Weekly round-up: January 11-15

The top five climate risk stories this week

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1) French investors exited fossil fuels following climate disclosure law

Climate disclosure by financial institutions leads to tangible climate action. That’s what economists at the Banque de France discovered after analysing the impact of a mandatory climate-related disclosure law introduced in 2016.

Financial institutions in France subject to the law were found to have cut their financing of fossil fuel companies by 40% compared with companies outside its scope. This translates to €28 billion of funding “redirected” since 2015.

The so-called TECV law (Transition Energetique et Croissance Verte) requires French insurers, pension funds and asset managers — but not banks —  to breakdown their climate risks in public disclosures.

The Banque de France researchers assessed the securities portfolios of covered institutions against those of banks between 2015 and the third quarter of 2019 to learn how their asset allocations had changed over time. 

Not only were covered institutions found to have cut their overall fossil fuel financings, the impact of the law was shown to be about twice larger for investments in “exploiting coal and unconventional fossil fuels”, some of the highest-emitting activities. Covered institutions were also found to favour dumping fossil fuel equities over bonds.

The researchers concluded that mandatory disclosure frameworks “are of the essence to effectively speed up the alignment of finance with transition needs”. They added that such disclosure rules need not be overly prescriptive, either, since the TECV law was found to have driven climate action even though it gives firms the freedom to choose their own climate metrics.

2) Canadian watchdog mulls climate capital requirements

Financial institutions in Canada have been asked whether their regulatory capital framework should be updated to include climate-related factors.

The Office of the Superintendent of Financial Institutions (Osfi), Canada’s financial regulator, launched a consultation on January 11 to canvass banks, asset managers and pension funds on how it could enhance their preparedness and resilience to climate risks.

To this end, the watchdog is examining three areas: capital requirements, supervisory review, and market discipline. Explaining its approach to the first, Osfi said it is “exploring whether there are climate-related considerations beyond what is already reflected in existing inputs that should be considered in the capital framework”. It also asked financial institutions to write in with the pros and cons of such an initiative.

Whether regulatory capital frameworks should be amended to cover climate risks is a topic of hot debate. Last year, the Network for Greening the Financial System, a club of central banks and supervisors, wrote that most watchdogs had yet to consider imposing climate capital requirements, explaining that more research was needed to understand the loss potentials of such risks.

Osfi’s proposed approach to supervisory review is to discern whether climate risks should be included “more specifically into guidance on risk assessment processes”, such as the Internal Capital Adequacy Assessment Process for banks, as well as scenario analysis and stress testing.

In relation to market discipline, the watchdog said it was considering the role climate-related disclosure could play to support oversight of financial institutions’ climate risks. 

The consultation closes on April 12. Ratings agency Moody’s said the push for enhanced climate risk preparedness was a credit positive for Canadian banks.

3) US watchdog passes rule that overturns banks’ climate risk policies

The Office of the Comptroller of the Currency (OCC) finalised its so-called “fair access” rule on Thursday, which would force banks to make loans to “politically controversial” sectors — including fossil fuel companies — regardless of their in-house climate risk policies.

“Banks should not terminate services to entire categories of customers without conducting individual risk assessments. It is inconsistent with basic principles of prudent risk management to make decisions based solely on conclusory or categorical assertions of risk without actual analysis. Moreover, elected officials should determine what is legal and illegal in our country,” said Brian Brooks, then Acting Comptroller of the Currency, on January 14. Brooks resigned his post the same day.

The watchdog introduced the proposed rule in November, and allowed a 45-day comment period that ended January 4. It received more than 35,000 stakeholder comments and suggestions. Banks, lobbyists, and sustainability advocates had all come out against the rule in recent weeks. Some now argue that its finalisation was rushed.

“From the onset, the agency’s ‘fair access’ rule flew in the face of healthy financial markets by attacking efforts to protect our economy from systemic financial risk. Now, its attempt to push the rule through without adhering to the required procedures flies in the face of administrative law,” said Steve Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets.

Greg Baer, president and CEO of the Bank Policy Institute, a Wall Street lobbying outfit, said the group was “disappointed” that the Acting Comptroller “chose to fast-track the final approval of this hastily conceived and poorly constructed rule on his last day in office.” 

The rule is slated to take effect on April 1. However, it is likely to be overturned by the incoming Biden administration. Democratic lawmakers, including the incoming chair of the Senate Banking Committee, Sherrod Brown (D-OH), denounced the rule on January 5.

4) Top asset owners unveil decarbonisation targets

Thirty-three leading institutional investors — including Allianz, Axa and Swiss Re — representing $5.1 trillion in assets have started to publish their portfolio decarbonisation targets for 2025. 

The investors are all part of the Net-Zero Asset Owner Alliance (AOA), a group set up by the UN committed to aligning their portfolios to a 1.5°C warming scenario. Under a target-setting protocol finalised in January, the firms must set goals to reduce scope 3 emissions from their investing portfolios over the next five years.  These must conform with the Intergovernmental Panel on Climate Change (IPCC) 1.5°C ‘no’ and ‘low’ overshoot scenarios. Firms must also commit to sector targets for the highest carbon-emitting sectors including oil and gas, transport and steel. 

German insurer Allianz released its targets under the protocol on January 14. Emissions for public equities and corporate bonds would be cut 25% by 2025. In addition, all real estate investments would “be in line with scientifically based 1.5-degree pathways in terms of total emissions” that year.

5) Bank of England warns of $100 carbon price

Banks and businesses should prepare for carbon prices to exceed $100 a ton, the Bank of England’s (BoE) climate risk lead has said.

Sarah Breeden, speaking at a webinar hosted by the central bank, said a price hike was likely if the transition to a low-carbon economy became disorderly. According to Bloomberg, which covered the event, Breeden said: “We must be really careful to make sure that we recognise that this is an economy-wide transition where every asset will see a change in value, and that we need to think about pricing and incentives, with regards to future emissions, not just current”.

The current price of carbon in Europe — the highest in the world — is about €33 ($40) a ton.

Carbon pricing will be an integral part of the BoE’s forthcoming climate stress tests for banks, planned for mid-2021. Institutions will be subject to three scenarios: a business-as-usual simulation assuming no uniform carbon price, an orderly transition with a gently rising carbon price, and a disorderly transition where the carbon price lurches abruptly higher.

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

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