This week, paying subscribers received the first edition of the ‘Climate risk regulation rundown’, a monthly series covering climate-related financial policy, rulemaking, and personnel, plus an in-depth article on climate risk analytics startups.
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1) Climate risk advisor joins US watchdog
The US Securities and Exchange Commission (SEC) has appointed a senior official to advise on climate risk and other environmental, social and governance issues.
Satyam Khanna, a former SEC counsel and most recently a resident fellow at NYU School of Law’s Institute for Corporate Governance and Finance, was tapped for the position by Acting Chair Allison Herren Lee.
“Having a dedicated advisor on these issues will allow us to look broadly at how they intersect with our regulatory framework across our offices and divisions. Satyam’s experience, insight, and resourcefulness will help ensure our efforts in this space are thoughtful and effective,” said Lee.
Last November, then Commissioner Lee called for the SEC to develop “standardized, comparable and reliable” climate-related disclosures for securities issuers, put together a rulebook to govern how funds approach ESG investment, and step up scrutiny of how credit rating agencies incorporate climate and ESG in their scoring methodologies.
Satyam served on the Financial Stability Oversight Council (FSOC) from 2015 to 2017 and as senior legal advisor to SEC Commissioner Robert Jackson from 2018 to 2019. He’s also advised the Principles for Responsible Investment and was on the Biden-Harris Presidential Transition’s Federal Reserve, Banking, and Securities Regulators Agency Review Team.
2) Goldman joins open climate data initiative
Goldman Sachs became the first bank to join OS-Climate, a cross-industry collaboration that plans to create an open source, free-to-access climate data library.
The US lender will augment the group’s efforts to develop a data and analytics tool suite that allows easy access to companies’ historical and forward-looking climate metrics. OS-Climate also wants to put together a scenario analysis kit to “inform climate risk-aware asset allocation” by investors and fulfill disclosure requirements, like those set out by the Task Force on Climate-related Financial Disclosures (TCFD).
“As corporates seek to integrate climate considerations into their business activities, they realize that the cost, the availability and quality of data, and analytical tools to make sound decisions is lacking,” said David Solomon, chief executive officer at Goldman. “More widely available data, and collaboratively developed analytics, will help companies measure progress against decarbonization goals and investors assess the physical and transition risks to which the industry is exposed”.
OS-Climate was founded last September by The Linux Foundation, a long-standing champion of open technology, along with Allianz, Microsoft, Amazon, Federated Hermes and S&P. The group plans to produce a first version of its data and analytics solution by 2022.
3) Global accounting body to move ahead with sustainability reporting framework
The IFRS Foundation, an international accounting standard-setter, has taken another step towards founding a new Sustainability Standards Board (SSB) to oversee a new harmonised reporting framework for companies.
A consultation on whether the group should wade into the sustainability reporting arena closed on December 31. On February 1, the Foundation said it would set up a steering committee to oversee the next phase of work, which may lead to a definitive proposal and roadmap by end-September 2021.
Many of the 576 respondents to the consultation urged the Foundation to use TCFD recommendations to underpin any new framework. However, there was plenty of disagreement on the scope of a future standard, the speed at which it should be put together, and whether it should prioritise climate-related issues over other sustainability concerns.
The IFRS Foundation governs accounting rules used by over 140 jurisdictions including the UK and the European Union.
4) EU central banks adopt climate rules for investment portfolios
Central banks in the European Union have agreed a “common stance” for investing their own funds in line with climate-related principles.
Over the next two years, the 19 national agencies and the European Central Bank — which together make up the Eurosystem — will monitor these portfolios using a variety of indicators reflecting sustainability and social responsibility, and publish climate-related disclosures aligned with TCFD recommendations. The rules will not apply to the banks’ monetary policy portfolios, made up of the securities bought and sold to set interest rates and manage liquidity throughout the financial system.
The Eurosystem’s new stance aligns with the recommendations of the Network for Greening the Financial System (NGFS), the club of climate-conscious central banks. In December 2020, the network found that over one-third of central banks monitored the carbon footprint of their investment portfolios. However, only half of these publicly disclosed this data.
Several Eurosystem banks already govern their investment portfolios using climate-related principles. On January 18, the Banque de France said it would halt investments in companies making more than 2% of their revenues from coal by end-2021 and exit the industry completely by 2024. Fossil fuel companies making more than 10% of revenue from shale oil and gas, oil sands, and/or arctic drilling will also be excluded as of end-2021.
5) Aussie banks face climate stress tests
Westpac, ANZ, Commonwealth Bank and other top Australian lenders will participate in an exercise to gauge their resilience to climate risks in the first half of 2021.
The Australian Prudential Regulation Authority (APRA), together with the Council of Financial Regulators, said it would run a Climate Vulnerability Assessment (CVA) for large banks to examine their exposure, and that of the financial system as a whole, to physical and transition risks. The CVA would also inform APRA of how banks could tweak their business models to withstand different climate change scenarios.
APRA said it would engage with “international peer regulators” to develop the tests. In 2020, the NGFS put together a pack of climate scenarios along with a guide that supervisors could use to run climate stress tests. APRA is not a member of the NGFS, though the Reserve Bank of Australia is.
This year APRA also plans to complete a supervisory review of 38 large banks that participated in a 2018 survey on climate risks. Its findings will be used to steer APRA’s climate risk policies and supervisory plans. Guidance on climate-related governance, strategy, risk management, scenario analysis and disclosure is due to be published for consultation by June this year.
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