Weekly round-up: July 12-16

The top five climate risk stories this week

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1) Fed “not ready” for climate stress scenarios – Powell

The Federal Reserve is looking into using climate stress scenarios to assess US banks, but has yet to give them the green light, Chair Jerome Powell has said.

Speaking to the Senate Banking Committee Thursday, Powell said that the use of climate stress scenarios by European central banks is “proving to be... a very profitable exercise, both for the financial institutions and for regulators”. 

“We haven’t decided to do that yet … my guess is that’s a direction we’ll go in but we’re not ready to do that yet,” he added.

Powell also reiterated the need to bridge climate risk knowledge gaps, saying the Fed can help with data collection and research.

“We need to get good data on the implications of climate change and how to think about that in terms of the risks that the financial institutions … are running. That’s a very basic exercise and we don’t have that yet”.

2) Bank of Japan airs climate strategy

Climate considerations will be a factor in the Bank of Japan’s (BoJ) monetary policy and supervision of financial institutions going forward, a plan issued by the agency on Friday says.

Part of the strategy has the BoJ offering zero-interest loans to banks against their green and sustainability-linked investments or loans. Investments made that count as “transition finance” — those designed to help carbon-intensive clients become less polluting — will also be eligible for the scheme. The Bank aims to have this lending facility up and running this year.

The BoJ also reiterated that it would step up its scrutiny of financial institutions’ management of climate risks through on-site examinations and off-site monitoring, and push them to enhance climate-related financial disclosures. Together with the Japan Financial Services Agency, the Bank is working on a climate scenario analysis project for major institutions, too.

Another part of the strategy is for the BoJ to “deepen its analysis on how climate change would affect the macroeconomy” and “make efforts in collecting climate-related data and refining analytical tools in order to better conduct surveillance and identify risks”.

3) Supervisors should harmonise climate stress tests – IIF

Financial authorities worldwide should agree on common approaches to running climate stress tests to head off regulatory fragmentation and speed research efforts, the Institute of International Finance (IIF) has said.

The think-tank published a report Thursday on global banks’ experiences with climate stress tests and scenarios analysis so far, together with a set of three “Reference Approaches” to coordinate the design, implementation and application of these across jurisdictions.

Source: IIF

The IIF found that 85% of the 20 banks it canvassed are already, or soon will be, participating in climate stress tests or scenario analysis. A growing number of banks with cross-border operations are also being caught up in more than one jurisdictional exercise. 

If financial authorities take a scattershot approach to these, they risk overloading banks’ capabilities and blurring the financial system’s view of its climate risks, the IIF warned. To prevent this, the think-tank recommended that the Basel Committee on Banking Supervision (BCBS) cook up a set of global principles and sound practices that all can abide by within the next two years. It also said supervisors should apply the climate scenarios developed by the Network for Greening the Financial System (NGFS) to foster comparability across jurisdictions.

Separately, the Bank for International Settlements (BIS) released a paper on bank climate stress tests Wednesday identifying the technical hurdles that still stand in their way, including data availability, the use of very long time horizons and uncertainty around future pathways of key reference variables.

4) Asset owners knock TCFD’s forward-looking metrics proposal

Asset owner members of the Transition Pathway Initiative (TPI) say disclosing metrics that show a portfolio’s contribution to climate change may “undermine” efforts to move to a low-carbon economy and force institutional investors to breach their fiduciary duties.

The TPI members — including The Church of England Pensions Board, Brunel Pension Partnership and BT Pension Scheme Management Ltd — were responding to the Task Force on Climate-related Financial Disclosures’ (TCFD) ‘Proposed Guidance on Climate-related Metrics, Targets and Transition Plan’ and technical supplement on ‘Measuring Portfolio Alignment’, both published in June.

In the Proposed Guidance, the Task Force recommended that banks, asset managers and asset owners “measure and disclose the alignment of their portfolios consistent with a 2°C or lower temperature pathway”. The TPI members say that this recommendation is not backed up by information presented in the reports and that there are “significant gaps and technical weaknesses” in the consultation documents.

The TPI offers investors research and tools to assess the alignment of their portfolios with the goals of the Paris Agreement. Institutions with over $29 trillion in assets under management or advice are members.

The members’ major concern with the TCFD proposal is that the publication of portfolio alignment metrics will deter financial institutions from holding “transitioning assets in high carbon intensive sectors”. These would elevate the implied temperature pathway of a portfolio, even if they were issued by companies that have made credible net-zero targets and want to decarbonise. Investment in such assets is crucial to the transition to a low-carbon economy and shouldn’t be discouraged, the TPI says.

The group adds that the TCFD’s proposals haven’t considered “the feasibility and cost versus the benefits for pension funds or asset owners”. For these kinds of firms, putting together portfolio alignment metrics may conflict with their fiduciary duties, interests and responsibilities.

The TPI members recommend the TCFD reword its Proposed Guidance so as not to prescribe the use and disclosure of portfolio alignment metrics. The Task Force’s consultation on its Proposed Guidance ends on July 18.

5) Top insurers to decarbonise underwriting portfolios

Eight major insurers and reinsurers pledged to eliminate greenhouse gas (GHG) emissions from their underwriting portfolios by 2050 as part of a new Net Zero Insurance Alliance (NZIA).

Founding members AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re, and Zurich all committed to set individual, GHG-reducing science-based targets for 2025 and subsequent targets every five years following.

Each member had previously committed to zeroing out the emissions from their investment portfolios as part of the UN-convened Net Zero Asset Owners Alliance (NZAO). Both the NZIA and NZAO are part of the Glasgow Financial Alliance for Net-Zero, a strategic forum for coordinating decarbonisation initiative across the financial sector.

Several founding members have already taken steps to decarbonise their underwriting portfolios. For example, Allianz announced on May 3 that it would no longer invest in or insure companies planning new coal plants and/or mines from January 1, 2023. On June 30, Generali said it would reduce its coverage of thermal coal projects to zero by 2030 for OECD countries and by 2038 for the rest of the world.

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First Image: Federal Reserve / Flickr.com, Fifth Image: archerix / Shutterstock.com. All other images under free license through Canva.