.woodall@climateriskreview.com, or getting in touch on LinkedIn.

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1) Basel Committee weighs in on climate risk management 

Banks and their supervisors should build up their “operational capabilities” to better assess their climate-related risks, the Basel Committee on Banking Supervision (BCBS) has said.

In two reports published on Wednesday, the standard-setter provided a rundown of how physical and transition hazards could impact lenders’ finances and an overview of “conceptual issues” around climate-related financial risk measurements and methodologies.

In the latter report, the BCBS said measuring climate risks “is a highly challenging task that demands significant resources, including adequate systems infrastructure, relevant human resources, and a sophisticated organisation”. It added that “a bank’s ability to assess its overall exposure to climate risks across all of its significant operations will be heavily dependent upon the quality of its IT systems and its ability to aggregate and manage large amounts of data”.

This is because climate risk measurement methodologies depend on highly-detailed information on borrowers’ businesses and supply chains, which can be used to size the carbon footprint of a given loan portfolio. Physical risk assessments require similarly granular location-specific data on borrowers’ fixed assets.

Banks will need to maximise their human capital, too, in order to take on climate risks. The BCBS said the “interdisciplinary nature” of climate risks could require “pooling resources from a wide range of relevant functional and business areas and developing in-house or outsourcing climate-specific expertise”. Complex banking groups may find this harder than simple lenders since “a higher degree of idiosyncrasy among business lines and banking entities may challenge internal harmonisation towards common risk assessment approaches, risk metrics and methodologies”.

In the report on climate risk drivers and their transmission channels, the BCBS said analysis so far by financial institutions and regulators has largely focused on how climate change could impact banks’ credit risks, and to a lesser extent their market risks. Assessments have generally been limited to “narrowly defined sectors of particular economies, individual markets, or top-down assessments of the macro economy as a whole”, the standard-setter added.

The Committee concluded that “a comprehensive analysis” could be undertaken to explore how climate risks could fit in with the existing Basel framework for bank risk management.

2) Toughen up bank capital rules for fossil loans, say experts

Increasing capital charges for carbon-intensive loans would be the best way for financial regulators to help combat climate change, a poll of 50 sustainable finance professionals shows.

Non-profit Climate Safe Lending Network (CSLN) asked experts from academia, civil society, commercial banks, central banks, and institutional investors to rank ten policy proposals by their potential impact on climate change.

The panel said increasing the amount of capital banks have to hold against fossil fuel companies would have the most impact, though some regulators questioned whether such a rule made sense in the short term. Sarah Breeden, executive director for UK deposit takers supervision at the Bank of England, said: “Once there is clarity on the path of forward climate policy this option would be more feasible — we would have better sight on how risks might arise and more data to support policy change”.

Second favourite was a proposal to have regulators set out “a clear framework” for what alignment with the Paris Agreement means for institutions, and clearly spelling out the consequences of falling short.

Both were assigned a medium feasibility ranking by the panel. The policy proposal the experts thought most likely to be enacted by regulators was an incentive scheme for “green” lending. Sarah Dougherty, senior green finance manager at the Natural Resources Defense Council, is one fan: “Green banks in particular have already been helping to speed up investment in new types of financial products. Scaling up this work could help speed up the adoption of clean energy financing”.

In addition to the proposals made by CSLN, respondents added some ideas of their own. Many said that central banks should toughen their collateral frameworks and bond-buying rules. Others argued that “concentration charges” should be imposed on bank lending based on a client’s greenhouse gas emissions intensity.

3) US lawmakers reintroduce climate disclosure bill

Democratic lawmakers on Thursday reintroduced a bill that would oblige US public companies to open up on their climate-related risks.

The Climate Risk Disclosure Act of 2021, sponsored by Congressman Sean Casten (D-IL) and Senator Elizabeth Warren (D-Mass), would direct the Securities and Exchange Commission (SEC) to issue rules forcing companies to report their direct and indirect greenhouse gas emissions, the total amount of fossil fuel assets they own or manage, how their valuation would change under both a business-as-usual and 1.5°C scenario, and the risk management strategies they have in place to meet physical and transition hazards.

The bill was first introduced by Casten and Warren in 2019. Today, with Congress under Democratic control, it may have a better chance of becoming law. 

“Senator Warren and I introduced the Climate Risk Disclosure Act requiring publicly traded companies to disclose their climate-related risks to provide investors with unambiguous disclosures to accurately convey their exposure to this massive and rapidly growing risk. The right time to safeguard our financial system against climate change was a decade ago, but our last chance is now,” said Casten.

The SEC has already taken steps to improve disclosure of climate risks by companies under Acting Chair Allison Herren Lee. On March 15, the watchdog launched a consultation on whether existing climate disclosure rules “adequately inform investors”.

Incoming SEC chair Gary Gensler, who was confirmed in the role by Senate vote on Wednesday, has also made plain his support for improved climate disclosures. 

“There’s tens of trillions of dollars of invested assets that are looking for more information about climate risk,” Gensler said during his confirmation hearing. “I think then the SEC has a role to play to help bring some consistency and comparability to those guidelines”.

4) Banks in Norway to measure portfolio alignment with Paris Agreement

All financial institutions in Norway have been invited by the government to assess how their asset portfolios match up with climate goals and gauge their exposure to transition risks.

The analysis will be undertaken using the Paris Agreement Capital Transition Assessment (PACTA) tool, developed by The 2 Degrees Investing Initiative (2DII), a non-profit think tank.

Participants will be able to upload their portfolios to PACTA and receive individual reports with anonymous peer comparisons on their climate alignment. The Norwegian government will get its own report on how in-sync the industry as a whole is with the goals of the Paris Agreement.

2DII will also conduct a qualitative survey of participants’ climate actions, such as investor engagements with fossil fuel companies.

The think tank has run similar country-wide projects in Switzerland and Liechtenstein. Future analyses are planned for the financial sectors of Austria, Luxembourg and the Netherlands.

The PACTA tool has been used by over 3,000 institutions worldwide since 2018, as well as supervisors including the Bank of England and European Insurance and Occupational Pensions Authority. In September 2020, ‘PACTA for banks’ launched, which allows lenders to measure the climate alignment of their loan books.

5) Four in ten global investors yet to factor climate risk into investment process — survey

Almost two-thirds of global institutional investors say climate change has already impacted their portfolios — but over 40% are yet to take any action to incorporate climate risk to their investment approach, a new survey shows.

Consultancy Greenwich Associates and asset manager PGIM polled 101 big investors on how they are responding to climate change. Nine in ten said it was an “important issue” to their organisation, and 59% claimed it had affected their investments already.

However, 42% said they have yet to factor climate change into their investment processes. North American respondents were the least likely to have taken climate into account, with 53% saying they don’t incorporate climate change into their investment strategies. European investors were the most likely to, with 81% saying they factor it in. Only 25% of North American investors said climate change held sway over their asset allocation decisions, compared with 85% of European institutions.

PGIM-Greenwich suggests this regional variance is a function of regulation. In a 2019 survey, Greenwich found that institutions thought regulators had the most influence on ESG investing in Asia and Europe. In contrast, only 17% of North American firms thought they were most influential.

Of global investors that have taken climate action, 57% said they’ve formally discussed climate change with their third-party asset managers and 32% that they’ve considered climate-oriented investment strategies. But just 23% have worked with external experts to gauge the climate risks in their portfolios, and only one in five have hired an ESG specialist.

A major factor dissuading investors from integrating climate change into their decision-making is doubt as to the reliability of climate models. Sixty percent of respondents said it would take “reliable modelling that shows the impact of climate change on assets, sectors and/or the economy” to get them to factor in climate. Thirty-eight percent said poor climate risk data was another barrier.

Please send questions, feedback and more to louie.woodall@climateriskreview.com

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The views and opinions expressed in this article are those of the author alone

First image: MDart10 / Shutterstock, third image: Maverick Pictures / Shutterstock. All other images under free media license through Canva