Monday and Thursday newsletters are for paying subscribers only. This week, a look into how the new UK climate centre could disrupt the climate risk analytics space, and a deep-dive on the TCFD’s consultation on forward-looking metrics. Not a paying subscriber yet? Why not take out a free trial to see what you’re missing:
1) UK launches green finance hub
The UK government has pledged £10 million to fund a new centre for climate finance and risk management, with physical hubs planned in both London and Leeds.
The UK Centre for Green Finance and Investment (UKCGFI) aims to speed adoption of data and analytics for gauging physical and transition risks by financial institutions, and establish the UK as a world leader in climate and environmental services.
Five major universities and partner institutions will power the centre. Ben Caldecott, professor of sustainable finance at the University of Oxford, will serve as director. “[The Centre] will allow financial institutions to access scientifically robust climate and environmental data for any point on planet earth now and projected into the future, and for every major sector of the global economy. Doing so will create public goods and unlock innovation,” he said.
Among its ambitions, the UKCGFI wants to mainstream “spatial finance”, the extraction of insights on investment risks from the physical location of underlying assets. Practitioners combine satellite imaging, data science and artificial intelligence to produce mountains of data to inform predictive models and identify risks with a high degree of precision.
The centre is slated to open in April this year.
2) Climate risk tools have ‘blind spots’ – UN
Existing tools and methodologies do not properly capture the knock-on effects of climate risks, a UN-backed report argues.
Economic impacts, public health incidents and migration caused by physical climate hazards “have not been adequately modelled” by the current crop of tools “which may constitute a considerable blind spot”, the UN Environment Programme Finance Initiative (UNEP FI) wrote.
Though these secondary effects “are difficult to model” because of human behaviour and the unpredictability of health crises, public research funding should help bolster capabilities, the authors added. The European Union-funded CASCADES project, for example, will model trade and supply chains and analyse “the impact of acute and physical climate change-related hazards on agricultural production, energy and commodity markets”.
In the same report, the UNEP FI assessed and compared the capabilities of over 20 climate risk tools and methodologies, from providers including MSCI, The Climate Service, Four Twenty Seven, and Baringa Partners. Each instrument was grilled on its scope, range of compatible climate scenarios, level of analysis and more.
Looking ahead, the report authors said that “increased demand for standardisation” would likely push tool providers to use uniform reference scenarios, like those put together by the Network for Greening the Financial System (NGFS). They also warned that financial institutions will “increasingly want to integrate climate risk into their financial and economic decision-making tools”, which would make them leery of using third-party ‘black box’ models.
3) Wall Street leaders warn against restrictive climate regulation
Banking rules that would limit financing to certain industries are ill-suited to fulfilling the goals of the Paris Agreement, a coalition of US finance trade bodies has said.
Members of the US Climate Finance Working Group, a consortium of bank and capital markets lobbyists, issued a set of 10 principles for financing a transition to a low-carbon economy on Thursday.
One states that climate-related financial regulation should be exclusively risk-based and principles-based, and limited to upholding the “resilience and stability” of the financial sector. The group adds that “prudential tools” are “not the most appropriate” means of supporting a climate transition.
This puts the industry at odds with calls by climate advocates for banking rules that would nudge institutions to invest more in climate-friendly sectors. For example, last year sustainability non-profit Ceres published a host of recommendations for US supervisors to help “reorient capital flows towards climate change solutions”.
However, US watchdogs have indicated that they too support an incremental approach to making climate rules. Speaking at the Institute of International Finance’s (IIF) Climate Finance Summit on Thursday, Federal Reserve Governor Lael Brainard said “it is not clear a highly prescriptive approach would be the most effective way to ensure financial institutions are well-prepared for the range of possible impacts of climate change”. She added that better outcomes may be produced using a “range of complementary approaches being developed in both the private and the public sector”.
Other principles adopted by the US Climate Finance Working Group align closely with the wishes of climate lobbyists. For example, the group says climate goals based on greenhouse gas (GHG) emissions reduction targets aligned with the Paris Agreement and supports putting a price on carbon. It’s also in favour of improved climate-related financial disclosures and collaboration between industry and regulators on climate risk modelling and scenario analysis.
4) Extreme weather threatens small US banks – CFTC’s Behnam
The stability of US regional- and community-based lenders is imperiled by the rise of freak weather events like the cold snap afflicting Texas, a top regulator has said.
“Think about events happening right now in Texas, forest fires in California, these regional weather events. Our smaller banks, our community banks, are obviously more vulnerable. We have to be wary of how climate events can affect regional financial institutions,” said Acting chair of the Commodity Futures Trading Commission (CFTC) Rostin Behnam at the IIF’s US Climate Finance Summit on Thursday.
Extreme weather in Texas has taken power plants offline and damaged core utilities. Wholesale energy prices increased 10,000% earlier this week as the deep freeze set in.
Such catastrophes could have knock-on effects on the solvency of local lenders. In a CFTC report sponsored by Behnam released last year, members of the watchdog’s climate-related market risk subcommittee wrote that “sub-systemic shocks” could “undermine the financial health of community banks, agricultural banks, or local insurance markets,” cutting off financial services to small businesses, farmers, and households.
The spatially-concentrated nature of the US economy also means localised shocks could drag down the output of the country as a whole. In 2018, just 31 counties — concentrated in California, Texas, and New York — generated one-third of overall US GDP.
The CFTC’s report recommended that the research arms of federal regulators “cover the potential for and implications of climate-related “sub-systemic” shocks to financial markets and institutions”.
5) BlackRock tells companies to upgrade climate risk efforts
Asset manager BlackRock, the world’s largest shareholder, told investees it expects them to have “clear policies and action plans to manage climate risks”, and may vote against company directors that fall short.
Laying out its approach on engaging firms on climate issues, the BlackRock said directors should have “sufficient fluency” in climate risk and the energy transition. Members of the board and management teams should also be equipped “to ensure adequate consideration of these risks and opportunities in strategy and operations”.
BlackRock may consider whether a company stress tests its assets under a less than 2°C scenario, the way in which it maps current and future emissions, and its plans to adjust its strategy to account for physical and transition risks when assessing their overall approach to climate issues.
If a company’s climate disclosures aren’t up to scratch, or its low-carbon transition plan isn’t credible, BlackRock said it may vote against directors it considers responsible for climate risk oversight. The asset manager said it could also support shareholder proposals “that we believe address gaps in a company’s approach to climate risk and the energy transition”.
BlackRock’s Big Problem, a pressure group, criticised the asset manager’s approach for not insisting all companies describe their scope 3 emissions and for continuing to support fossil fuel companies even though their ongoing operation isn’t compatible with certain net-zero scenarios.
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