***In observation of the holiday season, there will be no posts on December 21, 23 or 25. Next week’s round-up will post on December 24***
Climate Risk Review’s Monday newsletter, and Wednesday’s ‘Inside Climate Disclosures’ series, are for paying subscribers only. This week, an analysis of a new study on climate risk metrics by the Council on Economic Policies, and a deep-dive into Citi’s 2018 TCFD report. You can upgrade your subscription here:
1) Fed joins green central bank club
“As we develop our understanding of how best to assess the impact of climate change on the financial system, we look forward to continuing and deepening our discussions with our NGFS colleagues from around the world,” said Fed chair Jerome Powell on the 5-0 vote by the central bank endorsing membership.
The US agency had been a conspicuous hold-out from the club since its founding. Members have to be signatories of the 2015 Paris Agreement, which the Trump administration walked away from in 2017. President-elect Joe Biden has promised to rejoin the international accord, and following his election last month the Fed officially applied for membership of the club.
Six financial authorities from Paraguay, Egypt, Indonesia, Iceland, Poland and Uruguay also joined alongside the Fed, plus the European Union’s markets regulator, Esma. The NGFS now has 83 members and 13 observers, compared to just eight founding members on its launch in 2017.
While the network has grown, concrete actions by central banks to integrate climate-related measures into their operations have been subdued so far. In a survey of 107 central banks, the NGFS found that just 5% incorporate sustainability in their primary objectives, and 77% don’t consider sustainability at all. Respondents said that “international coordination” is required to bring about the integration of climate risk in their core activities.
2) Banks disclose climate alignment of shipping portfolios
Climate-conscious shipping banks have a lot of work to do to decarbonise their portfolios. That’s according to a first-of-its kind report put together by the 15 signatory lenders to the Poseidon Principles, a ship finance specific climate alignment agreement for financial institutions.
In the report, top lenders including ABN Amro, BNP Paribas, and Citi disclosed their overall ship finance portfolios’ climate alignment score for 2019, a measure of how in step they are with the agreement’s decarbonisation trajectory. Signatories pledge to align their portfolios with a target 50% cut in absolute carbon emissions by 2050 compared to a 2008 baseline.
A score of zero means a portfolio is exactly in line with this trajectory. A positive score indicates its carbon intensity is higher than that required. Of the 15 banks, just three had ship finance portfolios in alignment with the Poseidon goals. The average score was +1.2%. Amsterdam Trade Bank has the most misaligned portfolio, with a score of +31.58%.
Source: Poseidon Principles. DVB Bank did not disclose an alignment score
Some banks found that their portfolio scores were driven by a small number of financed vessels. Alignment of a portfolio can be influenced by a large number of financed ships being in- or out-of-sync with the decarbonisation target, high loan values associated with select ships, or a combination of both.
3) Transition shock to EU insurers’ portfolios could wipe 25% off climate-sensitive assets
European Union insurance companies’ climate-sensitive’ equity holdings could see their value cut by one-quarter under a chaotic transition, a study by the industry’s financial watchdog shows.
The European Insurance and Occupational Pensions Authority (Eiopa) assessed the impacts of a disorderly shift to a low-carbon economy on over €2 trillion ($2.5 trillion) of bond and equity assets owned by EU insurers.
Equity holdings designated climate-sensitive, largely those related to fossil fuel producers, were projected to lose around 25% on average under the scenario. Insurers’ stakes in renewable energy companies, however, would surge 10.1%, blunting the overall hit to their equity portfolios.
Climate-sensitive corporate bonds were estimated to lose about 2.3% of their value, after taking into account the mitigating effects of holdings in renewables.
Though the repricing of these assets under this scenario would be significant, such exposures make up a small part of insurers’ overall portfolios, Eiopa found. Overall, €350 billion of bonds and equities were in climate-sensitive sectors (€539 billion including UK firms) equal to 3.1% of total investments (4.8% including UK firms).
Still, transition-related losses to these portfolios could diminish insurers’ excess of assets over liabilities (eAOL). Around 85% of insurers’ investment portfolios are used to directly match policyholder liabilities. The remaining 15% act as its “own funds” to absorb losses, similar to bank capital.
Under the main Eiopa scenario, climate losses to portfolios backing non-unit-linked policies (meaning the insurer, not the policyholder, bears the asset risk) were projected to average 1% of eAOL for EU and UK firms. UK insurers were projected to be hardest hit, with losses equivalent to 2.1% of eAOL.
4) New climate risk bill would bolster US federal watchdog
Legislation introduced in the US Senate would empower a federal regulator to label so-called shadow banks that are exposed to climate risks as threats to the financial system.
The Addressing Climate Financial Risk Act, introduced on December 17 by Senator Dianne Feinstein (D-Calif.), would modify the process by which the Financial Stability Oversight Council (FSOC) determines whether non-bank financial institutions (NBFIs) are subject to enhanced supervision. Climate risk considerations would have to be taken into account when weighing a ‘systemically important financial institution designation’ for such firms.
“We must act now to dramatically reduce carbon emissions, but we must also guard against the financial strain that we’re seeing because of climate change,” said Feinstein. “And that means ensuring that federal financial regulators have expertise in climate financial risk and develop an approach to mitigate that risk”.
The bill also calls on the FSOC to set up a permanent advisory committee on climate risk to help the agency sleuth out climate-related threats to the financial system.
Another provision requires the Federal Insurance Office to produce a report on climate risks in the insurance sector and recommend ways to “modernize and improve the system of climate risk insurance regulation in the United States”.
Feinstein’s is the latest in a slew of bills sponsored by Democratic senators aimed at making US financial watchdogs tackle climate risks. Last year, Senator Elizabeth Warren (D-Mass) reintroduced the Climate Risk Disclosure Act, which would oblige public companies to report their exposure to climate-relates threats, and Senator Brian Schatz (D-Hawai’i) introduced the Climate Change Financial Risk Act, requiring the Federal Reserve to conduct climate-related stress tests on large financial institutions.
5) Lloyd’s of London to exit fossil fuels
Insurance marketplace Lloyd’s of London has banned its underwriters from selling new policies to thermal coal-fired power plants, coal mines, oil sands projects, and new Arctic drilling initiatives from January 1, 2022.
Member companies must also phase out the renewal of existing insurance coverage for these activities by January 1, 2030. Participants will have to divest from companies that generate more than 30% of their revenues from such activities by 2030, too.
Lloyd’s accounts for about half of the London insurance market, with gross written premiums of £35.9 billion ($48.4 billion) in 2019. Member companies have been involved in insuring controversial fossil fuel projects, such as the Adani Carmichael coal mine in Australia. Climate campaigners with Insure Our Future said the wording of Lloyd’s new policy didn’t explicitly prohibit member companies from continuing to insure fossil fuel-related projects like the Trans Mountain tar sands pipeline in Canada or drilling in the Arctic National Wildlife Refuge.
Still, the campaigners said Lloyd’s announcement put pressure on US insurers that continue to underwrite and invest in the most carbon-intensive fossil fuels. Insure Our Future recently reported that of the ten top US firms, six do not restrict insuring and investing in coal, and four have yet to restrict any support to fossil fuels.
“Lloyd’s is sending a message to the US insurance industry that it cannot continue its unchecked support for climate-wrecking projects under the Lloyd’s name,” said Elana Sulakshana, energy finance campaigner at Rainforest Action Network. “Building on today’s momentum, we will continue pressuring the US insurance industry to match and exceed Lloyd’s policies across their entire fossil fuel underwriting and investment portfolios.”
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