Weekly round-up: September 13-17

The top five climate risk stories this week

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1) Companies failing to incorporate climate risk in accounts, research shows

Few carbon-intensive firms include climate-related risks in their financial statements, and those that do often disclose information inconsistent with their other public reports, a study by the Carbon Tracker Initiative and the Climate Accounting Project (CAP) shows.

Out of 107 public companies assessed, over 70% did not factor climate issues into their 2020 financial disclosures. Only one in four disclosed at least some of the climate-related estimates and assumptions they used for preparing these filings.

Furthermore, 80% of auditors — companies charged with reviewing other firms’ financial statements — offered no evidence that they considered material climate-related issues in their assessments. Most auditors also provided little to no comment on discrepancies between financial statements and other public reports when it came to discussions of and responses to climate issues.

Source: Carbon Tracker and Climate Accounting Project

Carbon Tracker and CAP found that the oil and gas firms surveyed included the most information on climate risk in their financial statements and audited reports. Four in five of these companies signaled climate-related targets in their narrative reporting, 15% of which were net-zero emissions reduction targets. Of these, all were factored in to their financial statements.

In response to the findings, Carbon Tracker and CAP said companies should “improve their climate governance” so that appropriate oversight, internal control and risk management systems are in place, and “disclose quantitative climate-related estimates and assumptions”. As for auditors, they recommended they produce evidence of their work on climate-related issues and make sure the financial statements they scrutinise do not contradict other company disclosures when it comes to these issues.

2) US bank regulators coordinating on climate risk guide — OCC

Climate risk management guidance is being drawn up for the US’ biggest banks, one of the country’s top financial watchdogs said Wednesday.

Michael Hsu, the acting chief of the Office of the Comptroller of the Currency (OCC), remarked in a speech that the agency is working on this guidance with interagency peers — likely a reference to other bank regulators such as the Federal Reserve and Federal Deposit Insurance Corporation. 

“Climate change poses an existential risk to society and the associated financial risks pose safety and soundness risk to banks. To safeguard trust, banks and regulators must begin to take action now,” said Hsu. 

Though Hsu did not detail what the forthcoming guidance would contain, he acknowledged that banks are exposed to both physical and transition climate risks, and that these represent “novel challenges” for risk management. “How should such risks be identified, measured, and managed? What data is needed? What time frames and risk mitigants should be considered?” he asked.

Hsu appointed the OCC’s first Climate Change Risk Officer on July 27. On the same day, he also announced the agency had joined the Network for Greening the Financial System (NGFS), a club of central banks and supervisors focused on climate risk management. 

3) Reflect climate risk in bank regulation, UK lawmakers tell BoE

UK legislators and climate activist groups have called on the Bank of England (BoE) to introduce banking rules that account for the risks involved in lending to carbon-intensive companies.

In a letter to Andrew Bailey, the BoE’s governor, over 50 lawmakers from both UK Houses of Parliament urged the Bank to both “unleash green investment” and “regulate private finance” in support of the goals of the Paris Agreement.

Policy recommendations made by the letter’s signatories included introducing rules “that ensure that the high risk of fossil fuel lending is reflected in regulation” and making all financial institutions produce “credible transition plans” in line with the Paris Agreement.

The BoE launched its inaugural climate stress tests in June for the UK’s largest banks. However, Bailey has said that the results will not be used to set climate-related capital requirements, which could hike the costs of investing in carbon-intensive companies. Nor has the Bank mandated that lenders produce Paris-aligned transition plans.

On green finance, the letter’s signatories recommended the BoE provide cheap loans to commercial banks that promise to expand lending to sustainable projects, and pursue a partnership with the UK Investment Bank to promote investment “in a fair and green transition”.

Legislators from across the UK’s major political parties signed the letter, along with non-governmental organisations Positive Money, ClientEarth, and Greenpeace, among others.

4) Securities watchdogs target misleading climate disclosures

Financial regulators in Australia and the Netherlands have issued warnings against companies overstating how climate friendly they are in their public disclosures.

On Tuesday, the Dutch securities regulator Autoriteit Financiële Markten (AFM) published a study on the application of European Union sustainability classifications to a sample of 1,250 funds. Eight percent of these — about 100 funds — were classified as ‘Article 9’ compliant under European Union rules, meaning they self-certified as having a sustainable investment goal. However, the AFM found that these funds’ public descriptions of their sustainability characteristics were too general and lacked depth. For about half, the regulator said there were “question marks” as to whether they even qualified for the Article 9 designation. 

In a statement to Responsible Investor, an AFM spokesperson said it was sharing its findings with Dutch investment managers but would not take formal action against funds at this point.

On Wednesday, the Australian Securities and Investments Commission (ASIC) warned that companies making forward-looking net zero statements that have “no reasonable grounds” could be misleading, and that it would take “regulatory action where warranted” when it came to the use of these statements in firms’ fundraising documents and in the market at large.

ASIC described a recent intervention in an energy company’s initial public offering over its net zero statements. The regulator had asked for clarification about its greenhouse gas emissions statements. As a result of its questions, the company deleted net zero statements that “inferred near-term implications” and added information to its offering documents on how it plans to operate in a net zero manner.

5) MSCI debuts temperature rating tool

Index and fintech vendor MSCI launched an Implied Temperature Rise tool to help investors gauge how aligned their portfolio companies are with efforts to limit climate change. 

Announced Tuesday, the tool promises firm-level insights for over 10,000 publicly listed companies. MSCI said it has been designed to meet the specifications laid out by the Portfolio Alignment Team, a group set up by Mark Carney, the UN special envoy for climate and finance, to provide guidance on forward-looking climate metrics. 

The launch follows the publication of proposed guidance by the Task Force on Climate-related Financial Disclosures (TCFD) which recommended financial institutions measure and report how in line their portfolios are with a 2°C or lower temperature pathway and include forward-looking alignment metrics into their target-setting frameworks and management processes.

“Investors are rapidly sharpening their focus on the financial impacts of climate change, and they need greater transparency and insight on whether their capital may further, or frustrate, the goal of a more sustainable society. With its convenient measure for forward-looking portfolio emission trajectory, investors can use Implied Temperature Rise as a versatile tool to set decarbonization targets and strengthen engagement on climate risk,” said Remy Briand, Global Head of ESG and Climate at MSCI.

The Implied Temperature Rise tool follows the launch of MSCI’s Climate VaR tool in 2020, for measuring the climate-related risks and opportunities within the portfolios of financial institutions, and its Target Scorecard earlier this year, which facilitates comparisons between companies’ climate plans and assesses their credibility.

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