***Programming note*** Paying subscribers will receive the first ‘Climate Risk Review Regulation Rundown’ on Monday, February 1. The in-depth article will be sent on Wednesday, February 3.
***Correction*** In last week’s ‘Weekly round-up’, Didem Niscani, chief of staff to the US Treasury Secretary, was incorrectly identified as the head of the Task Force on Climate-related Financial Disclosures (TCFD) secretariat. She was a member of the secretariat, not the head.
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1) Big Oil’s credit ratings threatened by climate risks, says S&P
Total, Exxon, ConocoPhilips and other major oil producers could have their credit scores cut by ratings agency S&P in part because of climate risks.
Thirteen bond-issuing oil companies from North America, China, Europe and Australia were placed on negative watch by the agency on January 26 and face downgrades of at least one notch over the next few weeks. In addition, BP and SunCor Energy had their credit outlooks downgraded to negative from stable. S&P wrote that “the energy transition, price volatility, and weaker profitability” are elevating risks for these firms.
Each of the companies currently has an investment-grade rating of BBB- or above. Woodside Petroleum Ltd and Canada Natural Resources Ltd have the lowest ratings of the group, with BBB+ and BBB respectively.
S&P also updated its risk assessment for the oil and gas sector as a whole to “moderately high” from “intermediate”, partly in response to “the increased environmental threat posed by greenhouse gas emissions, evolving government policies and emission standards, and the rising role of renewables in the energy landscape supported by its cost-competitiveness”. It added that demand for ESG investments could make it harder for oil producers to access bond markets in future.
2) Fed sets up climate risk committee
The Federal Reserve has established a new body to deepen its understanding of how climate change could impact Wall Street.
The first-of-its-kind Supervision Climate Committee (SCC) will draw on experts from across the Federal Reserve system. Kevin Stiroh, the New York Fed’s top bank cop, will act as chair and “lead the Federal Reserve’s supervisory work related to the financial risks of climate change”.
Stiroh has served as head of the New York Fed’s supervision group since 2015. Since February 2020, he’s also co-led the Task Force on Climate-Related Financial Risks set up by banking standard-setter the Basel Committee.
In public statements, Stiroh’s has made his opinion clear that financial watchdogs, like the Fed, have an important role to play policing climate risks: “Supervisors can and should use our oversight tools to ensure financial institutions are prepared for and resilient to all types of relevant risks, including climate-related events,” he told the GARP Global Risk Forum last November.
But he’s not a fan of using financial supervisors’ powers to engineer specific climate change outcomes. In a speech at Harvard Business School last March, he said: “In the context of climate change, in my view, bank supervision should focus on ensuring that appropriate risk management frameworks are in place, rather than using supervisory tools for broader objectives”.
3) ECB launches climate change centre
The Fed isn’t the only central bank stepping up its work on climate change. The European Central Bank has also announced the launch of a new unit dedicated to climate issues.
The ten-member-strong climate centre will “steer the ECB’s climate agenda internally and externally” and report directly to the central bank’s chief, Christine Lagarde. “Climate change affects all of our policy areas,” Lagarde said in a speech at the ILF conference on Green Banking and Green Central Banking on January 25. “The climate change centre provides the structure we need to tackle the issue with the urgency and determination that it deserves”.
The ECB is already assessing the possible impacts of climate change on its monetary policy as part of an ongoing review. In the same speech, Lagarde said that the transmission of monetary policy could be impaired “to the extent that increased physical risks or the transition generate stranded assets and losses by financial institutions.”
Lagarde also announced that the ECB would invest in the Bank for International Settlements’ green bond fund, which was set up to help central banks fulfill sustainability goals for their management of reserves and capital. The ECB already holds €20.8 billion of green bonds in its own funds portfolio, 3.5% of its total.
4) Blueprint for scaling carbon markets issued by Carney taskforce
Plans to create a “large-scale, transparent carbon credit trading market” have been published by a private sector group set up by former governor of the Bank of England Mark Carney.
In a new report, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) proposes six major action areas for ramping up the adoption and exchange of carbon credits. These include drawing up a set of ‘core carbon principles’ to ensure credits are environmentally sound, creating ‘core carbon reference contracts’ to promote standardisation and foster liquidity, and producing demand signals to stoke engagement with the market.
The taskforce argues that voluntary carbon offsets may need to scale to over $50 billion by 2030 if corporations net zero goals are to be realised. In 2019, just $300 million of carbon credits changed hands.
“Offsets are the most convenient and efficient way to migrate the tens of billions of dollars that need to move from the hands of people like my bank … into the hands of people who can actually remove carbon from the environment or structurally remove carbon from the environment in the most efficient way,” said Bill Winters, chief executive of UK bank Standard Chartered and chair of the taskforce at the virtual World Economic Forum on January 27.
The taskforce received feedback from over 160 entities that helped shape its final report. It plans to implement the recommendations this year, with a pilot market in operation by December.
Separately, US exchange operator CME said it would launch a global emissions futures offset contract on March 1. The contracts will be based on the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which identifies credible carbon offsets in line with standards put together by the International Civil Aviation Organization (ICAO). The futures will allow delivery of CORSIA-eligible offsets from three ICAO-approved registries.
5) NYC pension funds to ditch fossil fuels
Two of New York City’s pension funds will divest $4 billion of fossil fuel securities by 2023.
The New York City Employees’ Retirement System (NCERS) and New York City Teachers’ Retirement System (TRS), which collectively manage around $170 billion of assets, voted on January 25 to approve the sales following an assessment of the portfolios’ exposure to fossil fuel stranded asset risks and other climate-related threats. The New York City Board of Education Retirement System (BERS), with $8 billion of assets under management, will also vote on divestment imminently.
“New York City is leading the way forward because we know the future is on the side of clean energy — not big polluters,” said New York City’s Comptroller, Scott Stringer.
The assets targeted for divestment were chosen based on “demonstrated risk from fossil fuel reserves and business activity”. The names of the securities will be released following the sale.
The NYC funds’ vote comes hot on the heels of the New York State Pension Fund’s announcement on December 9 that it would transition its $226 billion portfolio to be aligned with net zero emissions goals by 2040.
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