Weekly round-up: July 19-23
The top five climate risk stories this week
Thanks for reading Climate Risk Review! Want more climate risk management news and analysis in your inbox? Then become a paying subscriber by signing up below. This Thursday, paying subscribers received an analysis of responses to the TCFD’s consultation on portfolio alignment metrics, with exclusive comments from Legal & General Investment Management’s head of climate solutions:
1) Rush into ‘green’ assets could upend financial system — SEC commissioner
Efforts by the US Securities and Exchange Commission (SEC) to drive investment to climate-friendly sectors could “precipitate future financial instability”, Commissioner Hester Peirce has said.
Speaking at an virtual event hosted by the Brookings Institution on July 20, Peirce — one of two Republican officials serving on the five-member commission — said “the growing global concentration of capital in certain sectors or issuers deemed to be green could destabilize the financial system”, and warned that if the SEC put its “thumb on the scale” by ushering in new regulation it could pump up a green asset bubble.
In particular, Peirce warned against the imposition of ESG and climate-related disclosure mandates, which she said would “transform” the SEC into an “active participant” directing capital flows towards specific investees, and potentially away from “economically disadvantaged communities in the United States”.
She further argued that “many ESG issues lack a clear tie to financial materiality” and therefore need not be surfaced within regulatory disclosures. “Mandating that issuers provide them [investors] with information that does not contribute to assessing the prospect for investment returns costs them in, among other things, bills for lawyers and consultants to prepare the disclosures; employee, management, and board time and attention; and potential litigation expenses,” she said.
Chair Gary Gensler has laid out a regulatory agenda that includes action on climate-related risk and opportunity disclosures for public companies by October of this year. Allison Herren Lee, Acting Chair prior to Gensler’s appointment, also conducted a public consultation on enhancing disclosure of climate change issues by securities issuers this March.
Unlike her Democratic colleagues, Peirce believes there is no need to write new regulations to prompt ESG disclosure.
“Rather than embarking on a prescriptive ESG rule that departs from and undermines our agency’s limited, but important, role, we could work within our existing regulatory framework. We could put out updated guidance to help issuers think through how the existing disclosure regime already reaches many ESG topics and to address frequently asked questions that arise in connection with the application of the existing disclosure regime,” she said.
2) BlackRock stepped up voting on climate risks last year
BlackRock, the $9 trillion asset management firm, voted against 319 companies on climate-related grounds over the 12 months to end-June, up from 53 the year prior.
In a report on its stewardship activities, BlackRock also said it opposed the election of 255 directors out of climate risk concerns. Overall, the asset manager cast its ballot against 2% of the 13,190 companies it voted at on climate risk grounds. BlackRock defined “voting against” as votes against or abstentions on director elections and director-related proposals, and votes in support of, or abstentions, on climate-related shareholder proposals.
This last proxy voting season, BlackRock focused its climate-related engagement efforts on over 1,000 companies it says represent over 90% of global Scope 1 and 2 greenhouse gas (GHG) emissions attributable to its clients’ public equity holdings. It engaged with around 670 of these companies over the 12 months to end-June, pushing them on climate-related disclosures, emissions data transparency, short-, medium- and long-term GHG emissions reduction targets and the decarbonisation of their supply chains.
Of the companies voted against on climate risk grounds, 29% were in energy and 22% in materials. Over half were located in the Americas.
BlackRock also said that 54% of the 244 companies it identified last year as not adequately dealing with their climate risks had made “meaningful progress” on climate-related disclosure and risk management this year.
3) Half of central banks don’t consider ESG in investments
Fifty percent of central banks don’t incorporate environmental, social and governance (ESG) considerations in their asset portfolios, a new survey by think-tank the Official Monetary and Financial Institutions Forum (OMFIF) shows. However, those that do plan to ramp up their allocations to climate-friendly investments.
In its latest annual Global Public Investor report, the OMFIF also revealed that 10% of central banks say “sustainability” is one of their most joint-most important institutional priorities. In addition, more than 90% have already bought green bonds and 65% plan to increase their holdings, up from 48% in 2020. The OMFIF polled 102 global public investors, covering central banks, public pension and sovereign wealth funds.
When asked what barriers stand in the way of integrating ESG into their asset management, 31% of central banks said this does not fit in with their investment strategy, compared with around 35% of sovereign funds and 15% of pension funds.
Sixteen percent of central banks also said that legal and regulatory restrictions prevent them from embracing or scaling ESG strategies. The OMFIF quoted one European central banker saying that since central banks need to invest in government bonds for liquidity, “a large part of the portfolio is actually not in our hands as regards ESG”.
4) EU’s Green Asset Ratio flawed — Bloomberg
A new metric for gauging European banks’ climate-friendliness could produce “a misleading snapshot” of their green assets, a survey by Bloomberg shows.
The ‘Green Asset Ratio (GAR)’, proposed by the European Banking Authority (EBA) in March, would oblige lenders to disclose the share of their loan, debt and equity holdings exposed to sustainable activities as defined by the European Union’s taxonomy regulation. The metric is slated to come into effect at the end of 2022.
The some 20 banks Bloomberg surveyed on the GAR said that patchy client data on ‘green’ activities threatened to distort their ratios. Small and international customers won’t hand over the information required to build a complete picture of their green assets, they explained.
Respondents also grumbled about the metric’s implementation date, which front runs the launch of the EU’s Corporate Sustainability Reporting Directive in 2024 — a rule that would force companies to disclose the kinds of information banks need to build their ratios.
The EBA produced its first estimate of an EU-wide GAR in May, which found that around 7.9% of banks’ exposures counted as ‘green’. However, it also revealed wide discrepancies between banks’ GAR estimates and its own. Seven banks’ GAR estimates were over 5 percentage points higher than those computed by the regulator.
5) US banks trail global peers on climate-focused investments
Not one US bank made the list of top lenders to renewable energy compiled by the Institute for Energy Economics and Financial Analysis (IEEFA) for 2020.
The think-tank found that the top ten commercial banks funding the sector provided $30 billion of debt financing last year, covering some 563 projects. Japan’s Sumitomo Mitsui Banking Corporation Group (SMBC) topped the list, lending $4.3 billion across 78 projects. Overall, the list contained three Japanese and seven European banks. The IEEFA highlighted that six of the ten banks were not founding members of the Glasgow Financial Alliance for Net Zero, an industry-led initiative to mobilise funds towards achieving decarbonisation goals.
A number of the banks on the list also feature on a tally of leading fossil fuel banks published by the Rainforest Action Network earlier this year. SMBC Group, for example, was the 18th largest financier to the fossil fuel industry in 2020, providing $28.2 billion of funds. This implies that the banks leading the funding of renewable energy are not taking an all-encompassing approach to addressing their climate-related risks.
Remarking on the absence of US banks from its list, the IEEFA noted that the country’s largest lenders “have only recently started joining the global movement of investment into climate-focused sectors” and when it comes to their recent promises on climate-friendly investment “have yet to demonstrate progress towards fulfilling these commitments amid the building global momentum”.
Please send questions, feedback and more to firstname.lastname@example.org
You can catch additional climate risk management updates on LinkedIn
The views and opinions expressed in this article are those of the author alone