Climate Risk Review’s Monday newsletter, and Wednesday’s ‘Inside Climate Disclosures’ series, are for paying subscribers only. This week, the pros and cons of tailor-made climate stress test scenarios, and a deep-dive into NatWest’s TCFD disclosure. You can upgrade your subscription here:
1) Fed to join climate risk group for central banks
The club of green central banks will soon have a new member: the Federal Reserve.
Fed Vice Chairman for Supervision Randal Quarles told the Senate Banking Committee on November 11 that it has applied for membership to the Network for Greening the Financial System (NGFS), a group of 75 central banks and supervisors committed to “strengthening the global response required to meet the goals of the Paris agreement”.
“We have requested membership. I expect that it will be granted,” Quarles said. “I suspect we could probably join before the spring.”
The Fed’s application has been a long time coming. In January, Fed Chair Jerome Powell said it would “probably” join the group. Speaking at a virtual forum hosted by the European Central Bank on November 12, Powell said “we do think that central banks have a contribution to make” on climate change.
Quarles announcement came a day after the Fed recognised climate change as a systemic threat for the first time in its latest Financial Stability Report.
Here, the Fed said that it is “evaluating and investing in ways to deepen its understanding of the full scope of implications of climate change for markets, financial exposures, and interconnections between markets and financial institutions.” It added that it expects banks to identify, measure, control and monitor material climate risks.
“Climate change poses important risks to financial stability,” said Lael Brainard, a member of the Fed’s Board of Governors, in a statement accompanying the report’s release. “A lack of clarity about true exposures to specific climate risks for real and financial assets, coupled with differing assessments about the sizes and timing of these risks, can create vulnerabilities to abrupt repricing events.”
2) UK companies must report climate change risks by 2025
All public companies in the UK will have to disclose their climate-related financial risks by 2025, government finance minister Rishi Sunak announced on Monday.
The UK Treasury laid out a roadmap for implementing mandatory reporting over five years based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), with the majority of firms expected to be reporting by 2023.
Today, 224 UK companies are registered as supporters of the TCFD, out of over 1,500 worldwide. The UK’s plan envisions all banks and insurers implementing the disclosures by 2021, and all listed commercial companies by 2022. Smaller occupational pension schemes and UK-registered large private companies will be given more time to comply.
“The consistent and comparable climate-related financial disclosure requirements that we will implement across the economy are vital to ensuring that investors and businesses can make informed decisions about climate risks and opportunities,” wrote John Glen, Economic Secretary to the Treasury, in a forward to the roadmap.
Earlier this year, New Zealand became the first country to require the financial sector to produce TCFD disclosures, a mandate covering 200 large institutions. Recently, the New York Department of Financial Services said it expects the banks and insurers it oversees to publish TCFD-compliant reports, too.
Improving the quality of climate-related reporting will likely prove a harder task than getting the disclosures in the first place, however. On November 10, the UK’s Financial Reporting Council said that firms had to “raise the bar” on their climate risk documentation. “Consideration and disclosure of climate change matters in the financial statements lags behind narrative reporting,” it added.
3) Capital buffers won’t be affected by BoE climate stress tests
Climate stress tests planned by the Bank of England will not be used to set capital buffers for banks and insurers, Governor Andrew Bailey has said.
At a speech to the Corporation of London Green Horizon Summit on November 9, Bailey also announced the tests would take place in June 2021. Initially planned for this year, the BoE suspended the exercise to deal with the fallout of the coronavirus crisis.
Though regulatory buffers wouldn’t be affected by the tests’ outcome, Bailey said firms “must assess how climate risks could impact their business and review whether additional capital needs to be held against this”, as laid out in the BoE’s supervisory expectations.
“Investments that look safe on a backward look may be existentially risky given climate risks. And investments that might have looked speculative in the past could look much safer in the context of a transition to net zero. Uncertainty and lack of data is not an excuse. We expect firms to make reasonable judgements rather than default to “zero,” he explained.
The BoE stress tests will gauge the resilience of the UK’s largest banks and insurers to climate-related financial risks. Three scenarios will test the firms against an orderly transition to a carbon-neutral economy, a disorderly transition, and a business-as-usual climate trajectory.
4) Canada’s TD Bank to decarbonise financing portfolio
TD Bank became the first major Canadian bank to promise to zero out the emissions financed by its lending.
The bank, Canada’s largest, said it would establish greenhouse gas (GHG) emissions baselines across its business and financing portfolio and engage with its clients to set reduction targets, with the objective of achieving net zero emissions by 2050. The bank has also joined the Partnership for Carbon Accounting Financials (PCAF), a group of institutions working on a uniform methodology for assessing and disclosing the GHG emissions of their loans and investments.
Achieving its net zero objective will obliged TD Bank to overhaul its extensive fossil fuel portfolio. The firm has provided $103.4 billion of fossil fuel financing since the Paris Agreement was signed in 2015, data from the Rainforest Action Network shows. Gross loans to oil and gas companies totalled C$10.4 billion as of the third quarter.
5) Willis Towers Watson acquires Acclimatise to bolster climate hub
Boutique climate change advisory Acclimatise has been snapped up by Willis Towers Watson, the global consultancy giant, as it seeks to expand its physical climate risk and resilience practice.
UK-based Acclimatise, founded in 2004, will be absorbed into WTW’s Climate and Resilience Hub, which helps clients deal with climate and ESG challenges.
“By combining Acclimatise’s market leading climate modelling and adaptation capabilities with Willis Towers Watson’s deep experience in natural catastrophe modelling, risk management, re/insurance and investment markets we have a unique range of expertise to help clients manage climate exposures, seize adaptation opportunities and build more resilient societies and economies,” said Rowan Douglas, who leads the Hub.
Acclimatise has completed over 450 climate change projects for corporates and governments in over 70 countries. It’s also developed cloud-based software for assessing climate risks and vulnerabilities.
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