Weekly round-up: September 6-10

The top five climate risk stories this week

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1) US bank loans could lose around 10% every year to physical risks by 2080 — Ceres

Climate-related physical risks could inflict losses to large US banks’ syndicated loan portfolios of around 10% of their value each year from 2080, new analysis by the sustainability non-profit Ceres suggests. 

The analysis comes in the wake of the Intergovernmental Panel on Climate Change’s recent report on climate science, which made clear that more frequent and intense weather extremes have already been locked in because of anthropogenic warming.

Ceres and CLIMAFIN, a climate consultancy, estimated the impacts of physical climate risks — including floods, wildfires, and hurricanes — on over 60,700 syndicated loans held by 28 big US lenders, including JP Morgan, Goldman Sachs, and Bank of America.

The effects were projected over a 50-year time horizon, from 2030 to 2080, using three separate climate scenarios: a baseline simulation assuming no further climate change, an ‘orderly transition’ scenario and a ‘hot house world’ scenario. Annual value-at-risk (VAR) estimates for the syndicated loan portfolios, calibrated to a 99% confidence level, were generated twice for each scenario — once assuming ongoing expenditure on climate adaptation infrastructure, and a second time assuming no such investment.

Source: Ceres

Direct impacts to the portfolios assessed, in VAR terms, ranged from 2.1% under the baseline scenario to 4% under the ‘hot house world’ scenario in aggregate, assuming no adaptation spending. Indirect impacts —  like those to company supply chains, labour productivity, pricing and demand — could triple these risks, though, bringing the annual aggregate VAR to a whopping 12.1% under the latter scenario, and 9.7% under a ‘hot house world’ scenario with adaptation spending.

Tropical storms and coastal flooding were identified as the most damaging physical risks to the banks and syndicated loan portfolios studied. Of the individual banks assessed, Citi and US Bank appeared to have the highest projected future VAR from physical risks for 2080.

2) Net-zero banks falling short on emissions pledges — ShareAction

Most European banks that have promised to zero out the emissions from their lending and investing portfolios are not taking the steps necessary to achieve their goals, analysis by advocacy group ShareAction shows.

Th organisation found that of the 20 largest European banks to have made net-zero pledges, only three —  Lloyds Banking Group and NatWest in the UK, and Finland’s Nordea — have promised to cut their financed emissions in half by 2030. This intermediate target is seen as essential to ensuring banks can achieve net-zero emissions by 2050.

NatWest, the UK’s Barclays and France’s Crédit Agricole are the only three of the 20 to use an absolute emissions metric, or financed emissions disclosures, to measure their progress. Eight banks have established interim sectoral targets for their most carbon-intensive portfolios, like fossil fuels.

ShareAction also assessed the linkages between bank executives’ pay and their actions on sustainability. Though many banks do connect executive remuneration with climate-related metrics, ShareAction found that the most frequently used metrics are not the most relevant to their climate impact. For example, pay is commonly linked to efforts to reduce a bank’s own operational emissions, rather than their financed emissions — which are far larger. 

3) Proposed EU climate reporting standards go beyond TCFD recommendations

Draft standards for European Union companies on reporting climate change issues include disclosure topics and data points not yet covered by the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

The ‘Climate Standard Prototype’ working paper, published Wednesday by a European Financial Reporting Advisory Group (EFRAG) task force, is meant to serve as the basis for mandatory climate disclosure requirements authorised under the EU’s incoming Corporate Sustainability Reporting Directive (CSRD). This will oblige all large firms and publicly listed companies to disclose environmental and social information from October 2022.

The proposed climate standards set out 10 disclosure areas covering climate strategy, implementation and performance measurement. Many of these align with the TCFD recommendations. For instance, under strategy reporting, EFRAG proposes that companies describe the climate-related risks and opportunities they face, similar to the disclosures recommended under the TCFD’s strategy pillar.

Others, though, go beyond these recommendations. The standards envision companies disclosing the share of turnover they make from activities aligned with the EU taxonomy for sustainable activities, plus an estimate of what this share should be five years into the future. They also propose a reporting template for disclosing how climate-related remuneration is organised within a companies, and another for showing the pathways to achieving stated GHG reduction targets.

Source: EFRAG

The draft standards will now be reviewed by the full EFRAG Project Task Force on European sustainability reporting standards and then submitted to a dedicated expert working group, before being handed over to the European Commission for incorporation into the CSRD.

4) ESG-linked loans pose accounting headaches — ISDA

The US accounting framework is not able to facilitate decision-useful information when it comes to ESG-linked loans and debt instruments, a financial sector trade body has warned.

In a white paper published Tuesday, the International Swaps and Derivatives Association (ISDA) laid out issues with valuing the ESG features of financial instruments — like sustainability-linked loans — under US Generally Accepted Accounting Principles (GAAP). These transactions typically increase or reduce the interest payable by the borrower depending on their meeting, or failing to meet, sustainability targets — like reducing overall carbon emissions.

ISDA said these features may count as ‘embedded derivatives’ under US GAAP, and have to be marked-to-market by institutions separately from their host loan instruments. But the absence of sustainability-related data makes these features tricky to value, the trade body added, meaning the valuations firms produce would be “unlikely to be useful to readers of financial statements”.

ISDA also said there is “interpretative complexity” when it comes to judging whether some ESG features fit the criteria necessary to be treated as marked-to-market items, which could lead to “diversity in practice”.

In order to standardise accounting practices and reduce the “operational burden” involved in treating ESG features as embedded derivatives, ISDA proposed two alternative accounting treatments for ESG-linked instruments that would carve them out of the marked-to-market valuation requirement.

5) Insurers join with PCAF to measure underwriting emissions

A global, standardised way for (re)insurers to count up the GHG emissions of their underwriting portfolios is under development through a new collaboration between the Partnership for Carbon Accounting Financials (PCAF) and the UN-convened Net-Zero Insurance Alliance (NZIA).

The two organisations announced the launch of the PCAF Insured Emissions Working Group on Monday, to be made up of representatives from major (re)insurance companies and other key stakeholders. The group intends to produce a carbon accounting standard that allows insurers to gain insights into the climate impact of their underwriting decisions, facilitate the setting of emissions-reduction targets, and support climate scenario analysis. The new standard should also enable external stakeholders to compare and contrast the carbon footprints of insurance companies.

The NZIA was launched in July with eight members: AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich Insurance Group. Each member has pledged to achieve net-zero emissions in their underwriting portfolios by 2050.

PCAF has over 150 financial institution signatories, including insurers Münchener Verein, NN Group, and Phoenix Group. The partnership launched the first GHG accounting and reporting standard for the financial industry last November, covering lending and investing portfolios.  

Please send questions, feedback and more to louie.woodall@climateriskreview.com

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First image: ra2 Studio / Shutterstock.com, Second image: William Porter / Shutterstock.com, Fourth image: Bakhtiar Zein / Shutterstock.com, Fifth image: Kamilpetran / Shutterstock.com