Weekly round-up: November 1-5

The top five climate risk stories this week

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1) New ESG disclosures standards body to focus on climate

Accounting standard-setter the IFRS Foundation announced the creation of the International Sustainability Standards Board (ISSB), which will oversee the development of a new reporting framework covering environmental, social, and governance issues.

The new body, which officially launched on Wednesday at the UN Climate Change Conference (COP26) in Glasgow, plans to start work on climate disclosure standards first of all. These standards will aim to meet investor demands for “transparent and comparable information” on firms’ climate risks and opportunities and act as a shield against ‘greenwashing’. 

A prototype climate disclosure standard was published alongside the launch setting out draft rules for how companies could report their climate governance, strategy, risk management, and metrics and targets. On metrics, the prototype said companies shall disclose absolute gross Scope 1, Scope 2 and Scope 3 emissions, and the amount and percentage of assets or business activities vulnerable to climate-related transition and physical risks.

“The standards will form a comprehensive global baseline of sustainability disclosures. They can be used on a standalone basis or integrated into jurisdictional requirements to serve broader stakeholder or other public policy needs,” said Erkki Liikanen, Chair of the IFRS Foundation Trustees. 

The ISSB will absorb two bodies dedicated to climate- and sustainability-related disclosures to advance its efforts: the Climate Disclosure Standards Board (CDSB) and the Value Reporting Framework (VRF). Each currently presides over its own voluntary sustainability reporting framework, though both the VRF — the result of a merger of the International Integrated Reporting Council and Sustainability Accounting Standards Board — and the CDSB, along with other standard-setters, pledged last year to consolidate their work.

To have teeth, the agreed-on ISSB standards would have to be incorporated in countries’ regulatory frameworks so that businesses are required to use them. The IFRS Foundation has a strong track record on this front. Its financial reporting body, the International Accounting Standards Board, has produced rules that organisations in over 140 countries have to follow.

The ISSB’s draft climate standards are scheduled to be put out for public consultation in 2022.

2) Carney’s Net-zero finance alliances “failing”, say climate campaigners

Net-zero coalitions of banks, insurers, and other financial institutions convened by the UN’s Special Envoy for Climate Action and Finance, Mark Carney, are failing to curb the funding of fossil fuels and are moving too slowly to achieve climate goals, campaign groups say.

Reclaim Finance, a French climate NGO, said the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of six sectoral climate groups, is “fundamentally flawed” and guilty of “analysis paralysis” in a new report. The NGO pointed out that none of these groups require members to stop allocating capital to fossil fuel expansion, and that the UN ‘Race to Zero’ campaign — which GFANZ members have to join — does not even mention fossil fuels. This omission Reclaim Finance said was “rather like a global anti-smoking campaign not mentioning cigarettes”.

The International Energy Agency (IEA) said in its net zero roadmap earlier this year that limiting warming to 1.5°C would require an end to all fossil fuel expansion today. Advocacy groups including Reclaim Finance have since argued for this red line to be incorporated by climate finance initiatives.

The Net Zero Asset Owners Alliance (NZAOA), a GFANZ member, hit back at Reclaim Finance’s report in a statement on Tuesday. Chair of the Alliance, Günther Thallinger, said that NZAOA members are already changing their investment decision-making in line with short-term, science-based targets for portfolio emission reductions, and that the call from Reclaim Finance for GFANZ institutions to halt investment in fossil fuels “would create social and economic inequities, and thus would ultimately slow down the crucial transition into renewable energy”.

Another climate advocacy group, UK-based ShareAction, criticised the progress made by members of the Net Zero Asset Managers Initiative (NZAMI), another GFANZ member. It highlighted the Initiative’s own finding that out of the 43 signatories to have set out interim emissions-reduction targets to date, just 35% of their assets are currently managed in line with net-zero-by-2050 goals.

Peter Uhlenbruch, Director of Financial Sector Standards at ShareAction, said this figure “doesn’t signal the level of ambition the net zero revolution demands” and that it shows how the bar to be admitted as an NZAMI member may be too low.

GFANZ was convened by Carney in April this year. Today it covers over 450 banks, asset managers, and other financial institutions around the world. On Tuesday, the alliance announced at COP26 that its members now represent $130 trillion of private capital committed to shifting the global economy onto a 1.5°C pathway. However, journalists at NGOs have queried this figure, with the Financial Times claiming it double counts members’ assets.

3) BoE publishes ‘green’ bond-buying plan

The Bank of England (BoE) will stop buying debt issued by climate laggards as part of a plan to ‘green’ its Corporate Bond Purchase Scheme (CBPS).

Announced Friday, the plan aims to cut the weighted average carbon intensity (WACI) of the BoE’s corporate bond portfolio by 25% by 2025, and align it with net zero goals by 2050. To achieve this, the BoE will stop buying bonds issued by companies that fail to publish climate-related disclosures in line with UK government requirements from 2022, and those sold by high-emitting companies that do not have public emissions reduction targets.

The BoE will also ‘“tilt” its purchases to favour companies that perform well on an in-house ‘scorecard’. Metrics including emissions intensity, past cuts in absolute emissions, and third-party verification of an emissions-reduction target will count towards a corporate’s ‘score’. The BoE held around £20 billion of corporate debt under the CBPS as of end-September.

“Our strategy in greening the CBPS is to help incentivise firms to put in place and adhere to credible plans for reducing their emissions,” said BoE Governor Andrew Bailey. “Incentivising change is more powerful than immediate divestment to encourage the significant shifts in behaviour required across the economy in order to achieve net zero by 2050”, he added.

4) UK to mandate net-zero transition plans

Banks and other firms in the UK will be made to publish decarbonisation and transition plans as part of a government push to make the country a ‘Net Zero Aligned Financial Centre’.

Speaking on ‘Finance Day’ at COP26 on Wednesday, UK finance minister Rishi Sunak outlined the government’s intention to mandate the disclosure of “clear, deliverable” plans by financial institutions and listed companies that align with the UK’s net zero goals. A new Transition Plan Taskforce, made up of industry leaders and other experts, will develop a science-based “gold standard” for these plans to assist in-scope firms and head off ‘greenwashing’. The Taskforce is due to produce this standard by the end of 2022, and companies to start publishing transition plans in 2023.

Last month the UK said it would enshrine in law mandatory public reporting requirements aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The mandate would come into effect for over 1,300 UK-registered companies and financial institutions from April 6, 2022.

Other jurisdictions are mulling transition plan mandates for companies. In October, Frank Elderson — Vice-Chair of the Supervisory Board of the European Central Bank — said in a speech that Paris Agreement-aligned transition plans should be made legally binding for banks.

5) New York bank, insurance watchdog sets up climate risk division

Climate change will be factored into the supervision of New York-based banks and insurers following the creation of a dedicated Climate Risk Division at the New York State Department of Financial Services (NYDFS).

The new unit, announced Wednesday, will also help the industry to manage climate-related risks and work with peer regulators to build capacity on climate-related supervision. Leading the Division is Dr. Yue (Nina) Chen, who was the regulator’s inaugural Director of Sustainability and Climate Initiatives and will now serve as Executive Deputy Superintendent.

NYDFS has pioneered climate-related financial supervision in the US, having last year issued guidance to insurers and banks on managing transition and physical risks. It was also the first US regulator to join the Network for Greening the Financial System (NGFS), the club of climate-focused central banks and supervisors.

“This new division and Nina’s appointment position DFS at the forefront of climate-related financial supervision, fulfilling DFS’ mandate to ensure the safety and soundness of our regulated companies as they manage the financial risks from climate change, and support the roles of our institutions in advancing the low-carbon transition and enhancing communities’ resilience,” said Acting Superintendent of Financial Services Adrienne Harris.  

NYDFS oversees around 1,800 insurance companies and 1,400 banking and other financial institutions, including the consumer arm of Goldman Sachs and the branches of foreign banks Banco Santander, Barclays, BNP Paribas, and Deutsche Bank, among others.

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