Weekly round-up: March 22-26

The top five climate risk stories this week

**Programming note** The Monday deep-dive article next week will be replaced by the third ‘Climate risk regulation rundown’ on Wednesday, March 31. Next week’s comment piece, typically published on Thursdays, will instead be sent Monday, March 29.

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1) Trade-offs lie ahead for central banks fighting climate risks

Central banks could damage their reputations and risk legal brawls in their efforts to combat the threat of climate change, a new report by sustainability-minded monetary authorities says.

The Network for Greening the Financial System (NGFS), a club of 89 central banks and supervisors, identified nine ways they could adapt their policies to tackle climate risks and aid with the transition to a low-carbon economy. They range from biasing collateral frameworks against carbon-intensive assets to charging lower funding rates to banks that support sustainable companies. 

Source: NGFS

But the group said central banks face “trade-offs” if they decide to adopt these options. If they move ahead with climate policies and don’t “wait for a consensus to emerge on the most accurate approaches to climate-related risks” they open themselves to legal challenges. In addition, “ill-informed” measures could undermine their credibility and even harm the transmission of monetary policy. 

However, the longer they delay, the longer climate risks will “lie unchecked on their balance sheets”. Those institutions that massively expanded their portfolios through the coronavirus crisis by buying up corporate debt and other instruments may be especially exposed.

Because of this tension, the NGFS said central banks may find the best approach is to test climate measures on specific portfolios or asset classes to begin with.

The report also weighed the pros and cons of central banks mandating climate-related disclosures for participants in their credit operations. Though this could help institutions discriminate between counterparties based on their climate credentials, it would also impose costs on reporting participants. This may lead to an “adverse selection problem”, where polluting companies that are able to put together sophisticated disclosures get better treatment from a central bank than a ‘greener’ company that lacks the know-how and resources to report effectively. 

2) Fed to police climate threats to financial stability

The Federal Reserve is setting up a team to “identify, assess and address climate-related risks to financial stability”, an official has said.

Fed governor Lael Brainard announced the formation of the Financial Stability Climate Committee (FSCC) at a virtual conference hosted by sustainability nonprofit Ceres on Tuesday. The new team will work alongside the Supervision Climate Committee (SCC), established in January to build a picture of the financial implications of climate change for institutions, infrastructure and markets.

“It is increasingly clear that climate change could have important implications for the Federal Reserve in carrying out its responsibilities assigned by the Congress. Given the implications of climate change for both individual financial institutions and the financial sector as a whole, we need a framework that incorporates both microprudential and macroprudential considerations,” said Brainard, describing why both committees were necessary. The Fed is “investing in new research, data, and modeling tools” to support the two teams, she added.

Brainard also said the FSCC would “ensure coordination” with the Financial Stability Oversight Council (FSOC), the group of top-level US regulators charged with surveilling systemic risks.

Treasury Secretary Janet Yellen, chair of the FSOC, will start the first meeting of the council in the Biden era on March 31 with a session on climate change and “its potential impacts on financial stability”.

3) Banks scaled back fossil fuel financing in 2020

Global banks curbed their financing of fossil fuel firms in 2020, but overall levels remained higher than in 2016 — the year after the Paris Agreement was signed.

In its latest report on the big institutions bankrolling the dirtiest, most climate-harming industries, the activist group Rainforest Action Network (RAN) revealed that total financing fell 9% in 2020, to $751 billion. Giant lenders Bank of America, Barclays, HSBC and JP Morgan were among those that reined in lending and underwriting to fossil firms. French bank BNP Paribas was an outlier, increasing financing by 41% to $40.8 billion year-on-year.

JP Morgan remained the largest bank financier of the fossil industry, with outlays of $51.3 billion in 2020 and $316.7 billion since 2016.

Source: RAN

RAN said the group-wide drop in financing mirrored the global fall in fossil fuel demand and production caused by the coronavirus crisis, making it unclear the extent to which the lower level was the result of banks’ climate policies.

For the first time, RAN also judged banks’ commitments to cutting financed emissions — those produced by the companies they lend and invest in. Seventeen of the 60 banks had net zero financed emissions pledges in place. Fifteen were identified as members of the Partnership for Carbon Accounting Financials (PCAF), the body creating and overseeing methodologies for counting financed emissions.

4) Net zero yardsticks expose slow progress by high-carbon companies

New indicators for the world’s biggest greenhouse gas emitters illustrate the gulf between firms’ net zero ambitions and their plans to fulfill these.

Climate Action 100+, an investor group representing over $54 trillion in assets, published its ‘Net-Zero Company Benchmark’ on Monday. The tool offers in-depth and comparable assessments of individual companies’ climate performance against three primary goals: reducing greenhouse gas emissions, improving governance, and strengthening climate-related financial disclosures.

Of the 159 companies assessed, 52% have “announced an ambition to achieve net-zero by 2050 or sooner”. However, only half of these pledges encompass “most material emissions” and no one firm has “fully disclosed how it will achieve its goals to become a net zero enterprise by 2050 or sooner”.

Just six companies have aligned their future capital expenditures with their long-term emissions reduction targets: BP, Repsol, RWE, Total, Unilever and WEC Energy Group.

The majority of covered companies have promised to issue reports that follow the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), but only one in ten incorporate climate scenario analysis using a 1.5°C warming pathway.

“The ability to measure through benchmarking means investors can set a base to track the progress of companies in relation to their management of climate change investment risks and opportunities,” said Andrew Gray, director, ESG and Stewardship at AustralianSuper and Climate Action 100+ steering committee member.

5) UK consults on requiring large firms to disclose climate risks by 2022

The UK government has proposed making climate-related reporting mandatory for large public and private companies by 2022, as part of its efforts to become a world leader on climate disclosure.

On Wednesday, the business ministry published a 34-page consultation on the plan, which would cover around 1,600 companies. The 2022 start date aligns with an implementation roadmap laid out by the UK Treasury last November.

The proposal would require public companies, private firms with more than 500 employees and turnover of at least £500 million, and LLPs to publish information in their strategic or annual reports in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

“Whilst companies, financial institutions and Governments globally have expressed a great deal of support for the private sector led, voluntary TCFD framework, levels of disclosure overall are low, and many companies are often not disclosing against all four pillars of the TCFD recommendations,” the report says. As of March 6, just 293 UK companies are listed as TCFD supporters on the group’s website.

By targeting disclosure of climate information in financial filings or annual reports, the consultation could end the practice of firms segregating their TCFD disclosures in non-financial reports, says Mardi McBrien, managing director of the Climate Disclosure Standards Board. 

“Today marks the beginning of the end of the standalone TCFD report. The proposal executes the Task Force’s mission, to address the absence of material climate-related information in the mainstream financial filings of companies and thus being treated as any other material business risk,” she said.

The consultation closes on May 5.

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

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

First image: William Potter / Shutterstock, third image: gerasimov_foto_174 / Shutterstock, fourth image: Tom Wang / Shutterstock