Weekly round-up: November 23-27

The top five climate risk stories this week

Climate Risk Review’s Monday newsletter, and Wednesday’s ‘Inside Climate Disclosures’ series, are for paying subscribers only. This week, an essay on how the famous ‘lemons problem’ has taken on a new dimension among climate-sensitive investors. You can upgrade your subscription here:

1) EU bank lending to ‘dirty’ corporates has not slowed in 2020 so far

Eurozone banks have yet to cut lending to carbon-intensive sectors this year, data from the European Central Bank (ECB) shows. Loans to certain ‘dirty’ sectors have even increased since 2015.

Syndicated loans originated for ‘carbon hogs’ have either been flat on, or increased over, 2015-2019 averages. These include exposures to firms in utility and energy, manufacturing, transportation, construction and oil and gas.

As of August, loans to the transportation sector had swelled the most, up 1.1% on a three-month moving average basis versus the 2015-2019 average. Those to the construction sector had edged up the least, by just 0.47%. Syndicated loans to oil and gas companies were up 0.73% as of August. Back in April, the increase was 5.8%.

Source: ECB

Data on banks’ large corporate exposures tell a similar story. Exposures to ‘carbon hogs’ accounted for 33.6% of total large exposures to non-financial corporates in 2019, compared to 31.9% in 2015. The share to energy-intensive manufacturing has increased the most over this period, to 13.9% from 12.5%.

Source: ECB

However, the emission-intensity of these sectors has decreased somewhat over this period. This likely reflects efforts by firms to shrink their own carbon footprints.

2) Climate insurance markets threatened by ever-growing perils

Climate risk-transfer mechanisms could break down if capital markets start to doubt the ability of financial institutions to withstand mounting physical and transition perils, global standard-setter the Financial Stability Board (FSB) has said.

In a new report on the implications of climate change on financial stability, the FSB wrote that “the widespread and uncertain effects of climate-related risks” could undermine the effectiveness of risk-transfer products such as insurance-linked securities (ILS) and weather derivatives contracts.

ILS markets rely on buyers’ willingness to bear climate risks, and weather derivatives on the belief that counterparties’ credit is sound. The FSB said these could be upset given the “uncertainty concerning the scale of [climate] risks”. 

ILS, of which the most common iteration are known as ‘catastrophe bonds’, have boomed in recent years. These transfer the risk-of-loss for an insured event, such as a named hurricane or wildfire, from a re/insurer to the capital markets. Issuance has exceeded $14 billion in 2020 so far according to Artemis data, a record. Risk capital outstanding is around $45.6 billion, up 12% on the year and 75% on 2015 levels. 

The FSB added that the availability of traditional reinsurance may also deteriorate if losses from insured physical risks spiral as the world warms.

3) Few EU banks produce climate disclosures — ECB

Scarcely any European lenders disclose climate risks in line with supervisory expectations, the European Central Bank (ECB) has found.

The agency reviewed the 2019 disclosures of 125 firms in the European Union. Almost one in five published no relevant climate-related information, and 58% less than half the recommended disclosures. Only 3% reported all expected quantitative and qualitative data.

Banks’ public disclosures were searched for information on how climate change is considered in their business strategy, governance and risk management. Relevant climate-related metrics, targets and disclosure procedures were also sought out. Most banks (57%) described their process for identifying, assessing and managing climate-related risks. Over half also disclosed information on board oversight of climate risks, and how climate considerations are factored into credit-granting policies. 

Just over one-third disclosed at least one climate-related metric and target, and 26% a key performance or risk indicator. Less than a third make any reference to climate scenario analysis or stress testing.

At present, a vanishingly small number of firms meet the minimum level of disclosure outlined in the ECB ‘Guide on climate-related and environmental risks’, the final version of which was published today (November 27). Banks have been asked by the agency to run a self-assessment in early 2021 against the expectations in the guide, and draft action plans on implementing climate risk management and disclosure practices.

The ECB also announced that it would conduct a climate-related supervisory stress test on banks in 2022. Details will be released next year.

4) Sustainability reporting advocates team up

Two sustainability disclosure standard-setting bodies will merge in response to calls to declutter the corporate reporting landscape.

The International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) announced on November 25 that they would join forces and reconstitute as the Value Reporting Foundation.

“Sustainability disclosure is at the top of the agenda for many, creating incredible momentum towards simplifying the corporate reporting landscape. By merging two organizations focused on enterprise value creation, we hope to clarify the field,” said Janine Guillot, chief executive officer of SASB and future CEO of the Value Reporting Foundation.

The tie-up comes two months after the IIRC and SASB, along with three other standard-setting bodies, pledged to work together to develop “comprehensive corporate reporting” of sustainability matters.

San Francisco-based SASB has authored 77 industry standards that firms can use to identify, manage and disclose “financially-material sustainability information” to investors. The IIRC, based in London, oversees the <IR Framework>, which facilitates disclosure of integrated reports — those which communicate how an organisation’s “strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”

5) Most US insurers have no climate risk policy, survey finds

Over half of US insurers polled by state financial watchdogs do not have climate change policies as part of their risk or investment management.

Over 1,200 underwriters took part in the annual ‘Climate Risk Disclosure Survey’ run by the insurance departments of California, Connecticut, Minnesota, New Mexico, New York and Washington. Firms were asked to answer eight questions on how they factor climate change into their risk mitigation, risk management and investment plans.

Though 56% said they did not have climate risk policies in place, three-quarters said they had acted to deal with climate-related risks to their businesses. In addition, though 80% of companies said they’d considered climate risk in their investment decisions, 58% said they had not yet shifted allocation strategies in response. 

Eight respondents to the survey filed reports consistent with recommendations by the Task Force on Climate-related Financial Disclosures (TCFD): AIG, Allianz, Assurant, Axa, QBE, Swiss Re, Travelers, and Zurich.

Please send questions, feedback and more to louie.woodall@climateriskreview.com

You can catch climate risk management updates daily on LinkedIn

The views and opinions expressed in this article are those of the author alone

All images under free media license through Canva