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**Correction** Last week’s newsletter was revised after publication to clarify the CDP climate change score of the Anglo-South African bank Investec. The full correction can be read at the top of the revised article here.
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1) US regulator issues climate risk guidance for banks
US banks should factor climate change into their governance, policies, planning, and risk management, a major US watchdog has said in draft supervisory principles released Thursday.
In a statement accompanying their publication, the Office of the Comptroller of the Currency (OCC) said that “weaknesses in how banks identify, measure, monitor, and control potential climate-related financial risks” could undermine their safety and soundness, and that of the financial system as a whole. The draft principles, if finalized, would apply to banks over $100 billion in size. Supervisory expectations built on the principles may follow in future.
Among the principles, the OCC said that bank boards and managers should allocate appropriate resources to climate issues and assign climate-related financial risk responsibilities throughout the organization. Banks should also establish processes to identify, measure, and monitor material climate-related risks, for example using exposure analysis, heat maps, climate risk dashboards, and scenario analysis.
The principles further called on banks to consider how climate risks intersect with all well-established risk categories, including credit, liquidity, operational and litigation risk.
Climate activists welcomed the principles. “The substance of the guidance is a solid start. It takes the foundational step of recognizing that climate-related risk can threaten the safety and soundness of individual banks and the whole financial system which means it puts the full range of OCC tools on the table, including enforcement authority,” said David Arkush, director of nonprofit Public Citizen’s Climate Program.
The OCC draft principles are open for public consultation until February 14, 2022.
2) US financial institutions’ portfolio emissions exceed those of most countries
Wall Street’s top banks and asset managers finance GHG emissions equal to nearly the entire country of Russia, a new study by the Center for American Progress (CAP) and the Sierra Club has found.
The groups analyzed a sliver of the portfolios of the eight systemically important banks in the US — including Citi, JP Morgan, and Wells Fargo — as well as the funds of 10 asset managers, including BlackRock, Fidelity Investments, and Pimco. Financed emissions for each were extrapolated from public data on the banks’ lending and investing portfolios, and the asset managers’ funds, using the GHG Protocol’s methodology for investments and the application guidelines of the Partnership for Carbon Accounting Financials’ (PCAF) GHG accounting and reporting standards.
The eight banks were estimated to finance 668 metric tons of carbon dioxide equivalent (tCO2e) through $5.3 trillion of credit exposure. Exposures to utilities, energy, and materials companies were found to contribute the most to financed emissions overall. Home loans — accounting for around 15% of total exposures — were the fifth-largest contributor to the emissions total.
The asset managers financed 1.3 billion tCO2e through $27.3 trillion in assets under management (AUM). Investments in sectors accounting for just 7% of AUM, predominantly utilities, energy, and materials, made up 74% of total financed emissions. In aggregate, if the financial institutions in the study were a country, they would have the fifth-largest emissions in the world, just between Russia and Indonesia.
CAP and the Sierra Club said that the scale of US financed emissions shows the need for climate disclosures to be enhanced through regulation. Specifically, they called on the Securities and Exchange Commission to mandate disclosure by all financial institutions of their portfolio emissions — covering Scope 1, 2, and 3 categories. This would facilitate accurate measurement of financed emissions and help pinpoint especially carbon-intensive exposures.
They also recommended an overhaul of the prudential regulations governing banks, so that capital charges for fossil fuel assets would be increased and a climate risk surcharge for all systemically-important lenders introduced. They further advised regulators to set concentration limits for exposures to certain segments of the fossil fuel industry.
In response, Lauren Anderson, Associate General Counsel at lobby group the Bank Policy Institute, said these recommendations would be “a very blunt tool that would only serve to limit legitimate transition financing and push financing out of regulated banks and into the unregulated sector”.
She added that “draconian” responses like adjusting the risk-weights of assets or imposing credit limits for certain industries would be “premature” given “the nascent stage of climate-risk analysis and extensive data and methodological gaps that persist”.
3) Report your climate risks, NGFS tells central banks
Central banks should “lead by example” by disclosing their climate-related risks, the Network for Greening the Financial System (NGFS) has said.
In a new guide on climate disclosure for central banks published Tuesday, the NGFS said that public reporting of climate risks by financial authorities “would promote disclosures by other market participants” and help “meet the growing public demand for transparency about climate-related risks on central bank balance sheets”. Climate activists are increasingly focused on central banks’ climate-related activities, as evidenced by the recent Green Central Banking scorecard, produced by the nonprofit Positive Money and The Sunrise Project’s Green Central Banking publication.
The Bank of England and De Nederlandsche Bank are among the central banks and supervisors to have published climate-related disclosures to date. Other central banks have publicly disclosed their climate investment strategies and approaches to sustainability.
4) PCAF, CDP join forces to bolster emissions disclosures
Two major climate disclosure initiatives have teamed up to strengthen public reporting of financed carbon emissions by banks, asset managers, and other financial firms.
On Tuesday, the Partnership for Carbon Accounting Financials (PCAF) — which built and oversees a GHG accounting standard for financial institutions — and CDP — the nonprofit which runs a global disclosure platform for climate change, water security, and deforestation — announced an alliance “to promote the PCAF Standard and to increase assessment and disclosure of financed emissions amongst financial institutions globally”. Today, only one-quarter of financial institutions publish their portfolio emissions, CDP says.
As part of the tie-up, CDP will augment its ‘Full GHG Emissions Dataset’, which includes the Scope 1 and 2 emissions of over 7,200 companies, with a Data Quality Score for each emissions figure aligned with PCAF’s own Data Quality Scoring system. This scoring system allows users of financed emissions disclosures to judge the accuracy and reliability of the figures published by financial institutions.
5) Goldman Sachs sets portfolio decarbonization targets
Wall Street giant Goldman Sachs said Thursday it would work to cut the carbon footprint of its oil and gas, power, and auto manufacturing portfolios by 2030 as part of its commitment to zero out financed emissions by mid-century.
In its 2021 Task Force on Climate-related Financial Disclosures (TCFD) report, the bank — the fifth-largest in the US by assets — said the decarbonization effort will not only cover its corporate lending commitments, but its debt and equity capital markets financing and on-balance sheet debt and equity investments, too. Goldman Sachs committed to becoming a net-zero bank in March this year, and joined the UN-convened Net-Zero Banking Alliance on October 25.
The bank plans to reduce the carbon intensity of its oil and gas portfolio by 17-22% by 2030 relative to a 2019 baseline, that of its power portfolio by 48-65%, and that of its auto portfolio by 49-54%. Carbon intensity is defined separately for each sector. Goldman claims the lower bounds of each target aligns with 1.5°C net-zero pathways generated using its own in-house research series, ‘Carbonomics’. Significantly the bank said it would use carbon credits and/or offsets that are “high quality, additional and verified” to reach these goals.
Climate activists criticized certain aspects of Goldman’s targets for being ‘greenwash’. Jason Opeña Disterhoft, senior campaigner at Rainforest Action Network, said: “Intensity-only targets are fully compatible with increases in absolute emissions and expansion of fossil fuels. They certainly don’t guarantee that Goldman will deliver its fair share of emissions reductions by 2030, which the bank is committed to as a member of the Glasgow Financial Alliance for Net Zero. The targets’ reliance on offsets also perpetuates fossil fuel business-as-usual and threatens the rights of communities impacted by offset schemes”.
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