Thanks for reading Climate Risk Review, and welcome to the 32 new subscribers who joined this week! Not signed up yet? Why not join nearly *2,700 subscribers* interested in climate-related financial risk and regulation by signing up here:
Paying subscribers can read this week’s deep-dive on the Net-Zero Banking Alliance here
1) TCFD backs disclosure of financed emissions
Financial institutions should disclose the carbon linked to their lending and investing portfolios, the Task Force on Climate-related Financial Disclosures (TCFD) has said.
In new implementing guidance published Thursday, the TCFD recommended that banks, asset owners, and asset managers calculate their financed emissions using the Partnership for Carbon Accounting Financials’ (PCAF) Global GHG Accounting and Reporting Standard, published last year. The TCFD also recommended that insurance companies use a forthcoming PCAF methodology to count up the emissions related to their underwriting portfolios, which PCAF is currently working on alongside the UN-convened Net Zero Insurance Alliance.
The PCAF standard currently covers six asset classes: listed equity and bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans, with more on the way. The number of financial institutions in the partnership stands at 163, and includes Wall Street giants BlackRock, Bank of America, Citi, and Morgan Stanley.
The new emissions disclosure recommendation raises the bar for the TCFD’s over 1,200 supporters in the financial sector. The first iteration of the TCFD guidance, published back in 2017, recommended that financial institutions publish their operational emissions, and, “if appropriate”, their indirect emissions, which many firms interpreted to mean those associated with their employees’ business travel. Combined, these represent only a sliver of the GHG linked to their asset portfolios. Data from the nonprofit CDP estimates that financed emissions for banks are over 700 times larger than their reported operational emissions.
The latest implementing guidance closely follows a proposal put out for consultation by the TCFD in July. However, the wording of some of the new recommendations on metrics and targets for financial institutions has changed between the proposed and final versions.
In the final guidance, banks, asset managers, and asset owners are recommended to “describe the extent to which their lending and other financial intermediary business activities, where relevant, are aligned with a well below 2°C scenario, using whichever approach or metrics best suit their organizational context or capabilities.” In the July proposal, the recommendation was for these firms to “disclose the alignment of their portfolios consistent with a 2°C or lower temperature pathway (e.g., Paris-aligned), and incorporate forward-looking alignment metrics into their target-setting frameworks and management processes”.
The TCFD had received criticism for its proposal on forward-looking alignment metrics, notably from the Transition Pathways Initiative, which argued that they could “undermine” efforts by asset owners to support companies moving to a low-carbon economy, and the Institute of International Finance (IIF), which warned that portfolio alignment tools “remain … very much works in progress with a high degree of subjectivity and variation in methodology”.
2) Banks lagging on TCFD-aligned disclosures
Banks published more information aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) last year relative to 2019, but trailed other companies in many of the standard setter’s reporting categories.
In a report released Thursday, the TCFD revealed the findings of its latest review of companies’ climate-related disclosures and their degree of adherence to its 11 reporting recommendations. Average disclosure by banks climbed to 28% in 2020, up from 20% in 2019 and 15% in 2018. This is a lower average than that calculated for companies in the energy, insurance, and agriculture food and forest sectors, and far below the top-reporting sector — materials and buildings. For seven out of the 11 categories, banks were found to be lagging the all-companies average.
The TCFD used AI technology to review the public filings of 1,651 large companies from 2018, 2019, and 2020. For the banking sector, 282 firms were assessed. Among these banks, the most well-covered recommendation was that concerning the disclosure of climate-related risks and opportunities. Forty-five percent of banks reported information for this category in line with the TCFD’s recommendation. The worst-covered recommendation was that concerning the resilience of their strategies to climate change.
The TCFD’s review further revealed that insurance companies, like banks, most often disclose information on climate-related risks and opportunities, but lag the 2020 average for certain governance and risk management-related recommendations.
The report also provided an update on asset managers’ and asset owners’ climate-related disclosure efforts. Using data from responses made by these companies to the UN Principles for Responsible Investment, the TCFD found that disclosed information on governance, strategy, and risk management recommendations far exceeded that on metrics and targets.
Of those investors that did disclose climate-related metrics, a weighted average carbon intensity measure was the most popular with asset owners, with nearly 12% of respondents saying they used this to manage climate issues. Asset managers were found to favour a measure of total carbon emissions the most.
3) Set climate capital requirements for banks, billionaire hedge fund manager tell regulators
Chris Hohn, founder of The Children’s Investment Fund, has written to financial authorities in Europe, the UK, and US urging them to hike bank capital requirements for fossil fuel exposures.
In letters sent to the Bank of England, European Central Bank, and US Financial Stability Oversight Council , Hohn said they should introduce “systemic risk buffer capital requirements” to make banks hold more equity in reserve against all new fossil fuel investments, and additional regulatory charges for all coal-related lending.
He also called on the regulators to force banks to disclose their financed emissions, including those linked to their debt and equity underwriting activities, and to make them set five-year emissions reduction targets for these portfolios.
Hohn’s $35 billion fund helps bankroll The Children’s Investment Fund Foundation, a philanthropic organisation that works on “smart ways to slow down and stop climate change” alongside other priorities.
“The financial sector cannot be left to manage its own role in the climate transition. Current initiatives such as the UN Principles for Responsible Banking, and the newly established Net Zero Banking alliance do not cover all banks, and do not mandate full disclosure, credible action plans and an end to risky fossil fuel lending. 2050 Net Zero commitments alone are meaningless,” wrote Hohn.
4) Few UN Principles for Responsible Banking members have set targets
Only 17% of the more than 200 lenders signed up to the UN Principles for Responsible Banking (PRB) have set at least one “robust” target for making climate, environmental, and/or social impacts, a new report shows.
The two-year old initiative, set up to get banks to align their businesses with the Paris Agreement and UN Sustainable Development Goals, has around 250 signatories covering 40% of global banking assets, and counts financial giants Citi, Barclays, and Deutsche Bank as supporters. However, the status report — released Thursday — suggests the membership has made slow progress on its objectives.
The PRB’s Civil Society Advisory Body, a 12-member group set up to support the bank members, said that 70% of firms responding to the report “have yet to move past the most preliminary steps in this essential task of holding themselves and their clients accountable for progress” by failing to set targets.
However, many signatories have made some efforts to engage on climate-related issues. The report found that 177 banks have identified climate as an impact area, and around 81 of these have already set, or are working on setting, a climate target. Ninety-four percent of all PRB banks have singled out climate-related risks as “strategically relevant” to their organisation. The majority of members are also assessing their portfolios’ and sector exposures’ alignment with the Paris Agreement.
Going forward, the Civil Society Advisory Body — which includes the sustainability-focused nonprofits Ceres, ShareAction, and the WWF — said that the PRB banks’ financed emissions should be included in future progress reports to “provide evidence on whether and to what extent such emissions for which banks carry responsibility are being reduced”. It also called for an accounting of members’ climate-harming products and services, such as their lending to the fossil fuel industry.
5) Net zero financial institutions urge governments to act boldly on climate
Banks, investors, and insurers with more than $90 trillion in assets have told governments not to shift their climate responsibilities onto the financial sector and to accelerate efforts to avoid a ‘disorderly transition’ to a net-zero economy.
In a 16-page call to action published Monday, the Glasgow Financial Alliance for Net Zero — a coalition of institutional investors and banks committed to decarbonising their asset portfolios headed by UN Special Envoy Mark Carney — wrote that climate action by the financial sector is “no substitute” for that of governing bodies, which have much greater capacity to head off climate-related risks and maximise opportunities.
Among a series of recommendations in the call to action, the GFANZ members said G20 governments should commit to introducing climate reports aligned with the recommendations of the Task Force on Climate-related Financial Disclosure for public and private enterprises by 2024, along with net-zero transition plans. Such mandates should include financial institutions and small- and medium-sized entities, the members wrote.
They also urged governments to endow central banks and financial supervisors with “specific climate change and net zero financial stability mandates” so that they can effectively address climate issues across their areas of competency, and to foster global cooperation in areas like climate stress testing “to create a level playing field and to avoid penalising certain jurisdictions”.
Please send questions, feedback and more to email@example.com
You can catch additional climate risk management updates on LinkedIn
The views and opinions expressed in this article are those of the author alone