Weekly round-up: November 22-26
The top five climate risk stories this week
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1) EU banks falling short on climate risk management — ECB
No major lender in the euro area has met all 13 of the climate-related supervisory expectations set out by the European Central Bank (ECB) last year, a report published by the agency shows.
Among its findings, the report says banks are lagging when it comes to factoring climate change into their internal reporting, market and liquidity risk management, and stress testing. Half of the banks assessed by the ECB for the report are yet to plan “concrete action” to incorporate climate and environmental (C&E) risks into their business strategies, and less than 20% have constructed key risk indicators to monitor climate-related threats. The ECB assessment covered 112 ‘significant institutions’ directly supervised by the central bank.
While most firms have put in place implementation plans for meeting the ECB’s expectations, the report found that these vary in quality and content, with many lacking operational details on how climate objectives will be realized and neglecting interim milestones. About two-thirds of banks also failed to “tailor their plans sufficiently to their specific situation” the report said. Furthermore, roughly 40% of banks were found to not run climate risk materiality assessments or to have performed assessments with significant shortcomings.
On the flipside, the report said that two-thirds of banks have made “meaningful progress” when it comes to integrating climate into their credit risk management, for example by reinforcing due diligence measures and setting limits on financing activities with high climate risks.
Next year, the ECB plans to conduct “a full review” of how ready banks are to manage C&E risks, with an especially focus on their inclusion in bank strategy, governance, and risk management.
2) Fed Chair’s renomination irks climate hawks
President Biden’s announcement on Monday that Jerome Powell has been tapped to serve a second term as Chair of the Federal Reserve angered climate activists who say he has been too timid when it comes to tackling climate-related financial risks.
David Arkush, Managing Director of the climate program at Public Citizen, a progressive nonprofit, said Powell’s renomination “doubles down on reckless Wall Street deregulation and dangerous dawdling on climate-related threats to the financial system, flouting Biden’s own whole-of-government approach to stemming climate threats”.
Progressive members of Congress, including New York’s Alexandria Ocasio-Cortez, had opposed Powell’s renomination back in August, saying the central bank needed a “leader at the helm that will take bold and decisive action to eliminate climate risk”. The Fed recently ranked near the bottom of a list of G20 central banks for its climate and biodiversity policies.
Climate hawks were more receptive to Biden’s nomination of Fed Governor Lael Brainard as Vice Chair, the official who usually runs meetings of the Fed Board in the Chair’s absence and helps guide the Chair on policy matters. Brainard has made a number of supportive speeches in recent months on the importance of tackling climate risks to the financial system. In October, she voiced support of Fed-backed guidance for large banks on measuring, monitoring, and managing the threats to their businesses posed by climate change.
“We are encouraged to see Governor Brainard being elevated to the role of Vice Chair, and it is essential that President Biden nominate additional board members, including the Vice Chair of Supervision, that will act to address climate-related threats to our economy,” said Ben Cushing, Fossil-Free Finance Campaign Manager at the Sierra Club.
President Biden himself emphasized the climate credentials of Powell and Brainard on Monday, stating that both “share my deep belief that urgent action is needed to address the economic risks posed by climate change, and stay ahead of emerging risks in our financial system”.
3) Australian watchdog finalizes climate risk guidance
Bank directors should consider putting in place “risk exposure limits and thresholds” at their institutions to help manage climate risks, the Australian financial regulator has said.
The recommendation is one of several made in final guidance released Friday on tackling climate-related financial risks from the Australian Prudential Regulation Authority (APRA). Others include discussing climate risks at the board level, setting “clear roles and responsibilities of senior management in the management of climate risks”, and taking both a short- and long-term view of evaluating climate risks and opportunities.
The APRA guidance also has advice for bank managers on climate risk management, climate scenario analysis, and the disclosure of “ decision-useful, forward-looking climate risk information” in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Though APRA has not introduced any new regulatory requirements or obligations, next year the regulator plans to survey the banks under its watch to help understand their alignment with its guidance as well as the TCFD recommendations.
4) Don’t delay EU climate capital rules — Finance Watch
Climate risks should be incorporated “without delay” into the European Union’s capital rules for banks and insurers, the think tank Finance Watch has said.
In a report published Tuesday, the group said that none of the “soft” prudential rules introduced by EU authorities to confront climate risks to date have “delivered tangible results”. These include efforts to promote climate-related financial disclosures and climate risk management — for example through the use of climate scenario analysis and stress tests.
Instead, Finance Watch said so-called ‘Pillar 1’ minimum capital requirements should be amended to capture climate risks, just as today they capture banks’ and insurers’ credit, market, and operational risks, among others. Capital is “the most impactful tool to address risks” and delaying introduction of Pillar 1 rules is “effectively delaying transition” to a more climate-friendly economy and “increasing future risks”, the group insisted.
The report recommends Pillar 1 capital charges be ushered in for financial exposures to fossil fuel activities. Specifically, for every dollar loaned to, or invested in, assets linked with the exploration, expansion and exploitation of new fossil fuel reserves, banks and insurers should have to hold a dollar in reserve as capital. This ‘one-for-one’ approach would bring the cost of financing new fossil fuel activity in line with their climate risk profile, Finance Watch said.
The think tank added that elevated capital requirements should also apply to assets associated with the exploitation of existing fossil fuel reserves. For instance, insurers should have to assign the highest applicable capital charge allowed under Solvency II — the EU’s regulatory framework for insurers — to each fossil fuel exposure, be it equity, debt, or direct lending.
However, Finance Watch does not favor reduced capital requirements for alleged ‘green’ activities. “Lowering capital requirements for sustainable assets and activities could create a financial bubble by attracting too much capital at an artificially low price”, the report said.
5) US insurance industry opposes federal climate risk action
Insurers and industry bodies in the US are not happy about the Federal Insurance Office’s (FIO) efforts to help tackle climate risks.
The US has a state-based regulatory system for insurance companies, and federal oversight is limited. The FIO, a division of the US Treasury, was set up following the global financial crisis to “monitor all aspects of the insurance sector”, but does not have the ability to draft or enact regulation. However, in a May executive order President Biden directed the FIO to “assess climate-related issues or gaps in the supervision and regulation of insurers” and, in concert with the states, gauge the “potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts”.
In carrying out this order, the FIO issued a Request for Information (RFI) on the insurance sector and climate-related financial risks at the end of August. Certain respondents objected to what they saw as federal encroachment on state regulators’ turf. The National Association of Professional Insurance Agents said on Tuesday it had sent a comment letter to the FIO claiming it does not have the “statutory authority to make inquiries into climate-related gaps in insurance industry regulation and should not attempt to do so”.
Property and casualty insurer Liberty Mutual, in a comment letter of its own, said it was not appropriate for the FIO to “collect company-specific proprietary data that is being collected by state insurance regulators individually or collectively” and that it should instead “coordinate with the NAIC [National Association of Insurance Commissioners] and states on the collection of any data” that may be required.
However, Liberty Mutual did say it “may be appropriate” for the FIO to issue a written report identifying climate risks in the insurance sector and possible policy recommendations for the Biden Administration, Congress, state insurance regulators, and the NAIC.
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