By Laura Canevari
Following the release of the TCFD recommendations in July 2017, numerous events, initiatives, and publications have helped to progress climate-related financial risk disclosures in the banking sector. This article offers a summary of some of the key advances since 2017.
One of the first was established by the UN Environment Finance Initiative (UNEP-FI) which brought together 16 of the world’s leading commercial banks, established in autumn 2017. The group, supported by Acclimatise, developed and piloted publicly available methodologies which aided their responses to the TCFD recommendations. In late 2017, at the One Planet Summit in Paris, eight central banks and supervisors established a Network of Central Banks and Supervisors for Greening the Financial System (NGFS). This voluntary platform, which grew to 24 participating entities by the end of 2018, has amongst its aims to define and promote best practices that enhance the role of the financial system to manage and disclose climate risks.
January 2018 saw the release of the Final Report of the European Commission’s High-Level Expert Group (HLEG) on sustainable finance. The report set out a series of recommendations and aims to reform the European financial system to better support the EU’s targets under the Paris Agreement and goals of the 2030 Agenda for Sustainable Development. The HLEG called for effective disclosure of climate risks in line with the TCFD recommendations and requested the Commission to explore how the Non-Financial Reporting Directive (NFRD; Directive 2014/95/EU)requirements could be better aligned with that of the TCFD in its forthcoming review. Not long after, in March 2018, the European Commission’s action plan on financing sustainable growth was published, setting a clear roadmap for strengthening sustainability disclosure and accounting rule making. The Commission then began to develop a series of legislative proposals and amendments to existing EU Directives and developed a Technical Expert Group (TEG) to facilitate this.
Several other initiatives and reports helped to advance the foundations for future climate-related financial risk disclosures. In May 2018, the European Bank for Reconstruction and Development (EBRD) and Global Center on Excellence in Climate Adaptation (now Global Center on Adaptation) report “Advancing TCFD Guidance on Physical Climate Risks and Opportunities”, co-authored by Acclimatise, put forth 18 recommendations for corporates looking to disclose their risks and opportunities with regard to physical climate impacts. The report therefore provides important guidance for the development of metrics for standardising climate risk disclosures. In July 2018, UNEP-FI published the physical climate risk assessment methodologies its pilot group of banks had developed together with Acclimatise, as mentioned above. This is the first set of guidance and methodologies for assessing physical climate change risk and opportunities for the banking sector.
Throughout 2018, support for the TCFD recommendations continued to grow with many banks acknowledging the need to align with the TCFD recommendations in their annual report. This includes bankssuch as ANZ, BBVA, Barclays, UBS, Standard Charter, Commonwealth of Australia and the Bank of Montreal. The first climate-related financial disclosures were released as well, building on the outputs from the UNEP-FI TCFD pilot initiative (see climate disclosures from CitiBank, for example). According to the TCFD Status report released in September 2018, supporting banks had disclosed information aligned with the TCFD recommended disclosures in their financial filings more than any other finance group examined and their most common disclosure related to information on climate-related risk identification and assessment.
Apart from the collective action of the NGFS, individual central banks have also started taking steps forward to encourage the assessment and disclosure of climate-related risks in the banking sector. In late September 2018, the Bank of England’s (BoE) Prudential Regulation Authority (PRA) released its first report on the potential impacts of climate. Through information collected from 90% of the banking sector surveyed, the report finds that most banks are starting to treat climate change risks as financial risks, as opposed to considering is as solely an ethical issue. The BoE study also finds that these risks are starting to be considered at the board level. Shortly after the release of their report, the PRA published a consultation paper in mid-October setting out expectations regarding banks’ and insurers’ approaches to managing the financial risks from climate change. The PRA accepted consultation responses until 15 January 2019. BoE’s Financial Conduct Authority (FCA) simultaneously published a discussion paper on the impact of climate change on other financial services , and is accepting responses until 31 January 2019. In this discussion paper, the FCA has requested feedback on a series of issues such as on the challenges faced by security issues when determining materiality from climate change, how comparability of disclosures would help investors, and what information should be disclosed in climate risk reports.
October 2018 also saw action amongst European and international actors. The UN Intergovernmental Panel on Climate Change (IPCC) published a special report on the impacts of 1.5 °C warming which have implications for the banking sector, including credit and market risks. Additionally the first NGFS progress report was released, summarising the preliminary findings of its stock take exercise of relevant national, regional and international initiatives. In addition to other reflections, the report notes that financial supervisors are starting to actively assess the prudential risks of climate change and beginning to set supervisory expectations to enhance financial risk management of supervised firms. A more comprehensive report from the NGFS is due to be published in April 2019. Furthermore, the European Financial Reporting Advisory Group (EFRAG) advanced the Commission’s action plan this month by appointing members to the European Lab Steering Group.This Group is expected stimulate innovations in corporate disclosure of climate risks in Europe.
To conclude 2018, a side event was held in December during COP 24, which looked at adaptation finance and the TCFD Recommendations. Hosted by Acclimatise, EBRD and the Global Reporting Initiative (GRI), this event discussed how multilateral development banks can help foster the TCFD recommendations among commercial banks, and how they can help advance metrics and methodologies for reporting climate finance in their portfolios.
This long list of events, initiatives, and publications shows that climate-related financial disclosures are increasing in importance within the banking sector, but what does 2019 hold? The Commission’s TEG has been quick off the mark, releasing their Report on Climate-related Disclosures on 10 January 2019. This is the first final report from the Group and proposes a set of guidelines in alignment to the TCFD recommendations. The guidelines will assist listed companies, banks and insurance undertakings in developing high quality climate-related disclosures that comply with the NFRD. Worth highlighting is the specific guidance for banks provided in the report, in particular for lending and investment activities. Together with the wider changes in EU legislation around the sustainable finance system currently unfolding, 2019 is expected to be a year of significant activity for climate action.
Acclimatise – experts in physical risk for responding to TCFD recommendations
Acclimatise has worked on physical climate risk and adaptation with corporates and financial institutions for over a decade, helping them identify and respond to physical risks and to take advantage of emerging opportunities generated by a changing climate. We have witnessed the corporate, societal and environmental benefits stemming from the promotion of resilience-building strategies.
To discuss how your organisation can meet TCFD requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com