Monday and Thursday newsletters are for paying subscribers only. This week, a look at how finance industry groups are pushing back against the idea of climate capital charges, and insights from UK banks’ climate scenario analyses. Not a paying subscriber yet? Why not take out a free trial to see what you’re missing:
1) SEC prepares overhaul of climate disclosures
The US Securities and Exchange Commission (SEC) said it would begin updating its decade-old guidance on climate-related disclosures for public companies.
“Now more than ever, investors are considering climate-related issues when making their investment decisions,” Acting Chair Allison Herren Lee explained in a statement on February 24. “It is our responsibility to ensure that they have access to material information when planning for their financial future”.
Lee said the watchdog would review the extent to which the 2010 guidance on climate disclosure has been followed, and engage with public companies on the way to “developing a more comprehensive framework”.
The SEC’s action comes less than a week after Federal Reserve governor Lael Brainard told a climate finance summit that “standardized, reliable, and mandatory disclosures” are needed to unlock the data required to tackle climate risks.
While an SEC Commissioner under the Trump administration, Lee spoke of the importance of a disclosure regime that would allow financial institutions to count up the direct and indirect greenhouse gas (GHG) emissions of their investees. She also criticised the Republican majority on the SEC at the time for failing to beef up climate disclosure rules as part of a modernisation of reporting standards in 2020.
2) Two big Canadian banks join carbon accounting framework
Now four of the ‘Big Five’ Canadian lenders — CIBC, RBC, Bank of Montreal and TD Bank — have signed up in the last four months. Scotiabank is the lone holdout.
The framework, set up by the Partnership for Carbon Accounting Financials (PCAF), counts over 100 member institutions representing $21.5 trillion of assets. Last November, the group published a global carbon accounting standard, laying out rules on how to calculate emissions linked with six asset classes: listed equities and bonds, business loans, commercial real estate, mortgages, auto loans and project finance. PCAF members pledge to assess and report their financed emissions within three years of joining.
In addition to joining PCAF, RBC and CIBC also committed to the Center for Climate-aligned Finance, set up by the US-based Rocky Mountain Institute (RMI) in July 2020. The Center works with members to align their lending and investing portfolios with a 1.5°C-consistent emissions pathway. US banks Wells Fargo, Goldman Sachs and JP Morgan are also members.
RBC also committed to a net zero GHG lending portfolio by 2050. TD Bank — Canada’s largest lender — made the same pledge last November.
Canada’s top banks are among the biggest backers of fossil fuels, data from the Rainforest Action Network shows. RBC provided $140.7 billion of fossil fuel financing in the four years to 2019, TD Bank $103.4 billion and Scotiabank $97.8 billion.
3) UK banks made scant progress cutting climate-sensitive assets in 2020
Top UK lenders Barclays, Lloyds, NatWest and Standard Chartered did not make much headway curbing their climate-sensitives exposures last year, new disclosures show.
Each bank used different metrics for reporting the loans and commitments subject to climate risks on their books. However, in all cases year-on-year shifts were slight — with some banks actually increasing their holdings over 2020.
Barclays reported £43.7 billion of exposures “at an elevated risk from the impacts of climate change” as of December 2020, up £67 million on the year prior. However, combined oil and gas exposures did fall from £16.2 billion to £15.6 billion. Assets at elevated risk from climate change accounted for 31% of its total on- and off-balance-sheet assets.
NatWest used a more expansive definition — “heightened climate-related risk sectors” — disclosing £308.4 billion of exposures fitting this label, equal to 60.9% of its portfolio. This was up from £285.6 billion the year prior. NatWest said the increase was largely due to an increase in residential mortgage exposures. Its loans to the oil and gas sector, however, fell £800 million year on year.
Lloyds disclosed £44.6 billion of commercial loans to “customers in sectors at increased risk from the impacts of climate change”, about 8.9% of its total. This was down £2.8 billion on 2019. Retail exposures at increased risk, however, climbed from £305.2 billion to £310 billion year on year, and accounted for 61% of its overall portfolio.
Standard Chartered disclosed its loans and advances to eight “high-carbon sectors” for 2020. These came to $25.2 billion, up from $23.7 billion the year before, and made up around 8% of its total portfolio.
4) Japanese megabanks top list of coal lenders
Japanese lenders Mizuho, Sumitomo Mitsui Banking Corporation and Mitsubishi UFJ Financial Group issued $61 billion in loans to the coal industry over the past two years, new data shows — the most of all commercial banks.
Environmental groups including Urgewald, Rainforest Action Network and 350.org Japan published first-of-its-kind research on the financial flows to firms on the Global Coal Exit List — a database of 934 companies that continue to develop new coal assets. In total, they identified 4,488 institutions holding $1.03 trillion of investments in companies in the thermal coal value chain.
Of these, 381 commercial banks provided loans amounting to $315 billion to the industry, and 427 facilitated $808 billion of financing through debt and equity underwriting. Banks in Japan accounted for $76 billion of loans and $59 billion of underwriting.
“The coal policies adopted by Japanese banks are among the weakest in the world. They only cover a small portion of banks’ lending and do not rule out corporate loans or underwriting for companies that are still building new coal plants in Japan, Vietnam, the Philippines and elsewhere. Japan’s banks must stop pouring fuel on the fire and finally adopt comprehensive coal exclusion policies,” said Eri Watanabe from 350.org Japan.
Coal loans issued by US banks came to $68 billion and by UK banks $22 billion. Chinese lenders provided the bulk of coal underwriting — channelling $467 billion to the industry over the last two years. Total bank financing of coal was estimated at $543 billion in 2020, more than the $491 billion issued in 2016, the year after the Paris Agreement was signed.
The environmental groups said there’s an urgent need for financial institutions to enact clear, comprehensive coal exclusion policies to stop the Paris goals from slipping out of reach.
“The bulk of coal financing and investment must be ended before 2030. This is the decade that counts,” said Paddy McCully, climate and energy program director at Rainforest Action Network.
5) CFTC could help foster global carbon market
The US Commodity Futures Trading Commission (CFTC) could step up its involvement in efforts to form a global market for cash and derivatives carbon products, a member of the watchdog’s market risk advisory committee (MRAC) has said.
“That is an area in which the CFTC’s expertise can play a valuable role. The CFTC and its staff can engage with investors in this growing asset class,” said Salman Banaei, global head of clearance and settlement at IHS Markit and a member of the MRAC at a meeting of the committee on February 23.
A viable market for the buying and selling of carbon offsets is the goal of the recently-formed Task Force on Scaling Voluntary Carbon Markets (TSVCM), convened by ex-Governor of the Bank of England, Mark Carney. The group published its blueprint for action in January.
In written remarks, Banaei said the CFTC could encourage the TSVCM’s efforts, for example by incorporating the task force’s recommendations in guidelines for CFTC registrants that offer derivatives contracts referencing voluntary carbon markets. The watchdog could also play a role enhancing market integrity in carbon contracts.
“Congress has assigned to the CFTC the authority to pursue fraud and manipulation in both cash and derivatives carbon markets. The global market in voluntary and mandatory carbon credit trading could benefit from the CFTC’s encouragement and guidance to establish infrastructure that reduces these and other threats to market integrity,” wrote Banaei.
He added that the watchdog could also support the development of carbon market technology and infrastructure through LabCFTC, its financial technology hub.
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