Weekly round-up: May 24-28

The top five climate risk stories this week

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1) Shell ruling underlines climate legal risks

Royal Dutch Shell must cut its greenhouse gas emissions 45% by 2030 from 2019 levels, after losing a court battle in the Netherlands.

The Tuesday ruling by The Hague District Court may force the oil major to sell off assets, curb spending on exploration and take other actions to rapidly reduce its oil production. It may also inspire a new wave of climate lawsuits against top corporate polluters.

The legal action was brought by Friends of the Earth Netherlands together with 17,000 co-plaintiffs and six other organisations, who alleged that Shell’s carbon-intensive operations violate human rights laws in the Netherlands and the European Union. The company’s current commitment to reach net-zero operational emissions by 2050 and shrink the net carbon footprint of its products by 30% by 2035 was deemed insufficient as the “policy, policy intentions and ambitions” of the group, including ongoing fossil fuel explorations, are “incompatible” with its reduction obligation, the ruling stated.

“This is a landmark victory for climate justice. Our hope is that this verdict will trigger a wave of climate litigation against big polluters, to force them to stop extracting and burning fossil fuels,” said Sara Shaw from Friends of the Earth International, one of the co-plaintiffs.

Significantly, the ruling found that Shell was responsible for the Scope 3 emissions produced by customers burning its fuels. “Through the energy package offered by the Shell group, RDS [Royal Dutch Shell] controls and influences the Scope 3 emissions of the end-users of the products produced and sold by the Shell group,” the court said. Approximately 85% of Shell’s total emissions are Scope 3.

This ruling creates a legal precedent whereby fossil fuel companies are liable for the choices of their customers, which could be used to support future lawsuits against oil and gas producers.

Shell indicated it would appeal the ruling to the Supreme Court of the Netherlands. “We are investing billions of dollars in low-carbon energy, including electric vehicle charging, hydrogen, renewables and biofuels. We want to grow demand for these products and scale up our new energy businesses even more quickly. We will continue to focus on these efforts and fully expect to appeal today’s disappointing court decision,” the company said.

2) Green central banks call for global climate disclosure standards

A “rapid convergence” towards a global climate-related disclosure standard is needed to help bridge climate data gaps, the Network for Greening the Financial System (NGFS) has said. 

In a new report, the club of 90 climate-focused central banks and supervisors said that patchy data is hampering efforts to correctly price climate-related risks and assess their threat to financial stability. Global agreement on disclosure standards and a “green” taxonomy would help “catalyse progress towards better data”, the NGFS added, as would the development of “well-defined and decision-useful metrics, certification labels and methodological standards”.

The NGFS set up a workstream on data gaps in July 2020, under co-chairs Patrick Amis, of the European Central Bank, and Fabio Natalucci, of the International Monetary Fund. In its report, the workstream said the largest gaps exist for forward-looking data, like emissions pathways and companies’ climate-transition targets. Stakeholders grilled by the NGFS also said that the limited availability of “carbon” data — including firms’ Scope 3 emissions and data on avoided emissions — is a constraint, as is the lack of geographical data on asset locations.

As well as global agreement on standards, the NGFS workstream said “urgent steps” to improve climate-related disclosures should be made. Stakeholders told the group that the voluntary nature of disclosure frameworks, the fragmentation in the landscape, the absence of technical guidance and independent verification, and the lack of a common approach to materiality are all hurdles that still need to be overcome.

The NGFS pledged to engage further with non-financial corporates, data providers and ratings agencies on climate-related data gaps and publish additional recommendations on how to bridge them.

3) Almost half of top insurers failing on climate risks

Thirty-two out of 70 insurance giants show poor management of climate risks and opportunities, a new ranking by the nonprofit ShareAction reveals.

US insurers were the worst performers, with Allstate, American International Group (AIG), Protective Life Insurance Company, Genworth Financial, and Nationwide all receiving an ‘E’ grade, the lowest ranking under the ShareAction methodology.

Only 11 of the insurers received an ‘A’ or ‘B’ grade, representing good climate risk management, including European heavyweights AXA, Allianz, Aviva, Legal and General, and Aegon.

Source: ShareAction

Almost half the insurers surveyed have no board-level involvement in responsible investment and underwriting, and 70% have no climate policy for their underwriting activities. Fifty-six percent have no climate policy for their investments. In addition, just 40% of insurers use climate scenario analysis on their investment portfolios.

ShareAction said the findings were “surprising”:

“One might expect that the types of systemic risks explored in this survey would be an essential part of the analysis that feeds into development and pricing of underwriting products. This does not appear to be the case — instead, insurers’ approach to investment is more advanced. One reason for this might be that insurers have been able to learn from other asset owners and asset managers how to incorporate ESG issues into investment decisions and have benefitted from the general mainstreaming of sustainable finance, while the underwriting side requires a much more insurance-centric approach,” the nonprofit said.

The report follows the publication on Tuesday of key recommendations to strengthen efforts to address climate-related risks in the insurance industry by standard-setter the International Association of Insurance Supervisors (IAIS).

The paper lays out a series of tools supervisors can use to assess and address risks from climate change.

4) Democrats push climate stress test bill

The Federal Reserve would have to run climate stress tests for banks and other large financial institutions under legislation re-introduced Thursday in the US Congress.

The ‘Climate Change Financial Risk Act of 2021’, sponsored by Senator Brian Schatz (D-Hawai’i) and Congressman Sean Casten (D-Ill), would establish an advisory group of climate scientists and economists to develop climate change scenarios that would then be used by the Fed to stress test banks with over $250 billion in assets.

Each round of tests, to be run once every two years, would include 1.5°C, 2°C and “business-as-usual” scenarios. Participating firms would have to produce remediation plans that detail how they would approach capital planning, balance sheet management and business strategy in response to each test.

The bill was initially introduced in Congress in 2019, but did not progress to a vote. Its re-introduction comes hot on the heels of President Biden’s executive order directing federal agencies to incorporate climate-related risks in their policing of the financial system.

“The Biden Administration recognizes that climate change poses systemic financial risks, but our regulatory agencies still lag their international peers in integrating climate into their supervisory work. This bill will push the Fed to start treating climate risks with the seriousness they warrant,” said Senator Schatz.

The bill would also charge US prudential regulators to run a survey to assess the ability of non-systemic banks to weather climate risks. It would further create a climate change risk committee within the Financial Stability Oversight Council to measure and report annually on the climate-related risks to the US financial system.

5) Global banks launch effort to decarbonise steel industry

Citi, Goldman Sachs, ING, Societe Generale, Standard Chartered, and UniCredit have established a working group to align their financing of steel with the goals of the Paris Agreement. 

The Steel Climate-Aligned Finance Working Group will create a set of standards for financial institutions that fund steelmakers to help them meet their portfolio decarbonisation objectives and assist the steel industry with its own transition.

Senior representatives from each bank will draft a climate-aligned finance agreement for the sector defining its scope, and the emissions pathways, methodologies and governance structure to be used. The group plans to roll out the agreement ahead of the United Nations Climate Change Conference in November.

The agreement will be modelled on the Poseidon Principles, a framework for incorporating climate targets into lending decisions to the shipping industry, which has 27 signatories to date. 

“With the appropriate framework, all banks will be able to support their clients as they innovate and invest for a low carbon future,” said Stéphanie Clément de Givry, global head of mining, metals and industries at Societe Generale.

The Rocky Mountain Institute (RMI), a US nonprofit, will facilitate engagement between the new working group and the Net-Zero Steel Initiative (NZSI), a climate forum for steelmakers, to ensure efforts by banks and the industry are aligned.

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: Bart Hoogveld / Friends of the Earth. All others images under free media license through Canva.