Weekly round-up: July 5-9

The top five climate risk stories this week

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1) ECB to account for climate in decision making

The European Central Bank (ECB) will factor climate risks into its bond-buying and collateral framework as part of an action plan to green its monetary policy.

The package of measures, unveiled Thursday, reflects the bank’s understanding that climate change and the low-carbon transition could upset price stability, a core part of its mandate, and elevate the risk profile of its asset portfolio.

The ECB committed to impose environmental disclosure requirements on companies that want their assets to be used as loan collateral or be bought outright by the bank. The mandate may be used to screen eligible assets or “as a basis for a differentiated treatment” between them. The bank added that it will start releasing climate-related information on bonds bought through its corporate sector purchase programme (CSPP) by the first quarter of 2023. As of July 2, the ECB held €282.4 billion of bonds through the CSPP.

The bank also said it would review its collateral valuation and risk control approach to ensure climate risks are captured when assessing securities.

These measures go some way to meeting the demands of climate activists and think-tanks in recent months. In March, a joint study by Greenpeace, New Economics Foundation and UK universities found that debt issued by carbon-intensive firms made up 59% of all corporate bonds accepted as collateral by the ECB. To “green” its collateral framework, the organisations recommended adjusting bond valuation haircuts to better reflect the issuing companies’ climate impact.

The ECB further pledged to speed up the development of new models and conduct analyses to weigh the impacts of climate change on the EU economy and financial system. It also promised to develop “new experimental indicators” for green assets and the carbon footprint of financial institutions.

A roadmap outlining the action plan says the commitments will be implemented by 2024.

2) Financial Stability Board to herd climate risk efforts

International standard-setter the Financial Stability Board (FSB) laid out a roadmap for coordinating the various initiatives underway to tackle climate-related financial risks and preventing jurisdictions from pulling in different directions.

The blueprint, published Wednesday, describes four goals financial authorities should pursue — firm-level disclosures, better data, vulnerability analyses and the development of tools — and identifies actions they may take from now to 2023 to fulfill them.

The FSB said this should support “consistency of actions” across authorities and minimise the risk of “harmful market fragmentation”.

Also on Wednesday, the standard-setter published reports on promoting climate-related disclosures and climate data availability. The first includes the results of a survey of national authorities on climate reporting. This found that most jurisdictions strongly support “a common global baseline” for disclosure, with many referencing the International Financial Reporting Standard (IFRS) Foundation’s efforts to establish sustainability-related reporting standards.

The second highlights efforts to bridge data gaps that currently hinder the monitoring and assessment of climate risks. Among its recommendations, it says that authorities should “widen and harmonise data” on how institutions transfer exposures to climate-related risks between financial sectors. This includes data on the role of insurance in mitigating these risks, plus insurance-linked securities and catastrophe bonds.

It also presses financial authorities to compare their experiences running climate-related scenarios analyses “in order to identify relevant data gaps”.

3) Banks launch voluntary carbon market platform

Canada’s CIBC, Brazil’s ITAU, Australia’s NAB and the UK’s NatWest Group together launched a voluntary marketplace for carbon offsets to help customers manage their climate risks.

Project Carbon, announced Wednesday, is designed to help the banks’ clients access information on carbon offsets and promote “clear and consistent pricing and standards”. The project conforms with the principles laid down by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), an industry-led initiative set up by ex-Bank of England governor and UN Special Envoy for Climate Action and Finance Mark Carney.

When it was founded in 2020, the TSVCM said the carbon offset market may need to grow at least 15 times larger to meet demand from companies pursuing net zero emissions targets. The market was around $5.5 billion in size in 2019, offsetting 1.3 billion tons of CO2, according to Ecosystem Marketplace.

The Project Carbon banks plan to use blockchain technology to create a transparent registry of carbon offsets and their owners, thereby reducing the risk of double counting. The initiative also has ambitions to support the pricing of carbon offsets through the publication of executed trade sizes and successful bids.

Separately, on Thursday the TSVCM published a roadmap for building a “scaled, high-integrity” voluntary offsets market and said it is now recruiting for an independent Governance Body to oversee it. Some members will be independent experts, others drawn from the task force’s sponsors, and others from among market participants.

4) 41 asset managers join net zero pledge

Heavyweight investors Amundi, Sumitomo Mitsui Trust Asset Management, Franklin Templeton and 38 others joined the Net Zero Asset Managers initiative on Tuesday. This brings the total number of signatories to 128, covering $43 trillion in assets — about half of the entire asset management sector.

“This marks a fundamental tipping point across the investment sector and a significant boost in efforts to tackle climate change and decarbonise the global economy,” said Stephanie Pfeifer, head of the Institutional Investors Group on Climate Change, one of the six founding partners of the initiative. “There’s a lot more to achieve, but the sector is increasingly on a path to a net zero future,” she added.

The initiative, launched last December, commits signatories to set targets to align their portfolios with net zero by 2050 and engage investees on zeroing out their emissions. They are also pushed to build investment products aligned with net zero and publish information on their climate actions using the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Separately, 115 investors — including Aviva Investors, Fidelity International and Boston Common Asset Management — wrote to major banks on Monday urging them to update and strengthen their climate and biodiversity strategies ahead of the UN Climate Change Conference in November.

The banks were told to publish short-term climate targets “covering all relevant financial services” by the time of their 2022 shareholder meetings and integrate the International Energy Agency’s new Net-Zero Scenario into their climate strategies. 

The letter, organised by the nonprofit ShareAction, was sent to 63 banks, including JP Morgan, Deutsche Bank and Standard Chartered. Responses are requested by August 15.

5) Central banks debut climate risk training scheme

Central banks and supervisors will be able to study up on the financial and systemic risks of global heating through a new Climate Training Alliance (CTA), launched by major standard-setters on Friday.

The CTA — the brainchild of the Bank for International Settlements, the International Association of Insurance Supervisors, the Network for Greening the Financial System, and the UN-convened Sustainable Insurance Forum — will bring together educational materials from major central banks and make them more accessible to financial authorities through a dedicated online portal.

Its objective is to “improve the skillset” of central banks and regulatory agencies on both physical and transition climate risks.

In a survey of supervisors’ climate risk practices published by the Basel Committee on Banking Supervision last year, jurisdictions said they faced methodological challenges, a lack of capacity and human resources, and varying degrees of awareness when it comes to addressing climate-related risks

Mark Carney said the CTA “will provide training across supervision of climate risks, climate scenario analysis, and how to reflect climate in collateral management, ensuring the financial sector has the knowledge and tools to effectively measure and manage climate risks by COP26 and beyond”.

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