Weekly round-up: December 21-24

The top five climate risk stories this week

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1) IFRS Foundation lobbied to adopt TCFD

Accounting standard-setter the IFRS Foundation is being urged to structure a planned new sustainability reporting standard on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The Foundation, which oversees accounting standards used across 140 jurisdictions, launched a consultation on whether global sustainability standards should be part of its remit in September. To date, the group has received over 250 comment letters from industry groups, corporations and individuals. Many say the Foundation should build on existing climate-related disclosure efforts rather than start from scratch.

The Financial Stability Board, a multinational club of financial watchdogs and standard-setters, wrote that the eleven TCFD recommendations it launched in 2017 should act as “the basis for standards for climate-related financial disclosures”. It also pressed the Foundation to strengthen existing accounting standards and guidance for climate risk “so that financially material information for investors and other market participants are sufficiently captured within financial reporting”.

Ex-governor of the Bank of England Mark Carney, a TCFD pioneer, also told the Foundation to embrace the task force’s recommendations. Top industry groups including the Institute of International Finance and the UK’s Investment Association added that doing so would save firms from new layers of complexity and confusion.

2) UK watchdog debuts new climate-related disclosure rule

Nearly 500 UK companies will have to report their climate-related risks under a new rule introduced by the Financial Conduct Authority (FCA) on December 21.

Firms that are ‘premium listed’ must state in their annual reports whether their disclosures are aligned with the TCFD recommendations — and explain if not, why not. The rule will apply as of the 2022 annual reporting cycle.

The TCFD mandate is the first in a series that will cover almost all UK companies by 2025. The UK government’s implementation roadmap expects all banks and insurers to produce disclosures by 2021, and all listed commercial companies by 2022. Smaller occupational pension schemes and UK-registered large private companies will be given more time to comply.

Almost 260 UK companies were signed up as TCFD supporters as of December 24.

3) New cyclone insurance mechanism launched in Africa

Climate-related disaster insurance in Africa levelled up with the launch of the continent’s first parametric tropical cyclone protection product.

Put together by the African Risk Capacity (ARC) group, an agency of the African Union committed to helping the continent plan, prepare and respond to natural disasters, the new mechanism will pay out to participating countries when eligible cyclone events occurs. Madagascar is the first country to take out insurance using the mechanism.

African countries in the South-West Indian Ocean (SWIO) region are highly exposed to tropical cyclones. On average, 13 cyclones with wind speeds reaching up to 200km/h hit each year. 

In the wake of last year’s devastating storm season, in which cyclones Idai and Kenneth battered Mozambique, the ARC developed a model able to project the risk and losses from these storms to SWIO countries. This paved the way for the launch of the new mechanism.

“Our goal is to continue to diversify our product offering to meet the needs of our Member States effectively,” said ARC Director-General Ibrahima Cheikh Diong. “This new offer will allow our Member States to better anticipate and manage extreme weather events while ensuring that their impact on the population is mitigated”.

4) Fed working on climate data gaps

Federal Reserve staff are working with the club of climate-conscious central banks to identify the economic, market, and firm-level data needed to model climate risks.

Fed governor Lael Brainard, in a speech to the Center for American Progress on December 18, said that Fed employees are already cooperating with the Network for Greening the Financial System’s (NGFS) “Bridging the Data Gaps” workstream. This group is tasked with drawing up a list of missing data items needed “for measuring the banking sector’s exposure to climate risk and analyzing the implications for financial stability and prudential risks,” said Brainard.

The Fed officially joined the NGFS on December 15. Brainard said that in addition to the work on data gaps, the Fed looked forward to learning from and collaborating with other central banks “undertaking research on the implications of climate change for financial stability and the economy”.

5) Stoking voluntary carbon markets could imperil financial stability

Efforts to promote structured finance offerings around carbon offset initiatives could create financial stability risks, the non-profit Green Finance Observatory (GFO) has said.

In an open letter to the private sector-led Taskforce on Scaling Voluntary Carbon Markets (TSVCM), launched earlier this year with the backing of ex-governor of the Bank of England Mark Carney, the GFO said its recommendation to “catalyze structured finance” — getting banks to lend to carbon offset developers using carbon credits as collateral — could foster so-called ‘subprime carbon’ risks.

These are “contracts or projects that carry a high risk of not being fulfilled and may collapse in value”. Examples are those that use “controversial methodologies to verify emissions reductions” or those “where additionality [a project’s carbon-reducing effectiveness] is nearly impossible to calculate”.

A bank that extends a loan backed by subprime carbon credits may incur losses if the borrower defaults and the value of the underlying collateral doesn’t cover its exposure.

The GFO also blasted the TSVCM for stoking carbon offset markets rather than working to reduce overall carbon emissions: “The arguments being presented are mostly about minimizing the cost of compliance and creating profit opportunities for corporations in order for them to increase their ambitions. This is not surprising since the trading part of carbon markets has never been about addressing climate change, but about minimizing the cost of compliance for private corporations,” the organisation wrote. 


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