Thanks for reading Climate Risk Review, and welcome to the 30 new subscribers who joined this week! Not signed up yet? Why not join nearly *2,600 subscribers* interested in climate-related financial risk and regulation by signing up here:
1) Australian, Canadian financial authorities pledge action on climate disclosures
Banking and markets regulators in Australia and Canada said they would take steps to increase climate-related disclosures for financial institutions under their watch.
On Wednesday, the head of Canada’s Office of the Superintendent of Financial Institutions (OSFI) said that climate disclosures and climate risk management by federally regulated financial institutions would “expand materially” under his tenure. Peter Routledge, who became Superintendent on June 24, added that OSFI would deliver “agile, expedited disclosure requirements for banks and insurers”, but did not say when such requirements would be brought in, nor whether they would be mandatory.
He also said that though many financial institutions have embraced the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), the reporting of climate data at present “falls somewhat short” of providing the transparency into climate-related risks and opportunities hoped for. Therefore OSFI would consider whether this framework, and other public frameworks, are “sufficient” for the Canadian context.
Canada’s major banks — Bank of Montreal, CIBC, RBC, Scotiabank and TD — are all supporters of the TCFD and have published reports in line with its recommendations.
Also on Wednesday, Australia’s Council of Financial Regulators (CFR) said its members would set supervisory expectations on climate-related disclosures, as well as governance, strategy, risk management, scenario analysis and stress testing over the coming year. They would also work to improve “the quality, consistency and breadth” of climate risk disclosures. To this end, the CFR said it would consider how scenarios used in the ongoing climate vulnerability assessment of major banks, run by the Australian Prudential Regulation Authority, could be deployed more broadly to inform disclosures.
Members of the CFR climate change working group also said they are mulling the implications of having Australian entities produce TCFD disclosures on a mandatory basis.
2) Santander chief calls for joined-up climate stress tests
Financial authorities need to align on climate stress tests to prevent jurisdictions heading in different directions on climate-related capital requirements, the chairman of Spanish bank Santander has said.
In comments on a financial webinar held Wednesday, Ana Botin — executive chairman of the bank since 2014 — said: “We need coordination between central banks on stress tests because (otherwise) they would lead to (different) capital incentives”. The comments were first reported by Reuters.
“If we don’t have an alignment first on stress tests, second on what it means for capital requirements, you will have a lot of unintended consequences,” she added.
Santander is one of dozens of banks scheduled to undertake the European Central Bank’s institution-specific climate stress tests next year. Its UK division is also participating in the Bank of England’s inaugural climate stress test, the results of which are expected May 2022.
3) Investors managing $29trn urge companies to set 1.5°C warming targets
Major financial institutions — including Allianz, NN Group, and Crédit Agricole — are among 220 investors that have called on carbon-intensive companies to set emissions-reduction targets through the Science Based Targets Initiative (SBTI).
The campaign, coordinated by the non-profit group CDP, focused on 1,600 companies with large carbon footprints, including Hyundai Motor Company, Tata Steel, and Samsung. Collectively, the CDP says they emit 11.9 gigatons of emissions, an amount in excess of the annual total produced by the US and the European Union combined.
“2021 has been a year when global financial institutions have committed en masse to achieve net zero by 2050,” said Laurent Babikian, Joint Global Director Capital Markets at CDP. “But these goals are impossible to achieve without the companies they lend to and invest in having robust science-based targets that drive rapid decarbonization in the entire value chain in line with a maximum of 1.5°C of global warming. It is that simple, and when so many investors and lenders are collectively saying the same thing, companies must act or risk seeing their cost of capital rise”.
Today, there are over 1,775 companies that have joined the SBTI, 550 of which have targets aligned with a 1.5°C warming pathway. CDP ran a similar pressure campaign last year, following which 154 companies joined the SBTI. Of these, 56% said the campaign influenced their decision to commit.
4) Yellen urged to enhance climate-related financial regulation
Over 30 sustainability non-profits have told US Treasury Secretary Janet Yellen to take “bolder actions” to protect the financial system and broader economy from climate-related risks.
In a letter sent Tuesday, the non-profits — including 350.org, Amazon Watch, and Americans for Financial Reform — urged Yellen to issue a report that details how federal agencies can mitigate climate change and addresses fossil fuel financing.
Under President Biden’s May executive order on climate-related financial risks, Yellen is instructed to produce a report to the White House by November on how financial regulators can incorporate climate-related financial risk in their policies and programs.
The letter said this report should “identify specific policies” that each regulator could use to mitigate systemic climate risk that go beyond assessment and disclosure. “Banks, insurers, and other financial institutions … urgently need enhanced climate-related supervision and regulation to ensure they adequately address the threat that climate change poses to their stability and decrease their own contributions to systemic climate risks,” the non-profits wrote.
5) Banks, insurers, asset managers in major economies have $22trn of carbon-intensive assets — Moody’s
Financial institutions in the G20 have around $22 trillion of exposures to carbon-intensive sectors vulnerable to climate-related transition risk, research by ratings agency Moody’s suggests.
Banks hold the lion’s share of these, with $13.8 trillion of exposure to high carbon sectors, representing 19% of their total loans. Moody’s compiled the data from bank loan disclosures by financial regulators and the lenders themselves. Of these exposures, 41% are to organisations in the manufacturing sector, 24% to the transportation sector and 14% to power and other utilities.
Asset managers hold around $6.6 trillion of equities in carbon-intensive companies, equal to 28% of their stock portfolios, Moody’s calculated, using data from SNL Financial and Bloomberg. Leading insurance companies have $1.8 trillion of carbon-intensive exposures in their investment portfolios, equal to 13% of their total holdings.
Moody’s further calculated that $9 trillion of these exposures related to companies in Asia, $8 trillion to the Americas and $5 trillion to Europe, the Middle East and Africa.
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
Second Image: World Travel & Tourism Council / Flickr, Third Image: Susan Santa Maria / Shutterstock.com, Fourth Image: Alexandros Michailidis / Shutterstock.com. All other images under free media license through Canva.com