Weekly round-up: August 30 - September 3

The top five climate risk stories this week

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1) Liberals want a climate hawk as Fed Chair

Five progressive Democrats have called on President Biden to nominate a new Chair of the Federal Reserve who will commit to eliminating climate-related risks.

In a Tuesday statement, first reported by Politico, Representatives Alexandria Ocasio-Cortez (D-NY), Rashida Tlaib (D-MI), Ayanna Pressley (D-MA), Mondaire Jones (D-NY) and Jesús G. “Chuy” García (D-IL) said incumbent Chair Jerome Powell “has taken very little action to mitigate the risk climate change poses to our financial system”, citing the Fed’s D- rating for climate policy from advocacy group Positive Money.

“At a time when the Intergovernmental Panel on Climate Change is warning of the potential catastrophic and irreversible damage inflicted by a changing climate, we need a leader at the helm that will take bold and decisive action to eliminate climate risk,” the lawmakers said.

The Representatives did not name a potential replacement to Powell, though progressive groups have promoted the idea of current Fed Governor Lael Brainard being elevated to Chair. Brainard has made a number of speeches on climate-related financial regulation and supervision in her term to date.

The Democrats’ statement followed an August 30 letter to President Biden sent by 22 left-leaning advocacy organisations — including climate groups 350.org, Friends of the Earth US, and Greenpeace USA — urging him to appoint a Fed Chair, Vice Chair, and Vice Chair of Supervision who will fight climate change, alongside other economic and racial justice priorities.

“Today we must have leaders willing to make enemies of those who destabilize our planet,” the letter said.

Powell’s term as Chair expires in February, but President Biden is expected to announce whether or not he will be re-appointed for a second term as early as this month.

2) Australia’s Commonwealth Bank sued over fossil fuel financing

The largest bank in Australia is being taken to court by investors seeking access to information on its oil and gas deals, so they can verify the lender’s compliance with its own environmental policies.

Commonwealth Bank of Australia (CBA), which holds over AUD$1 trillion in assets, is being challenged by shareholders Guy and Kim Abrahams to disclose records related to seven specific projects, which they are concerned may violate the lender’s 2019 commitment not to fund any new fossil fuel projects that do not align with the goals of the Paris Agreement.

These include CBA’s reported involvement underwriting a credit line for Scotland’s Siccar Point Energy, which plans to exploit the Cambo oil fields off the Shetland Isles, and its role as “mandated lead arranger” for a bridge loan to Australia’s Santos Limited, which the firm used to buy the undeveloped Barossa Gas Field off northern Australia.

The Abrahams’ lawsuit wants any documents from CBA showing its assessment of the ESG impacts of these projects, its assessment of their alignment with the Paris Agreement, plus any “discharging any obligation or responsibility that any CBA unit, division or employee has under CBA’s internal E&S Policy”.

Climate law specialists Equity Generation Lawyers filed the case on behalf of the Abrahams. Previous clients include Mark McVeigh, who sued Australian pension fund Rest on its handling of climate risks, and Katta O’Donnell, who seeks to hold the Australian government to account for failing to disclose climate risks associated with sovereign bonds sold to retail investors.

3) ECB preps lenders for climate stress tests — Bloomberg

The European Central Bank (ECB) has told lenders that they’ll have to project how their balance sheets will evolve over 10, 20 and 30 years of climate change as part of upcoming stress tests, Bloomberg reports.

Citing people familiar with the matter, Bloomberg said a climate stress test methodology may be released by the ECB in October. The central bank plans to study ties between profits and carbon risks as part of the exercise, as well as how vulnerable lenders are to climate-related physical and transition risks.

The ECB first announced plans for a supervisory climate stress test of individual banks in November 2020. In March, it published the preliminary findings of its economy-wide climate stress test, which revealed that a ‘hot house world’ scenario — which assumes no new climate policies are implemented — would be most devastating to banks.

4) US Treasury to investigate insurers’ climate-related risks

The Federal Insurance Office (FIO), a unit of the Treasury Department, set out its plans for addressing climate-related financial risks to the insurance sector and requested public input on the data and activities it should prioritise.

In a Tuesday statement, Treasury said the request for comment was a response to President Biden’s May executive order directing federal agencies to incorporate climate change issues into their policing of the financial system. Treasury Secretary Janet Yellen said the initiative was “an important step towards assessing climate-related financial risk in the insurance sector”.

The Treasury outlined three priorities for the FIO’s climate-related work. First, identifying climate-related issues or gaps in the oversight and regulation of insurers, including the threat these pose to US financial stability. This includes “assessing whether sufficient data, methodologies, and tools exist to manage the solvency of insurers and to protect them against the long-term risk of climate change”. 

Second, gauging the potential for interruptions in insurance coverage in US markets especially at risk from climate change impacts. Climate change has been linked with a drop in availability and affordability of coverage in certain US regions — including areas susceptible to wildfires in California and flood zones in Florida. Treasury said it wants to investigate the insurability of climate-related natural catastrophes and identify how insurers can enhance “climate resilience in critical infrastructure” and buttress green investment initiatives.

Third, ramping up engagement with private insurers to pursue climate-related goals, such as climate mitigation, adaptation and the transition to a low-carbon economy. This could include “consideration of underwriting activities, investment holdings, and business operations” — potentially opening the door to discussions on whether certain fossil fuel activities should be excluded from insurance coverage.

The public has 75 days to comment on the FIO’s work plan. Stakeholders are also invited to provide input on what data items are needed to measure and understand the insurance sector’s exposures to climate-related financial risks and opine on the development of standardised, comparable and consistent climate-related financial risk disclosures.

On September 1, following the Treasury announcement, the FIO joined the UN-convened Sustainable Insurance Forum — a group of 31 insurance supervisors, regulators, and authorities dedicated to hardening responses to sustainability and climate change challenges.

5) Australian regulator details climate stress test plan

Australia’s five largest banks are testing their resilience to both ‘disorderly transition’ and ‘hot house world’ climate scenarios as part of the country’s first Climate Vulnerability Assessment (CVA), its top watchdog has said.

In an information paper published Friday, the Australian Prudential Regulation Authority (APRA) said it is using scenarios aligned with those published in June by the Network for Greening the Financial System (NGFS), overlaid with additional Australia-focused modelling.

ANZ, Commonwealth Bank, Macquarie Bank, National Australia Bank and Westpac started their CVAs in June. They are due to submit their findings to APRA by year end, and the regulator is scheduled to publish aggregated results early next year.

The banks have to test their mortgage and corporate loan portfolios against both physical and transition risks generated using the scenarios out to the year 2050. They also have to answer a series of qualitative questions on climate-related operational, market, and funding and liquidity risks.

Unlike climate stress tests in France and the UK, the APRA exercise requires banks to take both a ‘static’ and ‘proportional’ balance sheet approach to calculating their climate-related financial impacts under the scenarios. Under the ‘static’ approach, the banks have to measure climate exposures against their current lending portfolios. Under the ‘proportional’ approach, they can assume limited changes to the composition of their loan books over the scenarios’ time horizons.

The UK climate stress tests assume a static balance sheet only, and the recently completed French exercises a hybrid ‘static’ and ‘dynamic’ approach. The latter allows banks to assume management actions to their lending portfolios without constraint.

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First image: Flickr / Federal Reserve, Second Image: Commonwealth Bank of Australia. All other images under free media license through Canva.com