Weekly round-up: November 8-12

The top five climate risk stories this week

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1) Global banking regulators to set climate risk blueprint

The Basel Committee on Banking Supervision (BCBS) plans to roll out principles on managing and supervising climate-related financial risks for internationally active banks later this month.

As the world’s top panel of global bank regulators, the BCBS sets standards for prudential regulation and supervision that are followed by all major jurisdictions, including the European Union, the UK, and the US. These include rules on capital requirements, supervisory review processes, and public risk disclosure.

In the Tuesday announcement, the BCBS said that as well as the principles it is working on a set of potential measures covering disclosure, supervision, and regulation “to address climate-related financial risks to the global banking system”. This follows the April publication of two analytical reports on climate risks, the first of which provided a rundown of how physical and transition hazards could impact lenders’ finances, and another which covered the “conceptual issues” around climate-related financial risk measurements and methodologies.

The BCBS also said it is exploring the use of the Pillar 3 framework, which dictates the public disclosure of bank risks, to “promote a common disclosure baseline for climate-related financial risks”.

With these announcements, the BCBS is following the lead of other international bodies that have pledged to incorporate climate into the supervision of financial institutions. In July, the Financial Stability Board, a group of regulators set up to monitor the international financial system and harden it to shocks, published a roadmap for coordinating the various initiatives underway to tackle climate-related financial risks.

2) Push banks to run climate scenario analyses, OCC chief tells boards

Bank boards should press managers to develop climate scenario analyses in-house, a top US regulator has said.

Michael Hsu, the acting chief of the Office of the Comptroller of the Currency (OCC), in a speech on Monday laid out five questions boards should ask senior management on climate risk.  “What is our overall exposure to climate change?” is the first. Hsu said managers should answer this by doing what he called “small s” scenario testing.

“Boards should push senior management hard to develop scenario analyses, both top down and bottom up, as doing scenario analysis well takes time. But time is running out,” said Hsu. He likened this process to the myriad ‘what if?’ questions banks asked of themselves in the midst of the Greek debt crisis in 2009.

Bank boards should also explicitly ask managers about their institution’s exposure to a carbon tax, he added, the results of which could serve as a proxy for its overall transition risk. Doing such an assessment would also strengthen a bank’s ability to gauge its transition risk more broadly, said Hsu.

Other questions the board should ask managers include what the vulnerability of the firm’s data centres and critical services to extreme weather is, what “counterparties, sectors, or locales” should be tapped for heightened scrutiny of their risk exposure, and what climate opportunities the institution could capture.

Hsu said that though managers may not have all the answers to these questions today, he suggested they should by this time next year. He also reiterated that the OCC is working on “high level supervisory expectations” on climate risk management for large banks, which he said should be published by the end of this year.

3) GFANZ should adopt Net Zero Asset Owners’ target-setting approach, says UN chief

All members of the Glasgow Financial Alliance for Net Zero (GFANZ) should follow the strict target-setting model used by the Net Zero Asset Owners Alliance (NZAOA), UN General Secretary António Guterres has said.

Speaking at COP26, the UN Climate Change Conference in Glasgow on Thursday, Guterres said the NZAOA represents “the gold standard for credible commitments and transparent targets” and that the other sectoral initiatives included in GFANZ should “follow the same path”.

NZAOA members commit to setting interim targets every five years starting in 2025 on the way to achieving net zero portfolio emissions. The group’s target-setting protocol, published in January, lays down a framework for establishing emissions targets at the sub-portfolio and sectoral levels, as well as approaches to investee engagement and financing the low-carbon transition. The NZAOA has also called for an end to investments in new coal mines and power plants, unlike the other sectoral alliances. Reclaim Finance, a climate advocacy group, has said NZAOA is the “oldest and strongest of the GFANZ entities”.

Other GFANZ institutions came under fire earlier in the week from activist groups following a story from The Bureau of Investigative Journalism, which revealed that HSBC and the Sustainable Markets Initiative’s Financial Services Taskforce (FSTF) wanted the Net-Zero Banking Alliance to extend the amount of time signatories have to set portfolio alignment targets and to remove a list of sectors from the first round of target setting. 

Jeanne Martin, Senior Campaign Manager at ShareAction, said these findings “should raise red flags for shareholders and customers about their true commitment to net-zero”.

GFANZ was set up earlier this year by Mark Carney, the UN Special Envoy on Climate Action and Finance, and today has over 450 financial institution members. Last week, GFANZ announced that its member institutions had $130 trillion of private capital committed to a 1.5°C transition, though this figure has been disputed

4) SBTi sets out “common language” on net zero for financial institutions

Financial institutions understand what is meant by a ‘net-zero strategy’ differently, and few interpretations line up with the action needed to zero out global emissions by 2050, the Science-based Targets Initiative (SBTi) argued in a new report. 

Published on Wednesday, the ‘Foundations for Science-Based Net-Zero Target Setting in the Financial Sector’ by the SBTi identified six broad approaches to net zero across the financial sector, and found all fell short of its set of five “guiding principles” to varying degrees. The five principles identified were: completeness, science-based ambition, impact, decarbonisation and green, and influence. 

Net-zero strategies that depend upon portfolio-wide abatement with avoided or negative emissions were found to be the least in-sync with these five principles. In contrast, those founded on sector-based emissions reductions along 1.5°C pathways, or the alignment of portfolio companies with net-zero standards, were found to be the most compatible.

The SBTi concluded that financial institutions should “avoid strategies that rely on carbon credits or avoided emissions from investments as a substitute for emissions abatement”, since carbon credits do not adequately incent the funding of decarbonisation efforts in the real economy.

Of the various approaches assessed, the SBTi identified three “possible formulations” for how net zero could be defined for financial institutions. The first sees banks reduce portfolio-wide emissions in line with 1.5°C pathways at the “relevant sector-specific decarbonization pathways”. The second has banks adjust “operational activities” and all “underlying portfolio exposures” so that each balance sheet asset “achieves a state of net-zero consistent with the SBTi Corporate Net-Zero Standard”. Finally, the third depends on banks deploying funds to facilitate net-zero goals “in a way that ensures both transition financing for decarbonization activities and an explicit shift to finance more climate solutions” in pursuit of a “state where all financing is aligned with global climate goals”.

The SBTi paper is intended as a first step in its net-zero finance standard development process, which it says is necessary for financial firms to guarantee they “use their unique ability and influence to finance effective climate transition activities in the real economy”. The paper is open for public consultation.

5) Carbon accounting standard tackles sovereign bonds

A coalition of financial institutions dedicated to counting up and disclosing their portfolio emissions has expanded its accounting methodology to encompass the $86 trillion market in sovereign debt.

The Partnership for Carbon Accounting Financials (PCAF), a group of over 170 banks, asset managers, and other firms representing some $55 trillion in assets, published Wednesday three draft methods for totting up the financed emissions for sovereign bonds, green bonds, and emissions removals. If adopted, these three would join the six asset classes covered by the initial PCAF standard published last November: listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans.

In addition PCAF released a discussion paper on capital market instruments, which shares ideas on how financial institutions could account for the emissions linked to debt and equity issuances that they arrange. Here, PCAF introduces the concept of “facilitated emissions”, which encompass those off-balance sheet activities, like bookrunning, which lead to the sale and distribution of financial assets.

On Friday, PCAF also launched the PCAF Japan Coalition to help apply the Partnership’s methodologies to the Japanese context and rally support for the carbon accounting approach across the country. The Japan Coalition is chaired by Mizuho Financial Group and includes Nissay Asset Management Corporation, Mitsubishi UFJ Financial Group, Nomura Asset Management, Sumitomo Life Insurance Company, and Sumitomo Mitsui Financial Group.

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First image: kentoh / Shutterstock.com, Second image: Office of the Comptroller of the Currency , Fourth image: wan wei / Shutterstock.com, Fifth image: kamilpetran / Shutterstock.com

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