Weekly round-up: June 14-18

The top five climate risk stories this week

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1) Banks “a long way off” ECB’s climate risk standards

Not one lender under the European Central Bank’s (ECB) watch meet all its expectations on climate risk management, an official at the agency revealed.

Frank Elderson, a member of the ECB Executive Board, said at a conference on Wednesday that more than half of European Union banks have “no approach for assessing the impact of climate risks” and only 40% have assigned climate risk management responsibilities to the management body.

“All banks have several blind spots and may already be exposed to material climate risks,” said Elderson. “They are all still a long way off meeting the supervisory expectations we have laid out for them. And all banks need to catch up, as their climate risk undertakings will eventually influence their supervisory requirement”.

The ECB laid out its expectations in a 54-page handbook published last November. It asked firms to run a self-assessment of their current climate risk management practices against those in the guide and draw up appropriate “action plans” over the first half of this year. Now, the ECB will benchmark these assessments and plans ahead of a “full supervisory review” of climate risk practices in 2022.

Elderson explained that 90% of banks deemed their own reported climate risk practices to be “only partially or not at all aligned” with the ECB guide. He added that the ECB’s work would likely influence bank capital requirements “eventually” through the annual Supervisory Review and Evaluation Process run by the agency.

2) BlackRock, Baringa partner on climate tech

BlackRock will add specialist consultancy Baringa’s Climate Change Scenario Model to its flagship risk management platform in a new partnership announced Thursday.

The tie-up will bring together expertise from across the two firms to develop climate risk models and other climate analytics solutions. 

BlackRock created Aladdin Climate last December as an add-on to its Aladdin risk management platform, which is used by banks, investors and non-financial companies to surveil threats to their asset portfolios. Wall Street giants Vanguard and State Street are among its top tier clients. The recently-added climate tools help firms measure both the physical and transition risks of climate change at the asset and portfolio level.

Baringa’s Climate Change Scenario Model is used by firms with combined assets of $15 trillion, including major banks BNP Paribas and Standard Chartered. The tool allows for the assessment of both physical and transition risks as well as temperature alignment at the asset level, and can be used to meet the reporting recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Through the partnership, Baringa will leverage Aladdin Climate as part of its global consulting work on climate risk and to help financial institutions, governments and regulators map out net-zero emissions strategies.

3) Legal & General ditches AIG over climate failures

Legal & General Investment Management (LGIM), the UK’s top asset manager, will offload debt and equity issued by US insurer AIG and three other companies because of their “insufficient action” tackling climate risks.

In a Tuesday statement, LGIM said it would divest from AIG, Industrial and Commercial Bank of China (ICBC), China Mengniu Dairy and the US’s PPL Corporation for breaching the firm’s “red lines” on coal involvement, carbon disclosures or deforestation. The four companies join China Construction Bank, MetLife, Japan Post, KEPCO, ExxonMobil, Rosneft, Sysco, Hormel and Loblaw on LGIM’s blacklist.

AIG was sanctioned for not having a policy on underwriting thermal coal and for failing to disclose the Scope 3 emissions of its investments. ICBC was dropped for its stance on thermal coal, too. China Mengniu Dairy was excluded for its lack of a zero-deforestation policy and for not disclosing agricultural Scope 3 emissions, and PPL Corporation for failing to put in place timebound targets to phase out coal-fired power generation.

In addition, LGIM said during the 2021 proxy season it voted against the boards of 130 companies for climate risk management shortcomings. New additions to this voting list going forward include Canadian Natural Resources and Air China.

On the flipside, LGIM re-admitted US retailer Kroger to its list of investees because of steps taken to lower its climate and environmental footprint.

Last October, LGIM pledged to engage with 1,000 investees responsible for 60% of all listed companies’ greenhouse gas emissions and make its in-house climate ratings for these publicly available. Potential exclusions could apply to over £58 billion of assets held in its auto-enrolment pension funds. LGIM has approximately £1.3 trillion of assets under management total.

AIG was recently identified by nonprofit group ShareAction as one of the worst-performing global insurers for its sustainability practices, alongside US peers Nationwide, Allstate and Genworth Financial.

4) BoE’s financed emissions fell in 2020

Emissions linked to over £800 billion of the Bank of England’s (BoE) securities holdings dropped last year, reflecting a gradual decarbonisation of the UK government and corporate sectors.

In its latest climate-related disclosure, the BoE said the weighted average carbon intensity (WACI) of its UK sovereign bond portfolio fell 3% year-on-year to 222 tonnes of CO2 equivalents/£million of GDP. This is well below the G7 average sovereign bond WACI of 384 tCO2e/£m GDP. UK government paper makes up £766 billion of the BoE’s monetary policy portfolio and the bulk of its £17 billion of discretionary assets.

The WACI of its corporate bond holdings fell by 9% to 251 tCO2e/£m revenue, representing “broad decarbonisation across the economy”. Using an implied temperature rise metric, the BoE found that the emissions of this portfolio are aligned with a 3.0°C warming pathway, down from 3.5°C the year before. The BoE has around £19 billion of corporate bonds in its monetary policy portfolio.

The central bank also disclosed the results of a transition and physical risk analysis of its portfolios. It concluded that it faces “limited direct stranded asset risks to its sovereign holdings” because of the small amount of UK GDP linked to fossil fuel extraction. Physical risks to these assets also “remain relatively low overall”, with sea-level rise and flooding posing the greatest threats.

Last month, a BoE official said it would tilt its corporate bond-buying towards those issuers making efforts to transition to a net-zero emissions future using a ‘scorecard’ methodology, which would rank them based on the level and speed of change of their carbon footprints, the existence of regular climate reporting, and commitment to specific reduction targets.

5) US climate risk disclosure bill clears the House

The US House of Representatives on Wednesday passed a bill that would require public companies to report their climate-related risks.

The Climate Risk Disclosure Act passed the chamber as part of a bundle of reforms aimed at helping investors understand securities issuers’ ESG risks and opportunities. Sponsored by Congressman Sean Casten (D-Ill), the Act directs the Securities and Exchange Commission to publish rules within two years that oblige firms to report their direct and indirect greenhouse gas emissions.

The Act would also require issuers to describe how their valuations would be impacted should climate change continue at its current pace and if warming were contained to 1.5°C, as well as disclose their risk management strategies in relation to physical and transition hazards.

“When it comes to making the transition from fossil fuels to cleaner, cheaper energy, markets are some of the most powerful tools we have,” said Casten. “But for markets to work efficiently, investors need transparency. By requiring publicly traded companies to disclose all climate-related risks, my bill will empower investors to make smarter decisions and harness the power of the free market to help us win the race against the climate crisis before it’s too late,” he added.

The vote on the reforms, included as part of the ESG Disclosure Simplification Act, passed 215-214, with four Democrats joining all Republicans in opposition. The Bill must now find at least 60 votes in the Senate to avoid a filibuster and pass into law.


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First image: Yavuz Meyveci / Shutterstock.com, Second image: Tada Images / Shutterstock.com, Third image: II.studio / Shutterstock.com. All other images under free license through Canva.