**Programming note** next Monday’s subscriber-only newsletter will instead be sent Tuesday, November 24
Climate Risk Review’s Monday newsletter, and Wednesday’s ‘Inside Climate Disclosures’ series, are for paying subscribers only. This week, what the Federal Reserve’s membership of the Network for Greening the Financial System means for domestic and international regulation, and a deep-dive into Ping An’s TCFD disclosure. You can upgrade your subscription here:
1) Global banks launch carbon accounting standard
Financial institutions including Morgan Stanley, Bank of America and Barclays have agreed on a uniform approach to measuring and reporting the greenhouse gas emissions funded by their lending and investing portfolios.
On November 18, the Partnership for Carbon Accounting Financials (PCAF), a coalition of climate-conscious banks and asset managers, unveiled the Global GHG Accounting and Reporting Standard — a system for counting up the emissions associated with their financing activities. It covers six asset classes: listed equity and bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages and motor vehicle loans, with more promised in 2021.
Firms can use the standard to assess their climate-related risks in line with Task Force on Climate-related Financial Disclosures (TCFD) recommendations, set science-based carbon reduction targets and report emissions data to third parties like the Carbon Disclosure Project.
“GHG accounting provides crucial information to assess the resilience of portfolios to climate-related risks and identifies opportunities to finance the decarbonization that’s so urgently needed for the transformation to a net zero emissions society,” said Peter Blom, chief executive officer at Triodos Bank, a PCAF member and part of the core team of 16 banks that formulated the standard.
PCAF has 87 members with combined assets of $17.8 trillion, including five global systemically important banks: Bank of America, Barclays, Citi, Morgan Stanley and TD Bank.
2) Bank of Canada preps climate scenario analysis
Six Canadian financial institutions will gauge how the transition to a low-carbon economy could harm their businesses using climate scenarios cooked up by the Bank of Canada and OSFI, the country’s financial watchdog.
The exercise aims to strengthen firms’ climate scenario capabilities and support the financial sector’s efforts to disclose climate-related risks. Intact Financial Corporation, Manulife, Royal Bank of Canada, Sun Life Financial, TD Bank and The Co-operators Group will all participate.
Speaking at the Public Policy Forum in Ottawa, Ontario, on November 17, Bank of Canada governor Tiff Macklem said: “By developing climate scenarios that are relevant to Canada, we hope to encourage financial institutions to use scenario analysis. We also hope a common set of scenarios will make the results more comparable. More fundamentally, we hope that scenario analysis will help financial institutions better understand their exposures to transition risks, and this will increase their confidence in their ability to disclose them.”
The climate scenarios will build on efforts by Bank of Canada staff, who earlier this year adapted climate-economy models used in other contexts to identify sources of economic and financial risk.
The Bank of Canada and Osfi plan to publish the scenarios, along with their underlying methodologies, assumptions and key sensitivities by the end of 2021. The results of the analysis will not be used to assess the participating firms’ climate-related risks or the Canadian financial system’s vulnerability to transition risks overall.
3) Climate futures and options markets activity hits new peak — ICE
Derivatives exchange operator ICE said trader interest in financial contracts for pricing climate risk climbed to a record high earlier this month.
Open interest in those products that make up ICE’s environmental complex — including futures and options linked to carbon credit schemes in Europe and the US, renewable energy credits and carbon offsets — reached 2.65 million contracts on November 12.
Said Gordon Bennett, managing director of utility markets at ICE: “This record activity, coupled with the growth in the number of participants trading these markets, reflects the fundamental role market-based mechanisms like carbon cap and trade schemes play in pricing climate risk.”
ICE added that the number of participants exchanging carbon-related products has grown by 40% since 2017. Traders in North America powered the surge: there are 70% more of them buying and selling in these markets today compared to three years ago, the firm said.
The exchange spies an opportunity for its environmental products to add many more users as more companies make commitments on emissions reduction. In September, former governor of the Bank of England Mark Carney launched the Taskforce on Scaling Voluntary Carbon Markets, made up of business leaders committed to expanding emissions trading.
4) Company accounts must reflect true costs of climate change, say top investors
Investors with over $9 trillion in assets have pressed fossil fuel giants including Royal Dutch Shell, BP and EDF to adopt so-called Paris-aligned accounts that accurately reflect the effects of decarbonisation on their businesses.
Members of the Institutional Investors Group on Climate Change (IIGCC) wrote to 36 big companies asking them to include “material climate risks” in their financial statements. Each was sent a letter with five recommendations to help them integrate climate change costs in their accounts: affirming the goals of the Paris Agreement; adjusting critical assumptions and estimates to be consistent with a net zero carbon pathway; conducting climate sensitivity analysis; explaining how dividends could be affected by transition risk; and aligning narrative reporting with accounting assumptions.
Paris-aligned accounts should be issued alongside, and complementary to, reports based on the Task Force on Climate-related Disclosures (TCFD) recommendations, the IIGCC signatories added.
“Paris-aligned accounts are amongst the most important changes that will drive system-wide capital redeployment,” said Natasha Landell-Mills, head of stewardship and Sarasin and Partners LLP, an IIGCC member. “Put simply, we need Paris-aligned accounts to drive Paris-aligned behaviour, thereby protecting capital for all. This is hopefully something that all companies and their shareholders can coalesce around.”
5) Aon partners with Columbia University to upgrade cat models
Climate change data from Columbia University will enhance hurricane risk models used by reinsurance giant Aon.
The upgrade will sharpen insurers’ pricing of catastrophe risks and better inform their exposure management. It will also help Aon clients understand how tropical cyclone risks will differ in future because of the effects of global warming.
“The insights from Columbia are critical as Aon continues to work with reinsurers to develop a bespoke view of catastrophe risk,” said George deMenocal, US chairman of Aon’s Reinsurance Solution business. “This means understanding underlying assumptions, acknowledging uncertainty in estimates and incorporating bespoke adjustments into models when appropriate.”
Separately, Hawaii-based climate risk management firm AbsoluteClimo souped up its catastrophe models with new machine learning and artificial intelligence tools. Enhanced versions of its G๏TCHA™ and Clim๏Cats™ models will allow for wider tail risk probability forecasts, differential and departure forecasts, as well as increased in-house data customisation. The upgrades also include a new global pandemic climate epidemiology prediction model.
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