Monday and Thursday newsletters are for paying subscribers only. This week, February’s climate risk regulation rundown, and a review of a new working paper on the effect of the TCFD on climate disclosure. Not a paying subscriber yet? Why not take out a free trial to see what you’re missing:
1) EU watchdog plans ‘Green Asset Ratio’ disclosure for banks
Banks in the European Union will report the share of their loan, debt and equity holdings aligned with sustainable activities through a new ‘Green Asset Ratio’ (GAR) proposed by the bloc’s banking watchdog.
In a consultation on mandatory reporting of ESG risks published Monday (March 1), the European Banking Authority (EBA) said the GAR would identify “what part of institutions’ exposures contribute to or enable the objectives of climate change mitigation and adaptation” and facilitate the management of climate-related risks.
Loans and advances, debt securities, and equities held in the banking book would be covered by the GAR, with banks obliged to report what percentage of these represent exposures to sustainable activities as identified by the EU’s taxonomy regulation.
The EBA also proposed other climate-related metrics, including a quantitative disclosure of banks’ loans to carbon-intensive sectors and their risk exposures to extreme weather events. If enacted, banks would have to start disclosing these metrics semi-annually, with the first full-year report covering holdings as of end-December 2022.
The package is open for public consultation until June 1, 2021. A public hearing on the proposals is scheduled for March 26.
2) SEC to surveil climate, ESG disclosures
US companies’ climate disclosures will be policed by a specialist team within the Securities and Exchange Commission (SEC), in line with the watchdog’s renewed focus on ESG and sustainability issues.
The new Climate and ESG Task Force, announced yesterday (March 4), will operate out of the agency’s Division of Enforcement and be led by Kelly Gibson, its Acting Deputy Director. It will initially target “material gaps or misstatements in issuers’ disclosure of climate risks under existing rules” as well as the public reports published by investment advisers on their ESG strategies. The Task Force will also work to stamp out greenwashing by securities issuers and funds by chasing down tips, referrals and whistleblower complaints on ESG-related issues.
The formation of the Task Force follows the launch of a review of climate-related disclosures ordered by Acting Chair of the SEC, Allison Herren Lee, and her appointment of Satyam Khanna as senior policy advisor for climate and ESG.
This flurry of climate-related initiatives prompted Republican SEC commissioners Hester Pierce and Elad Roisman to urge the now Democratic-led agency to slow down in a public statement on Thursday. In reference to the new Task Force, they asked whether it wouldn’t have been “more prudent” to wait for the conclusion of the SEC’s review of climate-related disclosures before going ahead with an ESG-specific enforcement initiative.
Separately, President Biden’s nominee for the chairmanship of the SEC, Gary Gensler, told lawmakers that there’s a role for the SEC in bringing “some consistency and comparability” to guidelines on disclosure of climate risks in a Senate confirmation hearing on Tuesday (March 2).
3) Study says TCFD supporters guilty of “cheap talk” and “cherry-picking”
There’s little evidence that the Task Force on Climate-related Financial Disclosures (TCFD) has stoked increased reporting of material climate information by supportive companies, a new study suggests.
Academics at Swiss schools ETH Zurich and Uni Zurich used a natural language processing (NLP) model called ‘ClimateBERT’ to trawl through the annual reports of 818 TCFD-supporting companies for climate-related information. Reports from before and after the 2017 launch of the final TCFD recommendations were assessed to gauge whether climate disclosures improved in response to the initiative.
The model reported “a slight or negligible” 1.9 percentage point increase in information disclosed in line with TCFD categories after the launch of the recommendations in 2017 until 2020. This growth was largely driven by reporting aligned with the task force’s governance and risk management recommendations.
In contrast, disclosure aligned with the strategy and metrics and targets recommendations barely changed. These two categories, the researchers note, “would provide the most essential and material information to stakeholders”.
The findings led the author to conclude that “supporting the TCFD seems to be cheap talk and is associated with cherry-picking disclosures on those TCFD categories containing the least materially relevant information”, adding that this strengthened the case for mandatory climate-related reporting.
4) Bank of England adopts climate mandate
The Bank of England (BoE) will adjust its bond buying to account for issuers’ climate impact after the UK government updated its mandate to explicitly factor in its commitment to a net zero economy.
Chancellor of the Exchequer Rishi Sunak told the Bank’s monetary policy committee that its remit should “reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy” in a letter dated March 3.
In response, the BoE said on its website that it would propose an approach to adjusting its Corporate Bond Purchase Scheme (CBPS) “to account for the climate impact of the issuers of the bonds we hold, with a view to adapting our approach by the time of our next scheduled round of reinvestment operations in 2021 Q4”.
The CBPS was launched in 2016 to support corporate issuers in the wake of Brexit and was stepped up in response to the coronavirus crisis last year. The BoE held £20 billion of corporate bonds as of end-December. In its 2020 climate-related disclosure, the Bank said the carbon-intensive utilities sector accounted for 40% of its corporate holdings, and that the portfolio as a whole was aligned with a 3.7°C warming trajectory — well above the below 2°C target set by the Paris Agreement.
Last month, the BoE came under fire by UK lawmakers, who said it was at risk of stoking “moral hazard” by purchasing the debt of high-carbon companies “without placing any conditions on them to make a transition to net zero”.
5) Citi, Goldman Sachs make net zero pledges
Another week, another round of net zero commitments by top banks.
On March 1, Citi — the third-largest bank in the US — pledged to zero out its greenhouse gas (GHG) emissions by 2050, including those linked to its financing portfolio. Goldman Sachs followed suit yesterday. Both also promised to achieve net zero operational emissions by 2030.
Citi’s announcement, by new chief executive officer Jane Fraser, promised an initial ‘Net Zero by 2050 plan’ within the year, to include emissions reduction targets for carbon-intensive sectors, plus interim targets for 2030 for its energy and power portfolios. Fraser added that after an “initial implementation period” the bank would “assess which additional sectors to include” in scope of the plan.
Citi is already a member of the Partnership for Carbon Accounting Financials (PCAF), which offers a framework for the counting and disclosure of financed emissions. The bank also tightened its fossil fuel sector lending standards in 2020.
Climate advocates were left unimpressed by its net zero pledge, however. Maaike Beenes, a climate campaigner at BankTrack, a pressure group, said: “Waiting another year to announce how the commitment will be implemented is just not good enough. It’s not rocket science what needs to happen when aiming for net zero: Citi must come with a concrete plan that ends financing for the coal, oil and gas sector, starting with all expansion projects”. As of 2019, Citi was the third-largest provider of financing to the fossil fuel sector, according to the Rainforest Action Network (RAN).
Like Citi, Goldman Sachs said it would set “interim business-related climate targets”, to be unveiled by end-2021. The bank also said it had joined the UN Principles for Responsible Banking, a club of like-minded lenders working on common standards to transition their business models for a low-carbon world. Goldman Sachs is the fourteenth-largest provider of financing to the fossil fuel sector, according to RAN data.
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