Climate Risk Review’s Monday and Thursday newsletters are for paying subscribers only. This week, the debate on whether the TCFD’s ‘carbon-related assets’ metric is up to scratch and what a new paper by the Banque de France can tell us about the efficacy of climate disclosures. Not a subscriber? Why not take out a free trial to see what you’re missing:
1) Yellen pledges climate “hub” at Treasury
Incoming US Treasury secretary Janet Yellen told lawmakers she would set up a dedicated team focused on the financial risks of climate change.
Speaking before the Senate Finance Committee on January 19, Yellen said she’d appoint an official at “a very senior level … to create a hub within Treasury in which we particularly focus on [climate] financial system-related risks and tax policy incentives towards climate change”.
In written answers to committee questions, Yellen also said she would work with members of the Financial Stability Oversight Council — the group of federal officials tasked with surveying systemic risks — to assess the threat of climate change to the financial system.
Yellen has already hired Treasury staff with a thorough grounding in climate change. Didem Niscani has been tapped as chief of staff, who previously served as a member of the secretariat of the Task Force on Climate-related Financial Disclosures (TCFD) and as global head of public policy at Bloomberg.
Julie Brinn Siegel also joins as deputy chief of staff. She was previously an advisor to Senator Elizabeth Warren (D-Mass) on banking and financial regulation. The senator has in the past promoted policies to tackle climate financial risks and mandate climate-related disclosure.
2) Global banks, insurers oppose climate capital charges – IIF
Most bank and insurance members of the Institute of International Finance (IIF) say it would not be “appropriate” at present to use regulatory capital requirements to tackle climate risks.
In a new report, the think tank stated that persistent data gaps, the absence of consistent risk assessment methodologies, and the possibility that new charges could have unintended consequences made fast action to introduce these unwarranted. It added that climate stress tests and scenario analyses should not be used to test institutions’ capital adequacy in relation to climate risks, given the “significant uncertainty” inherent to these exercises.
Some financial watchdogs have floated the idea of climate-related prudential requirements in recent months. Anna Sweeney, executive director for insurance at the UK Prudential Regulation Authority, said on September 9, 2020 that it was possible “the incentives to address climate change risk for both firms and supervisors could be enhanced if it were incorporated explicitly into firms’ capital requirements”. European policymakers have also considered a “green supporting factor” to lower capital requirements for climate-friendly exposures.
On the flipside, other officials have made clear that altering capital requirements isn’t on their agenda. Andrew Bailey, governor of the Bank of England, said on November 9 that the forthcoming UK climate stress tests for banks and insurers would not affect their capital buffers.
The IIF report argued that institutions’ in-house risk management processes are a “strong tool” for dealing with climate change risks and that, if needed, supervisors could intervene to promote good climate risk management practices in other ways — for example by drawing up principles-based guidelines and expectations.
The think tank also urged “standard-setting bodies”, including the Basel Committee on Banking Supervision and International Association of Insurance Supervisors, to develop a “common roadmap” to “address inter-sectoral effects and broader systemic issues” from climate- and environment-related risks.
3) French central bank ditches fossil fuels
The Banque de France (BdF) will stop funding coal-related activities by 2024 and curb investments in oil, gas and other fossil fuels under a new policy published on January 18.
No investments will be made in companies making more than 2% of their revenues from coal activities as of end-2021. A complete exit is planned for end-2024. Fossil firms that generate over 10% of their turnover from shale oil and gas, oil sands, and/or arctic drilling will also be excluded as of end-2021.
As for conventional oil and gas companies, the BdF will align its policy with that of European benchmarks that are in sync with the Paris Agreement — cutting financing for those making more than 10% from oil and 50% from gas by 2024, including French supermajor Total.
The policy will apply to the BdF’s directly managed portfolios, which amounted to €22 billion in 2019. It does not cover the bank’s much larger monetary policy portfolio, the composition of which is defined by the European Central Bank.
Reclaim Finance, a French nonprofit that works to get financial institutions to ditch fossil fuels, wrote that although coal divestment was an “honorable objective”, by delaying a complete exit till 2024 the BdF would continue to fund the sector’s expansion. It explained that the Global Coal Exit list includes between 67 and 118 companies planning new coal-fired power stations that would not, or may not, trigger the 2% threshold.
Paul Schreiber, campaigner at Reclaim Finance, said: “With this announcement, the Banque de France is catching up with and overtaking private financial players and recognizing the urgency of cutting off financial support for fossil fuels. Now, it must apply this dynamic to its core business, by advocating for the immediate decarbonization of European monetary policy, and not wait another three to five years as recent comments from its governor suggest”.
4) Fannie, Freddie regulator calls for advice on climate risks
A US watchdog wants to know how physical climate risks could impact mortgage giants Fannie Mae and Freddie Mac and the Federal Home Loan Banks (FHLB), which together provide $6.7 trillion in funding to the housing market and financial institutions.
The Federal Housing Finance Agency (FHFA) issued a Request for Input “on the current and future natural disaster risk to the housing finance system” on January 19. Public feedback will be used to help identify and assess climate and natural disaster risk and help augment the watchdog’s supervisory and regulatory framework.
“Natural disasters can adversely affect the regulated entities. Historically, the ability to assess the scale, timing, location, and impact of such risks has been limited. Today’s RFI will help FHFA better understand and address the regulated entities’ exposure to climate and natural disaster risk,” said Director Mark Calabria on the consultation’s launch.
A 2019 research paper shows that financial institutions are increasingly offloading home loans collateralised by properties vulnerable to climate risks, such as those in low-lying coastal areas, to Fannie and Freddie.
In June 2020, sustainability nonprofit Ceres issued a report calling on the FHFA to examine the potential impacts of climate risks on the mortgage portfolios of the two agencies and draw up a strategy to deal with them. Among the recommendations, Ceres said the FHFA could mandate differential mortgage pricing in communities susceptible to climate risk and require flood-prone properties to have insurance before being admitted to the agencies’ portfolios.
5) Top insurers agree on how to spot and report risks from climate change
Twenty-two leading insurers, including Allianz, Swiss Re and Tokio Marine, have published a new report describing a shared methodology for identifying, assessing and disclosing climate risks.
Developed under the auspices of the UN-linked Principles for Sustainable Insurance Initiative (PSI), the methodology is based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). It offers a blueprint for insurers on how to run forward-looking climate change scenarios for physical and transition risks, along with a basic method to adjust model economic cost loss curves to reflect changes to climate hazards over different time horizons and a framework for assessing climate-related litigation risks.
The report also identified obstacles to climate risk management — among them, “the current steep curve representing the analytical sophistication across the physical, transition and litigation risk categories” and the “need for insurers to assess the potential overall impact of climate-related risks and opportunities — including net-zero emission targets — on both their insurance and investment portfolios”.
The PSI was launched in 2012. Members commit to four principles: to embed ESG into decision-making; to work with clients to raise awareness of ESG issues, manage risks and develop solutions; to work with the public sector and other stakeholders on ESG issues; and to regularly disclose their progress implementing the principles.
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