Climate Risk Review’s Monday newsletter, and Wednesday’s ‘Inside Climate Disclosures’ series, are for paying subscribers only. This week, an exploration of cross-border climate risks, and a deep-dive into the TCFD reports of Invesco and Legal & General. You can upgrade your subscription here:
1) Overdependence on climate financial regulation could breed systemic risks, says industry report
Excessive use of banking and markets regulation to promote climate finance could upset financial stability, a top industry body has said.
The Global Financial Markets Association (GFMA), together with Boston Consulting Group, issued a new report on December 2 on scaling investment in climate solutions.
Among its conclusions, the report said that “overreliance” on financial regulation to push capital towards climate-friendly activities could cause systemic risks to bubble up from “financing being directed at counterparties that are still economically uncompetitive due to an absence of carbon pricing” and the funding of existing portfolio companies that lack credible transition pathways.
Using regulation as a policy lever could have other “unintended consequences”, the report said, such as pushing the funding of high-emitting companies to the unregulated financial sector.
The trade body recommended policymakers embed financial regulations in a “holistic roadmap including economy-wide actions” and that new rules for banks and markets evolve at the same pace as initiatives in other sectors.
However, the report did also cite the importance of financial institutions enhancing their own climate risk management capabilities, and recommended they “collectively set an example of best practices in climate risk disclosures”.
2) BlackRock debuts ‘Aladdin Climate’
BlackRock unveiled an add-on to its flagship risk management platform that investors can use to weigh the climate threats lurking in their portfolio.
‘Aladdin Climate’ offers measures of physical and transition climate risks at the security level. It can also translate the effects of “policy changes, technology, and energy supply” on specific investments.
“What investors need to make informed decisions is data tied to specific securities in their portfolio. Aladdin Climate is a dramatic step forward to begin filling the information gap necessary to build truly sustainable portfolios,” said Rob Goldstein, chief operating officer at BlackRock.
Aladdin is used by banks, funds and non-financial corporations, which use its analytics toolkit to measure risks across equities, fixed income, foreign exchange, loans and more. Wall Street stalwarts Vanguard and State Street are top clients, as are five of the top 10 insurers by assets, says the Financial Times.
Aladdin’s climate update follows the recent integration of ESG data into the platform, facilitated through BlackRock’s partnership with data providers Sustainalytics and Refinitiv. Aladdin currently offers 1,200 ESG indicators to “help portfolio and risk managers identify sustainability-related risks in their exposures”.
3) Bank lobby group knocks climate stress tests
Climate stress tests look to be “a highly inefficient vehicle” for promoting the transition to a green economy and risk “degrading the integrity of financial regulation”, the head of a leading US bank trade association has written.
In an op-ed for American Banker, Greg Baer, president and chief executive of the Bank Policy Institute (BPI), explained that planned stress tests ask firms to project the effects of climate change on their balance sheets over too-long time horizons, with built-in assumptions on changes to the global energy mix, government policy, and global warming that “can become highly speculative over the longer term.”
He added that trying to capture climate change effects through such tests, and embedding them in the bank regulatory capital framework, “is no easier than predicting how pandemics or machine learning will affect banks by 2050”.
Baer’s intervention follows the publication of a research note by the BPI claiming it would be “premature” for climate scenarios to be incorporated in climate stress tests, given the lack of usable data, challenges constructing climate scenarios and the “heavy reliance on professional judgement”.
Policymakers and progressive organisations have promoted climate stress tests as a practical way to test the US financial system’s resilience to physical and transition shocks. Last year, the Climate Change Financial Risk Act was introduced to the US Senate, directing the Federal Reserve to put together such stress tests.
4) US insurers defy global peers on coal exit
Top insurance companies in the US continue to underwrite and invest in coal projects, even as many of their overseas rivals have exited the sector.
Climate campaign group Insure our Future ranked 30 big insurance companies on their fossil fuel and insurance policies. Of the ten US insurers assessed, six do not restrict insuring and investing in coal, and four have yet to restrict any support to fossil fuels: AIG, Berkshire Hathaway, TIAA and Travelers. None of the US insurers have limits on oil and gas activities.
In contrast, European firms Axa, Swiss Re, and Zurich topped the campaign’s scorecard because of binding constraints on fossil fuel insuring and investing. In all, 16 of the 30 insurers had policies affecting coal, eight on tar sands, and two — Swiss Re and Avivia — on oil and gas. There are now 65 insurers worldwide, with $12 trillion in assets, that have enforced a coal divestment policy or otherwise committed to no more coal investments, the campaign group found. This is up from 35 companies and $8.9 trillion of assets last year.
Data shows these exclusion policies are having a huge affect on the cost of insurance to coal developers. Willis Towers Watson, an insurance broker, says they face rate increases of up to 40% this year.
5) Exxon takes $20 billion impairment charge after oil price plunge
US oil supermajor Exxon will writedown the value of its assets by up to $20 billion after giving up on a bet on natural gas projects in North and South America.
The fossil fuel giant has lost more than $2.3 billion over the first nine months of the year on cratering oil prices in the wake of the Covid-19 pandemic. In an updated spending plan, the firm said it would exclude certain gas assets from its development plan and invest $19 billion or less next year, after previously planning to spend $30 billion a year through 2025.
Exxon has also lowered its oil price forecast by between 11% and 17% through to 2027, according to internal documents reviewed by the Wall Street Journal.
In the second quarter of this year, fellow oil major BP took an impairment charge of $11.8 billion and wrote off $2 billion in exploration investments after updating its long-term fossil fuel price assumptions. Royal Dutch Shell wrote off $16.8 billion in Q2 after revising price assumptions.
Please send questions, feedback and more to firstname.lastname@example.org
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