Weekly round-up: February 8-12

The top five climate risk stories this week

***Programming note*** The next subscriber-only newsletter will be posted on Wednesday, February 17.

Not a paying subscriber yet? Why not take out a free trial to see what you’re missing:

Get 14 day free trial


1) Financial institutions risk “misuse and abuse” of climate models, scientists warn

Careless use of climate models may hoodwink financial institutions into underestimating their exposure to physical hazards and facilitate “greenwash”, a new scientific paper argues.

“Many of the emerging demands for financially meaningful information cannot be met by current climate models that were designed for other purposes,” wrote the authors of a peer-reviewed article for Nature Climate Change published on February 8.

The authors contend that the models used by climate scientists may be inappropriately deployed by institutions and climate service providers (CSPs) and produce unreliable financial signals. Such models generate temperature change estimates at global or continental scales for decades into the future, and are therefore ill-suited to producing localised risk projections over shorter time horizons.

“Concerns have already been expressed that some CSPs may be “operating outside of the bounds of scientific merit”, leading to the potential misuse and abuse of climate models,” the authors wrote.

Institutions may receive a false impression of their climate risks from the outputs of these models and make decisions that lead to financial losses as a result. They could also be misled into pulling capital from areas deemed risky by these models, increasing the cost of funding for the affected governments and corporates.

To combat climate model misuse, the authors say a new professional class of “climate translators” should be developed, made up of experts able to decipher model outputs for financial institutions. They also call for public investment to “operationalise” climate modelling, so the discipline can better cater for the needs of the financial sector.

2) ECB may ‘tilt’ corporate bond portfolios using climate factors

The European Central Bank (ECB) should take climate risks into account when investing in or lending money against corporate bonds, the governor of the Banque de France has said.

Speaking at a climate change conference in Paris on February 11, François Villeroy de Galhau said “climate change is linked to the core of the Eurosystem’s monetary mandate” and proposed decarbonising the ECB’s holdings of corporate bonds, whether they be outright investments or taken in as collateral from other financial institutions.

To do this, Villeroy said the ECB could impose haircuts on bond prices that align with their issuer’s exposure to climate transition risks: “For instance, the Eurosystem could limit its securities purchases from issuers whose climate performance is not compatible with the Paris agreement. Conversely, securities issued by “aligned” companies could be purchased in larger quantities”.

Villeroy said that the ECB could start ‘tilting’ its corporate bond portfolios in this way in three to five years. Central bankers already have the wherewithal to produce climate indicators for 90% of corporate bonds, he added.

Last week, central banks in the European Union agreed a “common stance” for investing their own funds in line with climate-related principles. Villeroy’s proposal goes beyond the banks’ own investment funds, though, to encompass those corporate bond programmes that facilitate transmission of the ECB’s monetary policy.

3) Bank of America makes net zero pledge

Bank of America joined Wall Street rivals JP Morgan and Morgan Stanley in committing to decarbonise its financing portfolio by 2050.

The US’s second-largest lender by assets, BofA set itself the goal of net zero greenhouse gas emissions (GHG) “in its financing activities, operations and supply chain before 2050”, an ambition that aligns with the objective of the Paris Agreement. The bank also plans to set “interim science based emissions targets” for carbon-intensive portfolios, including energy and power, and to disclose its financed emissions no later than 2023.

The commitment is the latest in a series of climate actions taken by BofA in recent months. Last July, the bank joined Morgan Stanley and Citi as a member of the Partnership for Carbon Accounting Financials (PCAF), which oversees an open source methodology for counting and disclosing financial institutions’ financed emissions.

BofA is the third major US bank to pledge to zero out its financed emissions over the last six months. Data gathered by the Rainforest Action Network shows it is the fourth-largest provider of financing to the fossil fuel industry in the world, having committed $156.9 billion between 2015 and 2019.

In September, Morgan Stanley became the first systemic lender to make a net zero commitment. The bank had joined PCAF in July.

In October, JP Morgan said it would decarbonise its financing activities in line with Paris Agreement ambitions and produce specific targets for its oil and gas, electric power and automotive manufacturing portfolios in 2021.

In July, Citi said it would “begin measuring the climate impact of its own portfolios and their potential alignment with 1.5 and 2 degree Celsius warming scenarios”, but stopped short of committing to net zero financed emissions by 2050.

4) New York banks offered sweetener to make climate risk-reducing loans

Banks and credit unions in New York could earn credit under the state’s Community Reinvestment Act (CRA) by funding projects that improve the climate resilience of underserved communities, the local watchdog has said. 

Investments in renewable energy, projects to improve the energy-efficiency of affordable housing, flood resilience, battery storage projects and more would all count as CRA-eligible, the New York Department of Financial Services (NYDFS) explained in a letter issued on February 9.

The New York CRA, passed in 1978, incentivises banks to address the credit needs of local communities, including those in the low-to-moderate-income (LMI) bracket. Financial institutions subject to the law are periodically evaluated by the state regulator and graded in line with their efforts to serve these communities. The NYDFS may prevent a bank from expanding if it has a poor CRA record. A similar federal CRA law was passed in 1977.

“Climate change is happening now and there is no time to waste in addressing its financial risks. At the same time, climate change disproportionally impacts disadvantaged communities, many of whose members are people of color,” said Linda Lacewell, NYDFS superintendent of financial services. “New York will continue to take nation-leading, innovative approaches that address climate-related financial risks, support the needs of underserved communities, and combat environmental and racial injustice,” she added.

The NYDFS oversees around 1,500 financial institutions with $2.6 trillion of assets, including over 40 state-chartered banks such as M&T Bank and Goldman Sachs USA.

5) Sovereign wealth funds fall short on climate risk management

Few sovereign wealth funds (SWF) consider the risks of climate change when making investments, an industry body has found.

Only four of the 34 SWFs surveyed by the International Forum of Sovereign Wealth Funds (IFSWF) said they have a specific climate change framework in place. Four said they do not consider climate risks and opportunities in their investment process at all.

The IFSWF also found that just eight funds invest more than 10% of their portfolios in climate-related strategies. Nine said they do not invest in these at all.

However, a majority of respondents agreed that the physical and transition risks of climate change threaten long-term financial returns. Eighty-three percent said policy changes represented the most significant transition-related threat. Of the physical effects of climate change, 54% said water and food shortages and security posed the greatest danger.

Thirty percent of SWFs said the struggle to find reliable data on which to base decisions was a barrier to including climate change in their investment processes. Eighteen percent said an obstacle was that their stakeholders — sovereign governments — did not consider climate change an important issue.


Please send questions, feedback and more to louie.woodall@climateriskreview.com

You can catch climate risk management updates daily on LinkedIn

The views and opinions expressed in this article are those of the author alone

All images under free media license through Canva