Weekly round-up: May 10-14

The top five climate risk stories this week

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1) JP Morgan sets carbon targets for clients

Wall Street’s biggest bank published carbon-intensity targets for certain borrowers as part of its efforts to align its financing activities with the goals of the Paris Agreement. 

JP Morgan released 2030 targets for its oil and gas, electric power and automotive portfolios on Thursday, together with the underlying methodology used and its plan to monitor clients’ progress over time. The bank said it would develop targets for other sectors over time.

“We have carefully chosen our targets and put the resources in place to help our clients transition to a low-carbon world. Our Carbon Compass methodology creates incentives to deliver capital and advice to our global clients for the purpose of improving carbon efficiency, to help put us on a path to net zero,” said chief risk officer Ashley Bacon.

The bank is targeting a 35% cut in Scope 1 emissions and a 15% drop in Scope 3 emissions for oil and gas clients. Electric power borrowers have been set a 69% carbon-intensity reduction target, and automotive customers a 41% threshold. All reductions are relative to a 2019 baseline.

Source: JP Morgan

The targets will be used to “reallocate capital, as necessary” so that the banks’ sector portfolios are aligned with the Paris Agreement.

JP Morgan promised to publish intermediate emission targets for 2030 in October last year as part of a pledge to align its lending with the ambitions of the Paris Agreement.

The Carbon Compass methodology underpinning the targets is based on third-party energy and emissions scenarios, including the International Energy Agency’s Sustainable Development Scenario and Energy Technology Perspectives Beyond 2°C Scenario, which lay out specific trajectories to achieving the Paris goals.

2) Factor climate into US bank capital requirements – think tank

Updating the US bank capital framework to include climate risks could safeguard the economy from a “climate-driven financial crisis”, the Center for American Progress (CAP) has said.

In a new report, the liberal think tank outlined a five-point plan for regulators to build the financial system’s resilience to climate transition and physical shocks. All could be implemented by US authorities under existing laws.

CAP said that watchdogs could target transition risks at the institution level by raising the risk-weights applied to fossil fuel assets, which are used to set risk-based capital charges. The precise calibration should be linked to the amount of revenue extracted from oil, natural gas or coal by each borrower or counterparty. These risk-weights should ratchet higher over time to reflect the build up of transition risk, the report added.

Financially damaging transition shocks have already rocked the economy, CAP explained. For example, last July oil giant Total absorbed $7 billion of losses after cutting the value of reserves and current projects tied to Canadian tar sands.

“Banking regulators should ensure that banks are resilient to the heightened credit, market, operational, reputational, and liquidity risks created by the clean energy transition and are well-positioned to meet the needs of a low-carbon economy. Immediate financial regulatory action can help prevent the carbon bubble from bursting suddenly,” the report said.

In addition, the think tank argued for a “macroprudential capital buffer” that would apply to all banks over $100 billion in size. This would be sized according to each firm’s contribution to future climate-related losses, using the overall amount of greenhouse gas emissions they finance as a proxy.

Climate risks should also be factored into bank stress tests, which are used indirectly to set risk-based capital requirements for significant firms, CAP added. The findings of these tests could further inform risk-weight adjustments to assets particularly vulnerable to transition and physical shocks, it said.

Its final recommendation was for regulators to identify hedge funds and private equity companies loaded with climate-sensitive assets and designate them nonbank systemically important financial institutions. Doing so would bring them under enhanced federal scrutiny and subject to capital add-ons.

3) ConocoPhilips to set Scope 3 emissions targets after shareholder vote

Oil major ConocoPhilips has been told to set GHG emissions-reduction targets that cover both its own operations and those linked to the burning of the fossil fuels it produces following passage of a shareholder resolution on Tuesday.

The proposal, submitted by shareholder advocacy group Follow This, won with 58% of the vote.

“This majority vote is a victory in the fight against climate change. By passing our climate proposal, investors urge Conoco and the entire oil industry to change to achieve the goal of the Paris Climate Agreement to limit climate change to well below 2°C,” says Mark van Baal, founder of Follow This. 

ConocoPhilips’ board opposed the resolution. In a statement, it argued that it does not control who processes the crude oil and natural gas it produces or the energy products they’re turned into. It also claimed that Scope 3 emissions — those released by the end-users of its fossil fuels — represent an “unreliable benchmark” for target-setting, as they would confuse its current emissions count.

ConocoPhilips top shareholders include asset management giants BlackRock, Vanguard, State Street Global Advisors and T. Rowe Price Associates.

4) Fed quizzing banks on climate risks – Reuters

Supervisors at the Federal Reserve are asking Wall Street banks to explain how their loan portfolios would behave under various climate scenarios, Reuters reports.

In private discussions, Fed officials have requested big banks run internal stress tests to gauge their assets’ geographical exposure to physical risks — like flooding and drought — and to measure how their loans to fossil fuel companies and renewable energy firms would perform differently, according to four people familiar with the matter.

The Fed is also asking for data from these exercises to be handed over for its review.

Several top US lenders have already conducted internal scenario analyses and published their findings in annual reports aligned with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD). Last year, Citi stressed certain portfolios against a transition risk scenario that assumed the sudden imposition of a carbon tax. Morgan Stanley explored the credit rating migration of its oil and gas loans under a transition scenario, and mapped its exposures against potential hot spots for physical climate risks.

However, US regulators have yet to set formal climate stress tests for supervisees, lagging their counterparts in the UK, Europe and Japan.

5) Canada sets up council on climate risk and disclosure

Banks, pension funds and insurance companies will work with the government of Canada to enhance climate-related financial disclosures as part of a new Sustainable Finance Action Council, launched on Wednesday.

The Council, to be chaired by Kathy Bardswick, the former CEO of insurer The Co-operators Group, will focus first on public and private sector climate reporting standards, which are to be aligned with the TCFD recommendations. The group will also provide input on improving the assessment of climate risks and opportunities and opening up access to climate data and analytics. Helping develop common standards for sustainable and low-carbon investments will be part of its remit, too.

The Council’s first meeting is scheduled for June, with the roster of financial institution participants to be revealed over the next few weeks.

Canada’s Minister of Environment and Climate Change and Minister of Finance together appointed an Expert Panel on Sustainable Finance in April 2018 to explore how the financial sector could steer capital to low-carbon Canadian initiatives. In its final report, published 2019, the Panel issued a series of recommendations, including the establishment of the Sustainable Finance Action Council. In 2020, the new council was allocated $7.3 million CAD to fund its operations for the next three years.

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