Weekly round-up: August 23-27

The top five climate risk stories this week

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1) Central banks failing to confront climate crisis

Major central banks are “tinkering around the edges of the climate crisis” and have so far failed to use their powers to curb fossil fuel financing, a new report by a coalition of advocacy groups says.

Their analysis found that not one of the 12 central banks assessed — including the Bank of England, Federal Reserve, and European Central Bank — are taking actions aligned with the objectives of the Paris Agreement.

“Central banks have access to powerful tools to confront the climate crisis, but they aren’t using them,” said David Tong, Global Industry Campaign Manager at Oil Change International and an author of the report. “The climate crisis is too dire and too urgent for such critical institutions to be dawdling when they could be leading the finance sector in a new, climate-safe direction”.

The central banks were graded against a ten-point rubric covering their portfolio management, rules and support for commercial banks, and policy and research activities. This revealed that in most cases central banks’ climate-related actions have been limited “to measures to increase financial market transparency”. Exceptions include the French and Swiss central banks’ decisions to partially exclude coal assets from their portfolios.

Source: Oil Change International

The report also found that the central banks did nothing to limit around $3.8 trillion of funding for fossil fuel companies by large commercial banks between 2016 and 2020, and had so far “ignored proposals to use reserves requirements or prudential regulation to this end”.

To better align their actions to climate goals going forward, the report recommended that governments alter central banks’ mandates where necessary “to give them the power to support the managed decline of fossil fuel production”. Some have already taken this step. In March, the UK Chancellor of the Exchequer amended the Bank of England’s mandate to reflect “the importance of environmental sustainability and the transition to net-zero”. 

As for the central banks themselves, the report said they should exclude from their own portfolios all fossil fuel-linked assets, adopt a regulatory approach that aims at eliminating commercial banks’ support of fossil fuel sectors, and undertake research of climate-related risks and run appropriate stress tests.

2) EU banks, supervisors should accelerate ESG risk management efforts — BlackRock

Financial authorities in the European Union should speed up the integration of ESG risks — including climate risk — with bank regulations, a study by BlackRock for the European Commission states.

Released Friday, the 273-page report assessed current efforts to fuse ESG factors with the EU banking prudential framework and surveyed banks’ own ESG risk management, business strategies, and investment policies. BlackRock found that “few supervisors have developed dedicated and publicly communicated ESG prudential strategies” and that most have not yet defined quantitative ESG risk metrics. 

As for EU banks, the study showed their measurement of ESG risk exposures is “very limited” and that most “do not have a portfolio view of their exposure to ESG risks”. However, it also found that the highest degree of integration of ESG risks within banks’ internal risk reporting frameworks concerned climate-related issues.

BlackRock recommended that banks and supervisors “work to develop coherent definitions of ESG risks” and consider a ‘double materiality’ approach to ESG risk management — one which factors in both how ESG risks affect banks and how banks themselves may affect the environment and society. It also told lenders to ramp up efforts to improve ESG-related data quality, availability and comparability.

On the contentious issue of climate-related capital charges for banks, BlackRock said supervisory authorities “should analyse a potential risk differential to assess the risk relevance of a green supporting or brown penalising factor in Pillar 1 capital requirements”. The European Banking Authority (EBA) is currently exploring whether an ESG risk-specific capital charge for banks is warranted. It is due to report its findings by 2025.

BlackRock also endorsed the consideration of ESG factors in banks’ own Internal Capital Adequacy Assessment Processes (ICAAP) and the use of longer time horizons for assessing these factors in the EU’s Supervisory Review and Evaluation Process (SREP).

3) Climate funds out of sync with Paris Agreement

Many climate-themed equity funds do not invest in line with the goals of the Paris Agreement, and often hold fossil fuel assets linked to the world’s biggest carbon emitters, a new report by think tank InfluenceMap says.

Of the 130 funds — with a collective $67 billion in total net assets —  identified as climate-themed by the group, 55% received negative ‘Paris Alignment scores’, meaning their holdings do not promote a low-carbon transition. The scores for each fund were generated using the Paris Agreement Capital Transition Assessment (PACTA) tool developed by the 2º Investing Initiative.

The analysis also found the climate-themed funds together held $153 million of fossil fuel assets, from issuers including TotalEnergies, Kinder Morgan, Enbridge, Neste, Halliburton, Chevron, and ExxonMobil.

InfluenceMap said that many funds’ misalignment with the Paris Agreement is a function of the passive index-linked strategies used by fund managers to construct climate-themed products. By adjusting popular market indices using climate factor screens, fund managers often exclude lots of fossil fuel companies but continue to allocate to carbon-intensive assets outside the fossil fuel sector.

The think tank found that of the various climate-themed fund subtypes, those classified as ‘Clean Energy’ funds were the most aligned with the Paris Agreement because of their high exposure to the renewable power sector.

Source: InfluenceMap

The InfluenceMap report follows a separate analysis of European ESG funds by Risk.net, which found that many equity funds labelled “light-green” under European Union rules have more than 20% of their assets exposed to oil and gas companies.

4) Asset manager DWS under US, German investigation over ESG claims

DWS, the asset management firm majority owned by Deutsche Bank, is being probed by financial authorities in the US and Germany over claims it exaggerated the ESG bonafides of its investment products.

BaFin, Germany’s financial regulator, and the US Securities and Exchange Commission (SEC) are both investigating allegations raised by DWS’s former sustainability chief, Desiree Fixler, who says the firm overstated the amount of assets invested using its ESG screening process. The Wall Street Journal published Fixler’s account on August 1 and first reported the SEC investigation. Bloomberg first reported the BaFin investigation.

DWS stated in its 2020 annual report, released March, that more than half of its $900 billion assets were subject to ‘ESG integration’, where companies are vetted using ESG criteria. Fixler claims that in reality only a fraction of assets went through this process. She further alleges that the ESG integration process did not screen out companies involved in climate-harming activities like coal and fracking. Fixler was fired by DWS in March before the annual report’s release.

In a statement published Thursday, DWS rejected Fixler’s claims and said it had always been clear in its reporting. News of the investigations sent the firm’s stock tumbling over 13%, ending Thursday at €36.

5) Swiss Re strikes $10m deal for carbon offsets

Zurich-based startup Climeworks will be paid $10 million by reinsurance giant Swiss Re to suck carbon from the atmosphere and bury it underground over the next decade as part of a world first long-term purchase agreement.

The reinsurer did not disclose how much CO2 the deal would remove or specify the expense per tonne, saying only that each will cost “several hundred dollars”. Swiss Re has committed to reach net-zero emissions in its own operations by 2030, in part by buying carbon removal certificates from “impactful projects”, its 2020 sustainability report states. In 2020, the firm’s carbon footprint came to 2.4 metric tonnes of CO2 per full-time employee.

Climeworks uses direct air capture (DAC) technology run on clean energy to remove carbon from the atmosphere. Swiss Re’s contract will be fulfilled using Climeworks’ Icelandic facility, called Orca, which has the capacity to capture 3,600 tonnes of CO2 annually. The plant will come online in September.

The structure of the deal is intended to spur banks and other financial institutions to invest in DAC solutions: “Larger, more economical air-capture and storage facilities can only be realised if customers are committed to long-term purchasing agreements. They guarantee a future revenue stream to the developers, making new projects fundable,” said Swiss Re.

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First image: airphoto.gr / Shutterstock.com, Second image: Tada Images / Shutterstock.com, Third image: Bakhitar Zein / Shutterstock.com, Fourth image: Marc Van Scyoc / Shutterstock.com, Fifth image: Swiss Re