Weekly round-up: October 4-8

The top five climate risk stories this week

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Paying subscribers can read this week’s deep-dive on the European Central Bank’s first economy-wide climate stress test here


1) Fed working on climate scenario analysis, risk guidance — Brainard

The Federal Reserve is building scenarios to gauge financial institutions’ ability to withstand climate-related financial risks, a top official at the central bank has said.

Fed Governor Lael Brainard, in a speech on Thursday, said that modelling the impacts of climate change could lead to sharper risk management by banks and improve understanding of its effects on financial markets more broadly.

“It will be helpful to move ahead with the first generation of climate scenario analysis to identify risks and potential issues and to inform subsequent refinements to our models and data,” Brainard said.

She also spoke in support of Fed-backed guidance for large banks to support their efforts to measure, monitor, and manage the threats to their business posed by climate change. Last month the acting chief of the Office of the Comptroller of the Currency, Michael Hsu, said his agency was working on climate-related risk guidance with other federal regulators.

Last year, the European Central Bank (ECB) published climate-related supervisory guidance for banks under its watch, loaded with expectations on how they should guard against both physical and transition hazards.

Brainard is a favourite of climate activists who want the Fed to be more energetic in tackling climate-related financial risks. Her name has been floated as a potential replacement for Fed Chair Jerome Powell or Vice-Chair of Supervision Randal Quarles.

2) Carney pressed to strengthen net-zero financial alliance

UN Special Envoy on Climate Action and Finance Mark Carney has been urged to raise the membership requirements for the UN-convened Glasgow Financial Alliance for Net Zero (GFANZ) to stop banks and other financial institutions using it as “greenwash”.

Over 90 advocacy groups published a letter to Carney and took out advertisements in the Financial Times and Toronto Star on Thursday asking him to elevate standards for the alliance so that it leads “to a reduction in financed emissions at the pace that the science demands”.

“The membership requirements for these net zero initiatives are set too low and as a result these alliances are doing the opposite of what they’re supposed to,” said Richard Brooks, Climate Finance Director with Stand.earth, one of the letter’s signatories. “Rather than forcing banks and other financial institutions to step up their climate action, they’re giving them the cover to continue their dirty financing of fossil fuel companies”.

The groups said Carney should integrate the latest findings of the International Energy Agency into the GFANZ guidelines, which calls for a halt to new coal, oil, or gas expansion in order to cap global temperature rise to 1.5°C. At present, the majority of GFANZ members have not published fossil fuel financing reduction targets or action plans, the letter’s signatories claim, and many have extended financing to fossil fuel firms since joining.

3) European bank loan losses could soar 20% if climate change untamed — Moody’s

Falling short of the Paris Agreement’s emissions targets by any measure would increase loan losses for European banks, and in the worst-case push them up by one-fifth, a climate stress test run by Moody’s Investor Service indicates.

Moody’s subjected four European banks’ corporate loan portfolios to a suite of ‘what if?’ climate scenarios using its own gauge of climate change vulnerabilities. This analysis showed that under a ‘hot house world’ scenario, loan losses could be 20% higher by 2050 than under the ‘orderly transition’ scenario. This is far higher than the projections for the two ‘disorderly transition’ scenarios. Under a ‘disorderly transition with higher physical risk’ scenario, losses could be 6% higher than the baseline, and under a ‘disorderly transition with limited physical risk’ scenario, just 3.5% higher.

These loan loss projections are based on estimated future probabilities of default (PDs) for 14 different sectors produced by the European Central Bank (ECB). These are not the same projections featured in the recently released ECB economy-wide climate stress test, but an earlier iteration of the bank’s research.

Moody’s assumed that loss given default (LGD) values stayed constant across scenarios. However, under a ‘hot house world’ scenario, it is likely that these would spiral higher as acute and chronic physical risks erode the value of loan collateral. Assuming a 10 percentage point increase in LGD could elevate the additional losses under the ‘hot house world’ scenario to 45% relative to the baseline.

The Moody’s results suggest far greater losses than those projected under the ECB’s recent test. The central bank estimated euro area banks would face higher expected losses of 8% on average under a ‘hot house world’ scenario relative to an ‘orderly transition’ by 2050. However, the small sample of banks selected by Moody’s, coupled with limited data availability and the fact it used its own global heat map of environmental risk to measure climate vulnerabilities, likely explains these differences.

4) MSCI rolls out climate risk app for institutional investors

Equity index and financial data giant MSCI launched a new application to help institutional investors align their portfolios with net-zero goals. 

The MSCI Climate Lab offers a suite of tools for investors to access climate data for multiple asset classes, identify the climate risks and trends across funds, and single out those portfolio companies that are falling short on their low-carbon transition journeys. 

The platform can also facilitate climate scenario analysis at the enterprise and issuer levels and check portfolio alignment to warming targets. In addition, users can aggregate up to the portfolio level the firm-level insights produced by MSCI’s recently released Implied Temperature Rise tool, and surveil this metric across funds.

“With Climate Lab, investors finally have the tools to transition their existing investment strategies to net-zero,” said Remy Briand, Global Head of ESG and and Climate at MSCI. “For chief executives and business leaders, the solution brings a new level of transparency and coordination that ensures crucial climate progress is being made across every level of the organization”.

5) BlackRock opens shareholder votes to asset owners

Institutional investors will be allowed to directly vote on shareholder proposals at companies included in around 40% of BlackRock’s equity index funds, representing $2 trillion of investments.

Typically, asset managers vote at shareholder annual meetings on behalf of the investors in their funds. From 2022, BlackRock says big asset owners, like pension funds and endowments, will be able to have their own say at these meetings — including on what actions companies should take on climate risk and climate-related financial disclosures.

Investors will have an array of options when it comes to exercising their vote. They can vote according to their own policies, select from a range of third-party proxy voting policies to decide their votes for them, vote directly on specific resolutions or companies, or continue to allow BlackRock Investment Stewardship to vote on their behalf.

With $9 trillion in assets under management, BlackRock owns more than 7% of all shares on the S&P 500. Over the 12 months to end-June, BlackRock Investment Stewardship voted against 319 companies on climate-related grounds, up from 53 the year prior. Of the 13,190 company meetings it voted at on climate risk grounds, it opposed management 2% of the time.

Earlier this year, BlackRock told investees it expects them to have “clear policies and action plans to manage climate risks”, and may vote against company directors that fall short.


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First image: Federal Reserve / Flickr, Second image: FSB / Flickr, Third image: koya979 / Shutterstock.com, Fifth image: Tada images / Shutterstock.com. All other images under free media license through Canva.com