Weekly round-up: July 26-30

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 read a breakdown of the International Swaps and Derivatives Association’s critique of bank capital rules for carbon credit trading:

***Special Request*** Risk.net is conducting a survey of buy-side firms about their climate risk management. Readers of Climate Risk Review that complete the survey will be entered in to win a $100 Amazon gift card. Submissions are anonymous and the survey results will be published on Risk.net next month.

Click HERE to take part

1) SEC chief says climate risk disclosure rules will be drafted by year end

Gary Gensler, Chair of the US Securities and Exchange Commission (SEC), said agency staff would “develop a mandatory climate risk disclosure rule proposal” by the end of the year.

In a speech to the Principles for Responsible Investment (PRI) group on Wednesday, Gensler said the SEC “can bring greater clarity to climate risk disclosures” and ensure they are “consistent and comparable” by making them compulsory.

Significantly, he said he’d directed staff to explore whether these disclosures should be housed in companies’ annual 10-K filings — those most pored over by investors. In response to an agency consultation on climate-related disclosures earlier this year, certain big name companies — including Alphabet, Amazon and Facebook — lobbied for any new disclosures to be located outside of annual and regulatory filings, so as “not to subject companies to undue liability”.

On the contents of future disclosures, Gensler said the SEC would consider “a variety of qualitative and quantitative information”. Under “quantitative”, he said staff would make recommendations about how companies might disclose their Scope 1, 2 and 3 emissions so that investors can get an all-round view of their carbon footprints and properly scrutinise their net-zero commitments.

The SEC Chair also set his sights on “green” and “sustainable” funds, saying that “investors should be able to drill down to see what’s under the hood of these funds”. To this end, Gensler said he’s directed staff “to consider recommendations about whether fund managers should disclose the criteria and underlying data they use”.

2) Fidelity International to vote against climate laggards

Global asset manager Fidelity International said it would vote against the management of investee companies that fail to take action to fight climate change.

The investment firm, with $787 billion in client assets, said on Monday that from 2022 it expects companies to have policies in place to manage climate change impacts, reduce their greenhouse gas (GHG) emissions, and make specific and appropriate disclosures around emissions, targets, risk management and oversight. 

In its revised sustainable investing voting principles, Fidelity said investees should be able “to meet potential regulation on climate change” and climate risk, for example through the management of their energy mix. Strategies on reducing Scope 3 emissions and reaching net zero are also among its expectations.

For companies in the industries most likely to be affected by climate change, Fidelity said they should use multiple scenarios to inform their strategic planning, including an impact scenario referencing a 1.5°C temperature limit.

3) US banking regulator appoints climate risk official

The US Office of the Comptroller of the Currency (OCC) tapped a near 30-year agency veteran to be its first Climate Change Risk Officer, with a mission to help the federal banking system gets to grips with climate-related financial risks.

Darrin Benhart, who first joined the OCC in 1992, was tapped for the role by Acting Comptroller Michael Hsu. Most recently, Benhart was part of the team overseeing Bank of America. He’s also previously served as Deputy Comptroller for Supervision Risk Management and Deputy Comptroller for Credit and Market Risk.

“Having Darrin in this newly created position will significantly expand the agency’s capacity to collaborate with stakeholders and to promote improvements in climate change risk management at banks,” said Acting Comptroller Hsu.

Hsu also announced that the OCC had officially joined the Network for Greening the Financial System (NGFS), the coalition of central banks and regulators working on common standards and tools for managing climate-related risks. It is the third US agency to join following the Federal Reserve and New York Department of Financial Services. 

The OCC chief laid out a two-pronged strategy to address the climate issues facing its supervisees in May: engaging and learning from other agencies and building up effective risk management practices at banks. Joining the NGFS and appointing Benhart furthers both objectives, Hsu said.

The OCC acts as the main prudential regulator for over 1,000 financial institutions, covering 70% of the US commercial banking sector’s assets.

4) Institutional investors debut temperature score for funds

A coalition of pension funds, insurers and asset managers unveiled a new method of producing temperature scores that investors can use to measure how in line funds are with climate goals.

The Investment Leaders Group — a network convened by the Cambridge Institute for Sustainability Leadership (CISL) made up of financial institutions holding over £14 trillion in assets — published a report on Thursday outlining what it called “a simple, transparent and scientifically robust method of reporting fund alignment with the Paris Agreement”.

“Disclosure of climate performance is a must for any responsible fund. But the plethora of purposes, tactics, methods and metrics is confusing for the industry, let alone the public,” said Dr Jake Reynolds, Executive Director, Sustainable Economy at CISL. “We want the industry to converge on a universal measure that all funds can adopt, whether or not they make climate claims. The public deserves to know how their money is being used and this method provides an answer”.

The proposed method has four steps. First, a fund has to estimate the emissions intensity of its portfolio. Second, it has to ballpark the equivalent global CO2 emissions of the portfolio — in other words, the global CO2 emissions that would arise if the whole economy had the same emissions intensity as the portfolio. Third, it has to guess the cumulative portfolio emissions from 2020 to 2100. Fourth and finally, it estimates the implied temperature rise of the portfolio, using the statistical link between cumulative global CO2 emissions and global average temperature increase.

The method can be used either to measure a fund’s current climate performance — if in step three it’s assumed portfolio emissions remain constant to the end of the century — or to create a forward-looking measure, if cumulative emissions to 2100 are adjusted to account for company-level climate commitments.

CISL and the Investment Leaders Group say this approach is distinctive because it does not rely on either third-party modelling or scenarios, instead using the “nearly linear relationship” between emissions and global heating to generate a temperature score.

In a report released earlier this year, CISL claimed that the then-available methods for producing temperature scores “do not allow investors to understand their alignment with the Paris ambition”, meaning investors “are largely blind to the impact of their holdings on global climate stability”. 

5) Securities watchdogs mull ESG ratings oversight

The International Organization of Securities Commissions (IOSCO) recommended competent authorities take action where they can to improve the reliability, comparability and interpretability of ESG ratings and data providers, including climate-related ratings providers.

In a consultation launched Monday, the global standard-setter — with members covering some 130 jurisdictions — said that where they have the authority, securities regulators may consider taking steps to enhance the governance and transparency of ESG ratings providers’ assessment processes and the management of conflicts of interest.

IOSCO also proposed that watchdogs evaluate their current regulatory regimes to determine “whether they provide sufficient oversight of ESG ratings and data products”. It further prompted authorities to find out whether there are opportunities “to encourage industry participants to develop and follow common industry standards or codes of conduct”.

Ashley Alder, IOSCO Chair and Chief Executive Officer of the Securities and Futures Commission of Hong Kong, said: “The use of ESG rating and data products is on the rise but most jurisdictions do not have regulatory frameworks which explicitly cover the providers of these products. Users have signalled that having multiple ESG ratings and data products can cause confusion, raising serious questions about relevance, reliability and greenwashing”.

In the report accompanying the consultation, IOSCO identified “increasing demand from investors for products that will push society towards a greener economy and mitigate the risks stemming from climate change” as a key driver of the explosion in ratings providers in recent years. 

The consultation closes on September 6, 2021.

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

You can catch additional climate risk management updates on LinkedIn

The views and opinions expressed in this article are those of the author alone

First Image: SEC, Second Image: IgorGolovniov / Shutterstock.com, Third image: Mark Van Scyoc / Shutterstock.com. All other images under free license through Canva.