Category: Climate Finance

Climate adaptation: its time is now

Climate adaptation: its time is now

By Sam Greene

Adaptation is finally on the map. The climate change narrative has long been heavily skewed towards mitigation – on how to curb further climate risk and avoid pushing our planet towards climate crisis. But recent years – and months – have seen adaptation climb the political agenda, no longer the ‘poor cousin’ of mitigation.

The forming of the high-profile Global Commission on Adaptation led by former UN secretary-general Ban Ki Moon, World Bank CEO Kristalina Georgieva and Bill Gates has upped the ante with urgent calls for bolder solutions for managing climate risks. The UN secretary-general’s climate summit will take place in September, bringing together world leaders from government, business, finance and civil society to discuss transformative climate initiatives. The Egypt and UK-led resilience and adaptation track will focus on integrating climate risk into government and private sector thinking preparing for climate disasters effectively, and considering how vulnerable groups can recover from disasters faster.

But to be responsive to the priorities of the most vulnerable, these high-level international dialogues must be grounded in the real world.

The community of practice on community-based adaptation (CBA), grown collectively by IIED and partners, has connected local-level adaptation solutions with international dialogues on climate change for almost 15 years. This community has been working to get local adaptation priorities to the heart of discussions on climate change – long before the recent international calls for urgent action.

The CBA top three

Over the years, the CBA community has honed in on three areas:

  • Getting finance to countries so they can implement their adaptation projects and programmes
  • Transferring technology that will help climate vulnerable communities adapt, and
  • Improving adaptation policies so they recognise the challenges faced by vulnerable people most affected by climate change.

These three pillars are politically important – internationally recognised as crucial for delivering the Paris climate agreement. But they also form a platform for local people to demand what they need to solve their own climate problems.

Last month, the CBA community gathered in Addis Ababa to share their experiences of adaptation and discuss how to make change more effective.

Delegates raised concerns that amid the new enthusiasm for adaptation, mistakes of the past could persist whereby priorities of the most vulnerable will continue to be overlooked. The community of practice that gathered for CBA13 recognised this challenge and together developed three sets of compelling messages that include tangible, practical solutions for creating locally-driven change.

Financing that is fit for purpose

The system for delivering climate finance where it is needed does not work. Not only is there not enough funding, but the systems for transmitting that funding are inadequate.

Most large-scale funds such as the Green Climate Fund are inaccessible to countries that need them most, while bilateral funding is often too short term or too small scale to create lasting impact. Only 18% of adaptation financereaches the Least Developed Countries (LDCs), and only 10% of adaptation finance reaches the local level where it can address, with community input, the local drivers of poverty, natural degradation and climate vulnerability.

Devolved climate finance as practiced by the National Drought Management Authority through the Adaptation Consortium, and climate responsive social protection programmes such as the Hunger Safety Net Programme (both Kenya-based) are working examples of what can be achieved with sustained, patient funding.  

Programmes trialling these approaches have succeeded by building on existing systems (rather than creating new ones), and building the capacity of different actors to take the lead.

These kinds of systems can create the pipelines to enable at least 70% of climate finance to reach the local level, a demand put forward by the LDCs to the international community.

Searching for the unicorn

The differing views on the private sector from CBA participants demonstrate the need for clearer thinking and communication on how private sector funding can be mobilised for widespread adaptation.

Some see the private sector as “the unicorn” of adaptation – often talked about, but rarely seen. But others see real potential for private sector investment in the many smallholder farmers on which developing economies depend.

It is critical for projects seeking to leverage the private sector to include such institutions from the very beginning, to ensure their market knowledge and expertise can inform and support innovation. Good examples of success do exist and from which we can learn, such as the Solar Home Systems Initiative by IDCOL, and microinsurance schemes such as AfatVimo (PDF) in India.

Inclusive policies

Policies can supercharge adaptation interventions, creating the conditions for programmes to work. But to do so they must include a wide range of voices. Priorities of women and young people continue to go unheard in policy discussions. Yet governments often do not have capacity, sufficient resource or indeed the motivation to carry out inclusive discussions on a large scale.

Failed development interventions tell us that a business-as-usual approach cannot continue – we need new systems and mechanisms to bring all community members into discussions that inform policy design.

This is particularly crucial for National Adaptation Plans, with the potential to guide countries toward climate-resilient futures. But they are often driven and funded by multilateral agencies. Instead, they need to be led by government institutions that have the convening power and resources to bring different actors together and to break away from the siloed, sectoral approaches of the past.

One example is the Bangladesh Academy for Climate Services, which brings together scientists, policymakers and communities. Another is an online resilience platform, TCHAD-AGORA, that enables users to share their experiences and continue informal discussion directly with policymakers.

Technology: integrating gender and traditions from the past

The technology to adapt to climate change is, in many cases, already available. Getting it to the people that need it most, with the knowledge of how to use it at scale, is the challenge.

We must integrate new technologies with traditional methods from the past, many of which have adapted to their context and are fundamental to sustaining local ecosystems.

Respect for traditional technologies and methods encourage locally led, bottom-up networks or ‘ecosystems’ of actors for innovation that bring multiple types of technical knowledge together rather than the ‘solutions looking for a problem’ approach often seen in practice today.

Gender analysis must become a fundamental tool of the technology trade. The design of new technologies must recognise the different priorities of men and women, how they spend their time, socialise and generate income. How gender-sensitive a technology is will determine how well it is taken up by women and men. Practical Action’s renewable energy for smallholders project in Zimbabwe has demonstrated the effectiveness of gender-sensitive approaches.

The CBA community of practice: an invaluable resource

These messages from practitioners on finance, technology and policy add more nuance and greater legitimacy to the messages that the CBA community of practice have long been calling for – that communities must be at the centre of efforts to shape their own resilient futures. Those most at risk must be given higher, broader platforms through which to advise and advocate.

As the Global Commission on Adaptation continues its work, and the UN climate summit gets set to push adaptation further into the limelight, there is opportunity for a dramatic shift in the way adaptation and development is done.

These international processes must take on board the knowledge and experiences of the CBA community. And there is an open invitation to mine this invaluable resource as we seek to build a climate-resilient future.


Cover photo by Charl Folscher on Unsplash.
This article was originally published on the IIED blog.
London Climate Week: Getting private finance on track to achieve Paris Agreement’s objectives

London Climate Week: Getting private finance on track to achieve Paris Agreement’s objectives

By Caroline Fouvet

One of London Climate Week’s first events was organised by the Climate Policy Initiative (CPI) in association with Bank of America Merrill Lynch and focused on “Driving private finance to achieve 1.5-degree objectives”. It was an occasion for the CPI to hold panel discussions on the current needs and challenges to mobilise sufficient private finance in the context of the Paris Agreement. The event also showcased innovative ideas focused on enhancing private sector investments in climate mitigation and adaptation that were developed as part of CPI’s Global Innovation Lab for Climate Finance (the Lab).

CPI’s latest Global Climate Finance assessment shows that global climate finance flows amounted to USD 463 billion on average per year over the 2015-2016 period. This amount is mostly driven by the private sector, representing 54% annually for 2015/2016, including project developers, corporations, and commercial banks. Besides, over 94% of this amount was allocated towards mitigation, leaving only USD 22 billion to adaptation.

However, more resources are needed to achieve the Paris Agreement’s dual target when it comes to climate-related finance. Its objectives are both to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (article. 2.1c)” as well as to provide “financial   resources   to    assist    developing   country   Parties   with   respect   to   both   mitigation   and   adaptation” (article 9).

The event looked at how to scale up the private sector’s finance flows to tackle climate change in both developed and developing countries through two panel discussions. The first panel focused on how to unlock investment for climate action in infrastructure and mobility. It gathered representatives of a wide spectrum of organisations, from the public sector represented by the UK department for business, energy and industrial strategy, the European Investment Bank (EIB), and to private organisations Bank of America Merrill Lynch and asset managing firm Legal & General Investment Management. Discussion points included:  

  • Panellists stressed that the present climate challenge is huge and urgent, as we currently are on a 3.5-degree pathway.
  • They further underlined the complementarity of public and private action in terms of climate finance, as private investors need to be supported by public policy to further mitigation and adaptation action. It was acknowledged that climate-related regulations for the financial sector, such as Bank of England’s and from the European Union, were useful to raise awareness on climate change and created a powerful momentum in the industry to address the issue. As for developing countries, panellists mentioned that there was a need for greater support from Development Finance Institutions (DFIs) to de-risk investments, and that climate and development aid flows should be regarded as similar types of finance.
  • Overall, a recurrent obstacle for private finance to flow towards adaptation remains the difficulty to quantify it, whereas mitigation projects offer clearer targets and are hence easier to invest in. An option could be the concept of avoided costs, that can be useful to capture adaptation-related benefits. This however entails understanding which cities, for instance, are vulnerable to and requires public consultations on the matter.
  • Private sector participants also mentioned their current action in the climate finance space. Bank of America Merrill Lynch representative mentioned the bank’s work with private equity firms to shift their investments to provide support to climate disruptive companies. Legal & General Investment Management explained that they both worked with investors to help them transition their portfolio away from brown assets, but also engaged with investee companies who develop their own climate strategies and make their own climate investments.

The second panel discussion focused on the Lab’s laureates and the investment solutions they had developed. This session was an occasion to show that a wide variety of financial instruments and mechanisms, including debt, leasing and private equity, could be used to finance climate action. They included:

  • The Water Financing Facility: it mobilises large-scale private investment from domestic institutional investors, such as pension funds and insurance companies, by issuing local currency bonds in the capital market in support of their own country’s national priority actions on water and sanitation service delivery. It is currently engaged with 14 water providers worldwide and has been active in Kenya for three years. Its ultimate target is to reach USD 1 billion of local currencies in five to eight countries.
  • Cooling as a Service (CaaS) initiative – by the Basel Agency for Sustainable Energy (BASE): it aims to scale up investments in energy efficient service facilities. Its business model aims to enable customers to base their decision on life-cycle cost rather than on the purchase price of cooling equipment. The goal is to help clients benefit from high end and energy efficient cooling technologies without the need of an upfront investment. CaaS involves end customers paying for the cooling they receive, rather than the physical product or infrastructure that delivers the cooling.
  • Climate Resilience and Adaptation Finance and Technology Transfer Facility (CRAFT) – by the Lightsmith Group: CRAFT is a private equity fund focused on climate resilience and adaptation. It aims to invest in 10-20 companies, located in both developed and developing countries, which have proven technologies and solutions for climate resilience and have demonstrated market demand and revenue. It provides blended finance and includes a concessional capital layer to mitigate risk and a technical assistance facility to support companies in developing countries. It also measures impact against Sustainable Development Goals (SDGs), Climate Action in Financial Institutions and gender-related Key Performance Indicators (KPIs).
  • Restoration, insurance, service companies for coastal risk reduction (RISCO) – by Conservation International: this is a social enterprise that invests in mangrove conservation and restoration in areas with high-value coastal assets, enabling property damage risk reduction and protecting blue carbon. RISCO assesses and monetises the coastal asset risk reduction value and carbon storage benefits of mangroves. It works with insurance companies, to embed mangrove risk reduction values into insurance models for coastal properties and allows for reduced premium prices. A portion of the premium savings, or other insurance-related revenue, is paid by coastal asset owners to finance the upfront cost of the conservation and restoration projects. RISCO also generates and sells blue carbon credits to organisations seeking to meet voluntary or regulatory climate targets.
  • Responsible Commodities Facility – by Sustainable Investment Management (SIM): coordinates a suite of activities to promote the production and trade of responsible commodities in Brazil, starting with soy and corn. It provides competitive (low interest) credit lines for producers that meet Eligibility Criteria, i.e. do not contribute to deforestation.

Cover photo Secretary Kerry addresses delegates at COP21 / Wikimedia Commons
Insights from the Green Finance Summit

Insights from the Green Finance Summit

By Laura Canevari

On the 2nd of July, the City of London hosted its third Green Finance Summit, coinciding with London Climate Action Week. The event revolved around the critical role that financial institutions have to play in the transition to a low carbon and resilient economy.

As noted by Hoesung Lee, Chair of the IPCC, the scale and speed of climate impacts is unprecedented, and much higher than previously understood. Failing to achieve net zero emission by 2050 and increases in temperature over 1.5 °C above pre – industrial levels would have irreversible impacts on the climate system. Although, in aggregate terms, the shift of investment required is relatively small (0.4% of global GDP) In fact, there are not enough policy supports and market initiatives to enable this shift.

One of the challenges Mr Lee stressed is the disparity between aspirations and facts: indeed, the majority of Nationally Determined Contributions (NDCs) from countries that have signed the Paris Agreement lack an aligned financial strategy to fuel the transition. This is also why the announcement by John Glen (MP and Economics Secretary of the Treasury) of the release of the UK Green Finance Strategy has been so well received. Mr Glen also reminded us on the key role that the City of London has to play as one of the key financial centres globally, in helping to unlock capital and to develop the financial instruments to seize the opportunities for a green and resilient future. It is not enough for London to address the climate challenges facing the city: it has to actively engage in shifting the financial system and changing the way in which companies do business.

The event also saw the launch of the new Green Finance Institute, which will be directed by Dr Rhian Mari Thomas, former Global Head of Green Banking, Founder and Chair of the Green Banking Council at Barclays, who strongly advocates for the need to update our definition of what markets are for. In her view, their purpose today is not simply that of generating value and revenues to its shareholders: It is to facilitate the movement of capital to meet the needs of society.

The conversations throughout the day were lively and filled with aspirations. But they also reminded the audience of the challenges ahead. During a session chaired by Daniel Godfrey (CEO of the Investment Management Association) that focused on how to unlock capital for the SDGs, Andrew Parry (Hermes Investment Management) noted that it is not the lack of available finance that is holding us back; but rather the lack of financeable projects. He emphasised that we should focus on building the business model of potential solutions, and from that point the finance will flow more easily. Amal-Lee from the Inter-America Development Bank noted that whilst the SDGs provide a good framework, it is not sufficient to inform investment. Thus, we need a more granular understanding and more detailed taxonomy to help financial institutions greening their portfolios.

The event also benefitted from the wise words of former Ireland President, Mary Robinson, who summarized her call for action in three simple steps:

  1. Make climate change personal in your life
  2. Get angry and active and support those who are on the right side
  3. imagine the world we need to hurry towards

Cover photo by Joshua Ness on Unsplash.
How should central banks respond to the impending climate crisis?

How should central banks respond to the impending climate crisis?

By Laura Canevari

Earlier this week, as part of London Climate Action Week, the SOAS Centre for Sustainable Finance held a rich discussion centred on the role of central banks in relation to climate risks.

Ulrich Voltz, Director of the Centre for Sustainable Finance, kickstarted the conversation by reminding us that there are a lot of instruments central banks can use to help address climate risks to financial stability. These include: green macro-prudential regulation, climate stress testing, information disclosure requirements and green credit lines, among others. But should they be utilising all their tools at their disposal or leave freedom in the market to adjust to the climate reality? And do their mandates account for sustainability?  In a recent publication, he and Simon Dikau note that of a 133 mandates investigated, 54 central banks and monetary unions have a mandate through which they could potentially enhance sustainability. Of these ones, only 16 have an explicit “sustainability” mandate.

Prashe Vaze, from the Climate Bonds Initiative also reminded us of the importance of risk weighting capital in prudential regulation: In fact, what may have looked as a promising investment (e.g. an oil company with 150 year track record producing share to its shareholders) may now prove to be a less appealing investment when climate transition risks are factored in the picture.

Theresa Lober, Head of Climate Strategy at the Bank of England, introduced the audience to measures the PRA has taken over the past few months to respond to the climate crisis, including: the release of a Supervisory Statement on climate change for banks and insurers; the establishment and first meeting of a Climate Financial Risk Forum; as well as BoE’s plans to carry climate risk stress test for insurers this year, as noted by Marc Carney in a speech earlier this year.

The conversation concluded with Professor Daniela Gabor’s (UWE) reflections on the key actions that central banks should focus on:

  • Getting more closely involved in defining the rules of the game through the elaboration of a detailed taxonomy
  • To consider the development of green monetary policy
  • And to foster a coordinated response with Treasury at the government level for a just transition.

At the end, the discussion revolved around the different roles that government and central banks must take, according to their mandate. Ms Lober reminded the audience that although the Supervisory Statement is not legally binding, it does set clear expectations and that there are still limits to how much they can mandate, as they don’t have all the solutions yet. “If we had all the solutions, it would be already mandatory”, she says. However, central banks have the power to work with the private sector and to convene the right people. Whilst it is the government’s responsibility to set climate policy, central banks can engage with the treasury to discuss what needs to be done next and how the state can “act as a midwife” (as Professor Gabor calls it) in the birth of a sustainable finance sector.

In his closing remarks Sean Kidney, CEO of the Climate Bonds Initiative, noted a lack of urgency and no shared level of cognitive understanding of what is at stake regarding climate action. He believes that there is currently too much reliance on voluntary initiatives and positive opportunities narratives, and highlighted the need to “find every door we can push and push it hard”.


Cover photo by Dan Schiumarini on Unsplash.

Advancing climate-related financial risk disclosures in the Financial Sector

Advancing climate-related financial risk disclosures in the Financial Sector

By Laura Canevari

Transitioning to a low carbon and climate-resilient future is a challenge of unprecedented scale. The financial sector has a fundamental role to play in this transition. However, to enable the sector to play this role, there is a need for a systemic shift in the way the financial system operates and in the way investment decisions are made.

Critical to a smooth transition is the effective management of climate risks and opportunities. The underestimation of climate risk poses a threat to the stability of the financial system, in particular, when capital is allocated without a full understanding of the potential climate implications on adjusted risk returns. Similarly, responding to climate change and transitioning to a low carbon economy offers huge investment opportunities, many of which remain largely untapped.

The role of the Task-Force on Climate-related Financial Disclosures (TCFD) Recommendations

Through the release of the TCFD Recommendations in 2017, financial institutions (FIs), along with corporates, have been given a robust compass with which to navigate climate disclosures. The TCFD recommendations  encourage FIs and companies to incorporate climate-related considerations in their governance, strategy, risk management, metrics and targets, and to provide climate-related disclosures in their public financial fillings. The recommendations effectively require organisations to assess where they stand in their ability to understand and manage climate related risks. The TCFD knowledge hub has been established, which is an interactive portal that collates resources for organisations to aid their disclosure activities. Many FIs and corporates are still coming to grips with how best to analyse and disclose climate risks, though the direction of travel is clear – the TCFD recommendations has been a game changer in putting climate risks on their radar.

Investors clearly understand the value of this information and the demand for useful, climate related financial information continues to grow, according to the second TCFD status report, released in June 2019. Climate risk disclosures not only help investors to make more informed decisions, they also help reduce litigation risks.

Many organisations have started to disclose in alignment to the TCFD Recommendations (see the TCFD Knowledge Hub). Similarly, voluntary disclosure frameworks such as CDP, GRI and SASB have started to align their disclosure frameworks to the Recommendations of the TCFD. Others, such as PRI are making it mandatory for members to disclose certain types of climate related information.

Managing climate risks has become imperative for regulators, investors and the market

In early 2019, the Central Banks and Supervisors Network for Greening the Financial System (NGFS), 36 members in total, have joined forces to promote collective action to manage climate-related financial risks. Frank Elderson, Chair of the NGFS and board member of De Nederlandsche Bank, notes that climate-related risks are a source of financial risk. Elderson points out that climate-related risks are therefore within the mandates of central banks and supervisors, and it is up to them to ensure the financial system is resilient to these risks. In their most recent report, the NGFS published a set of recommendations around the distinctive elements of climate change-related financial risks and the need to ensure resilience in finance. These recommendations send a powerful signal to others within the finance sector that financial regulators are increasingly interested in robust climate disclosures.

Regulators have also independently started to tackle climate risks. In the UK, for example, The Prudential Regulatory Authority (PRA), has released a new supervisory statement setting out its expectations for banks and insurers on managing climate-related financial risks  and established, together with the Financial Conduct Authority (FCA), a Climate Financial Risk Forum. In France, Article 173 made it mandatory for institutional investors to disclose climate-related information.

Rating agencies such as Moody’s and S&P Global have started to incorporate climate change considerations in their rating systems as well. Their assessments now illustrate how much climate factors can impact (negatively and positively) on the risk rating of companies and municipal bonds.

Similarly, investors have started to integrate climate change considerations as part of their due diligence processes and as part of their risk management and investment strategies. Early findings provided by BlackRock suggest that investor portfolios integrating climate change are already outperforming those that do not. Yet, BlackRock also suggests that most portfolios are still failing to fully account for climate related risks.

Growing action among banks and investors

The number of FIs that have started to align with the TCFD recommendations has steadily grown since the release of the final recommendations in 2017. Over 200 entities dedicated to banking, asset management or banking and insurance have become official supporters of the TCFD recommendations, and some have started to release their first climate-related risk disclosures.

Their activity is supported by a number of global initiatives with the mandate to help FIs understand and address climate related risks. For example, the TCFD pilot project established by the UNEP-FI with 16 commercial banks (with the support of Acclimatise, Oliver Wyman and Mercer) has led to the publication of a set of novel methodologies to help banks appraise and manage physical and transition credit risks.

Similar initiatives are proliferating across the world. In Mexico and South Africa, for example, the Cambridge Institute for Sustainable Leadership (CISL) and GIZ have established an initiative to help financial institutions incorporate environmental scenario analysis into routine financial-decision making. Similarly, in Mexico, the Inter-American Development Bank (IDB) and the Mexican Banking Association (ABM) have established a Climate Risk Capacity Building Program aimed at strengthening the institutional and operational capacity of Mexican banks to identify and manage climate, environmental and social risks. Within this program, a new stage started with the objective to analyse the gaps in governance systems and in the management of climate, environmental and social risks in Mexican banks in relation to the TCFD recommendations.

On the investor side, The Institutional Investors Group on Climate Change (IIGCC) has launched a new project to develop guidance for investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes. This physical risk and opportunity guidance will be available in Summer 2019. This guidance will build on other guidance reports issued by the IIGCC, such as the 2018 practical guide on how to apply the principles of scenario analysis.

A proactive approach will likely pay off 

It is clear that the way to do business is changing as the climate risk governance landscape is changing. The role of FIs is shifting in light of these broader changes. Similarly, the conversation around risk is also clearly shifting, from being centred on individual companies or investments, to a broader recognition of the environmental and societal risks that climate change is posing.

The financial sector has a privileged role to play in the coming years in steering economic development towards a more resilient future. Those who begin the journey early will help set the benchmark on best practice and start reaping the benefits that stem from making climate conscious decisions. Those that do not may be left behind.


Cover photo by Jannes Glas on Unsplash.
CFTC announces subcommittee targeting climate-related financial-market risks

CFTC announces subcommittee targeting climate-related financial-market risks

The Commodity Futures Trading Commission(CFTC) has recently announced the formation of a subcommittee to examine and manage climate-related financial-market risks. The announcement was made on Wednesday 12th of June at a Market Risk Advisory Committee (MRAC) meeting in Washington D.C.

The event and the announcement of the new committee could not have been timelier. Financial regulators are increasing their requirements; Investors are demanding better disclosures and greater divestments. What’s more, evidence of the financial materiality of financial risks in the U.S. has accrued extensively, as noted by the $12 Billion in insured losses caused by the 2018 wild fires in California and the massive reductions in agricultural output for 2019 in the Midwest[.

The MRAC meeting thus focused on climate-related financial risks, industry approaches to climate risk management, and building an understanding of challenges ahead for regulators and market participants in the derivatives market. As noted in the opening statement of the MRAC Commissioner, Rostin Behman, the meeting represents an important first step in the development of the subcommittee focused on climate change financial market risks. In accordance to the CFTC’s announcements, the Commission will start to assess financial risks associated with climate change building on the experiences and lessons shared during the MRAC meeting.


Cover photo by Pavel Fertikh on Unsplash.
Second TCFD status report suggests there is room for improvement, despite growth in climate disclosures

Second TCFD status report suggests there is room for improvement, despite growth in climate disclosures

By Robin Hamaker-Taylor

The Task Force on Climate-related Financial Disclosures (TCFD), has issued a new status report, available here. The report provides an overview of current disclosure practices as they relate to the Task Force’s recommendations, highlights key challenges associated with implementing the recommendations, and outlines the efforts the Task Force will undertake in coming months to help address some of the implementation challenges.

Using artificial intelligence technology to screen reports for over 1,100 large companies from 142 countries in multiple sectors over a three-year period, the analysis was augmented by a survey to assess companies’ efforts to implement the TCFD recommendations as well as users’ views on the usefulness of disclosures. Unsurprisingly, the demand for decision-useful, climate-related financial information by financial institutions, especially investors, has continued to grow. Among the potential drivers for this demand are regulators’ sustained and growing interest in climate disclosures. Growing interest from central banks, regulators and supervisors are reflected in the recommendations provided in the newly released Network for Greening the Financial System (NGFS), which calls for the development of robust and internationally consistent climate and environment-related disclosures and which “encourages all companies issuing public debt or equity as well as financial sector institutions to disclose in line with the TCFD recommendations.”

The results of the review are encouraging and survey results suggest that progress is underway; but much work still remains. Companies and financial institutions have started to report climate-related information in their annual reports and sustainability reports and recognize the materiality of climate related financial risks. However, many organisations have highlighted the challenges of implementing the recommendations, in particular the lack of standardized industry metrics and concerns about confidentiality of information. There are also still several key ways through which companies could still improve in their disclosures. First, the Task Force found that not enough companies are disclosing decision-useful climate-related financial information. The review also indicates that more clarity is needed on the potential financial impact of climate-related issues on companies and that disclosures relating to resilience is often left out of climate-related risk strategies.

The status report indicates that further support in the implementation of the recommendations is needed. To that end, the Task Force plans to prepare another status report for the Financial Stability Board in September 2020, following a continued period of support and monitoring recommendation uptake. In addition, the Task Force is considering additional work in the following areas:

  • Clarifying elements of the Task Force’s supplemental guidance contained in the annex to its 2017 report (Implementing the Recommendations of the TCFD),
  • Developing process guidance around how to introduce and conduct climate-related scenario analysis, and
  • Identifying business-relevant and accessible climate-related scenarios.

Cover photo by Brendan Church on Unsplash.
Acclimatise kick-starts new project with Mexican banks by discussing how financial institutions can align their governance and risk management structures to the TCFD Recommendations

Acclimatise kick-starts new project with Mexican banks by discussing how financial institutions can align their governance and risk management structures to the TCFD Recommendations

By Laura Canevari

The Inter-American Development Bank and the Mexican Banking Association (ABM) have established a Climate Risk Capacity Building Program aimed at strengthening the institutional and operational capacity of Mexican banks to identify and manage climate, environmental and social risks. Within this program a new stage started with the objective to analyse the gaps in governance systems and in the management of climate, environmental and social risks in Mexican banks in relation to the TCFD recommendations.

The specific objectives of the project are to:

  1. Provide knowledge about the main international trends and practical examples of banks that are aligning with these regulatory and/or voluntary trends.
  2. Identify, through an international benchmarking exercise, best practices in governance  within banks in Latin America and the Caribbean that are sustainable finance leaders in their context of operation and/or “early adopters” of the TCFD’s recommendations.
  3. Develop a tool for the identification and analysis of EC&S governance structures and practices for the management of climate, environmental and social risks within banks in Mexico. The tool will allow the self-evaluation by banks of their performance regarding the implementation of TCFD’s recommendations for governance and climate risk management, as well as comparison with peers. Easy to use and accessible to all interested banks, the results of its application will allow the analysis of existing gaps, the identification of short and medium-term objectives and the visualisation of progress made in the implementation of TCFD’s recommendations.
  4. Use the tool to evaluate the performance of a sample of 3-5 Mexican banks in terms of governance and practices for the management of climate, environmental and social risks.
  5. Facilitate a training workshop with member banks of ABM and other interested banks where the tool and its possible applications will be presented, along with anonymous results of its application to those involved. A series of group exercises will be organised to analyse the main gaps and discuss possible barriers and enablers for climate risk management in Mexican banks. The workshop will also enable the elaboration of “road maps” for TCFD implementation through the identification of objectives, activities and timelines with respect to each criterion.

As part of this initiative, Acclimatise representative, Laura Canevari, was invited to present at a workshop organized during the XIV Symposium on Risk Management, held at the Hilton Reforma in Mexico City on the 29th of May. Here, she introduced the recent outputs from the UNEP-FI First pilot project with the banking sector on TCFD Implementation, and reflected on climate risks and opportunities best disclosure practices from around the world.

During the workshop, representatives from different financial institutions within the country engaged in dialogue to explore examples of governance and risk management systems for socio-environmental and climatic risks, and to learn about practical cases, tools and international reference frameworks that can help them pave the way to TCFD aligned disclosures.

Opening remarks from Rafael del Villar Alrich, Governance advisor of the Bank of Mexico (one of 36 financial institutions in the Network for Greening the Financial System Initiative) were complemented by presentations from ABM, Banobras, Bancolombia Banamext as well as CEBDS Brasil and GIZ.  As noted by Alan Gómez Hernández, Sustainability committee Coordinator from ABM, , climate change needs to be regarded as a fundamental issue impacting the private sector: A business topic with potentially significant positive and negative repercussions.

As noted by Virna Gutierrez (Banobras), these issues need to be recognised and tackled at high levels of governance within banks, with the support of risk management systems that can support the identification and evaluation of policies to mitigate potential risks and pursue potential opportunities. Steps are being taken to make this possible. In South America, for example, Bancolombia has recognised the role it has to play in financing the transition to a low carbon economy, with a well-established climate policy to inform their strategy. They are also active players in government conversations and have a very cohesive internal group within the bank that works to advance sustainability and climate risk management issues and engages directly with potential clients to foster the development of their green bonds and credit lines. These activities are all reported to the board of directors, which has established a target of US$10bn in climate investments by 2030.

The Mexican banks are also taking steps forward. Banamext SARAS (Sistema de Gestión de Riesgos Ambientales y Sociales) system, for example, establishes a comprehensive management framework that includes policies, procedures, tools and internal dissemination actions as well as training needs in order to identify, supervise and manage the exposure that the bank may have against potential environmental and social impacts within the credit allocation process. Similarly, they have also developed a self-assessment tool (MEDIRSE): A methodology to determine the impact of risks relating to social aspects of energy investments, in accordance with Bancomex’s due diligence process and SARAS system.

In addition, innovative collaborations are fostering the development of instruments that help Mexican banks better incorporate social, environmental and climate risks in their governance structures and that facilitate the alignment with the TCFD Recommendations. Such is the case of an initiative established by the Deutsche Gesellschaft für Internationale Zusammenarbeit’s (GIZ’s) Emerging Markets Dialogue on Finance (EMDF) Initiative, with the support of the University of Cambridge Institute for Sustainability Leadership’s (CISL’s) Centre for Sustainable Finance, the Instituto Tecnológico Autónomo de México (ITAM) and Banco de México. The project aims to empower financial institutions across the banking, insurance and asset management sectors and to promote the integration of environmental scenario analysis into practice in financial decision making.

Whilst Mexican banks acknowledged the challenges of incorporating social, environmental and climate risks and opportunities within their governance and risk management systems, it remained clear that banks should embark on this process now (if they have not already). The process and outputs generated through the newly established Inter-American Development Bank project working with the Mexican Banking Association are designed to provide the required support.


Cover photo by Asociación de Bancos de México ABM
Climate vulnerable countries are unable to access finance proportionate to level of need

Climate vulnerable countries are unable to access finance proportionate to level of need

By Will Bugler

study by the Stockholm Environment Institute (SEI) titled, ‘Climate Change Adaptation Finance: Are the Most Vulnerable Nations Prioritized?’ warns that “the allocation of adaptation finance is not consistently aligned with the sentiment of the Paris Agreement.”

The findings demonstrate that:

  • The most vulnerable nations are the least likely to be selected as finance recipients by both bilateral and multilateral donors;
  • Multilateral donors are found to allocate more adaptation finance to SIDS, yet they are not observed to prioritize vulnerable nations in the selection stage;
  • Multilateral donors are less orientated towards recipient need than their bilateral counterparts; and
  • Countries that are most vulnerable to climate change receive smaller allocations of adaptation finance from bilateral donors than their less vulnerable counterparts.

The paper finds that bilateral donors allocate more adaptation finance to recipients with: a higher level of need, determined by gross domestic product (GDP) per capita; more strategic importance, for example with whom they share a larger amount of bilateral trade; and higher levels of good governance, where aid is presumed to be more effective.

Multilateral donors, the authors note, prioritize well-governed nations. In spite of targeting groups vulnerable to climate change, multilateral donors do not prioritize the most vulnerable within those groups. The study concludes that there are barriers that limit the ability of the most climate vulnerable countries to access a share of adaptation finance proportionate to their level of need.

Download the study here.


Cover photo by Sabin Basnet on Unsplash.
Voluntary climate disclosures can reduce litigation risk

Voluntary climate disclosures can reduce litigation risk

By Robin Hamaker-Taylor, Richard Bater, Nadine Coudel

Climate risk disclosures are now a crucial part of the voluntary disclosure activities of many corporates and financial institutions. As these disclosures grow, questions around the extent to which they may leave disclosers exposed to litigation linger. Recent analysis from the accounting literature indicates that voluntary disclosures can actually lead to reduced litigation risk however. This article looks to these recent studies in other areas of voluntary disclosure to explore this question, and reviews changes underfoot that could increase litigation risk in the medium-term.

Does voluntary disclosure reduce or increase litigation risk? 

As capital markets began to grow and open up in the last century, it soon became clear that traditional financial reporting frameworks were not able to fill the information gaps between shareholders (investors) and corporate management according to researchers Schuster and O’Connell. Voluntary disclosure grew out of the need to fill the gap between the management’s view of the company’s value and what the market or investors saw as the view of the company’s value.

Corporates’ key performance data, for example, was not fully captured in conventional financial reports. As such, a number of frameworks for value-based reporting emerged in the 1990’s, which call for a range of voluntary disclosures such as forecasts of threats and opportunities, information on tangible and intangible assets, and management, among others. Coupled with the advent of technological advancements such as the internet, which for the first time allowed for rapid information dissemination via corporate websites, voluntary disclosures among corporates took off and are now part and parcel of firms’ external communications.

As public interest in the transparency around the procedures, policies, governance structures, and risk management strategies of corporates and financial institutions continues to grow, an important debate has unfolded around the relationship between voluntary disclosures and litigation risk. Litigation risk is, simply put, the potential that legal action could be taken because of a corporation’s products, actions, inaction, etc. The current debate centres around whether or not voluntary disclosure reduces or increases litigation risk, and following that, if litigation risk increases voluntary disclosures.

Researchers Dong and Zhang find evidence – in the US context – that litigation risk increases voluntary disclosure. The authors hypothesise that this may be the case either because disclosures could work to invalidate claims the firm is withholding information from investors, or because disclosures can help prevent one trigger of investor lawsuits – namely stock price crashes. Further analysis also indicates in the US, in instances of lower litigation risk, the likelihood and frequency of disclosures (e.g. earnings forecasts) are reduced, in particular for companies conveying negative news. This is a much-studied question in the accounting literature, however, and empirical evidence suggests litigation risk may deter disclosures. This may be the case because lawsuits could emerge after forward-looking disclosures are proven untrue after the fact.

Disclosing climate change-related risks may reduce litigation risks

Climate risk disclosures are now firmly part of the voluntary disclosure landscape, in part due to voluntary carbon disclosure frameworks such as the CDP and the more recent Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The Financial Stability Board (FSB) established the TCFD in 2015, who published its final voluntary recommendations for climate risk and opportunity assessment and disclosure in 2017. The FSB was concerned that because of the information asymmetry between financial markets and those they are lending to, investing in, and insuring, climate risks are a threat to the stability of the wider financial system.

The TCFD recommendations have been taken up with gusto among corporates and financial institutions, with over 500 official supporters as of early 2019. Recent analysis shows that two out of three companies assessed have started to disclose climate change-related risks, though importantly, the quality of disclosures is still low, and disclosures have varied greatly across markets in the first few years of reporting, according an annual climate risk disclosure study. Given the growing number of finance and corporate actors starting to voluntarily disclose climate risks and opportunities, and the varying scope and quality of disclosures, the debate about the influence of voluntary disclosures on litigation risks is reawakened.

There is, however, a general anxiety among corporates and financial institutions that they could be held liable for their climate risks disclosures, concerns which have been used as reasoning for lack of action in this space. Others argue that companies and their directors are actually more likely to face litigation if they fail to assess and disclose climate-related financial risks. Evidence is emerging to that effect: in 2017, shareholders of the Australian Commonwealth Bank sued, alleging the Bank violated the Corporations Act of 2001 by failing to disclose climate-change risks in its 2016 annual report. Though the case was settled, it may be a sign of what is to come.

The Hutley opinion, a 2016 landmark legal opinion set out the ways that company directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence. The 2019 supplementary opinion, provided again by Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker, reinforces and strengthens the original opinion by highlighting the financial and economic significance of climate change and the resulting risks, which should be considered at board-level. As the 2016 opinion explains: “It is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company”.

There has been a marked increase in climate disclosure litigation since 2017, underpinned by innovations of legal argument, increasing awareness, and progress in scientific evidence. This can give rise to considerable legal and reputational costs regardless of outcome, especially where liabilities are not covered by liability insurance. The disclosure trajectory is clear, therefore firms that get ahead of the game stand to benefit from unearthing opportunities, win the confidence of investors and consumers, and minimise liability risk. To be clear, firms should follow best practice in order to reduce concerns around liability associated with TCFD-style scenario-analysis and disclosures. Further recommendations on this are available here.

Future legal developments

The legal and physical environment in which organisations (e.g. firms, municipalities, and financial institutions) are operating is in a period of rapid flux. Past knowledge and assumptions about the resilience of assets, investments and supply chains to climate risk may no longer be valid, potentially giving rise material financial risks that investors have a right to be informed about. Several changes are afoot that could increase litigation risk in the medium-term. In April 2019, the Bank of England’s Prudential Regulation Authority released a Supervisory Statement (SS) concerning banks’ and insurers’ management of climate risks. The SS sets out clear expectations regarding the strategic approach that banks and insurers will be expected to take, including appropriate disclosure of climate-related financial risks, with mandatory requirements not an impossibility in the medium term.

The obligations that Directors, boards, financial intermediaries are under are also in flux. New and existing reporting frameworks increasingly require reporting and / or disclosure of climate-related risks, whilst the attitude of investors, consumers, and regulators is hardening. All of this is serving to steadily evolve standards of professional practice and reasonable expectations of fiduciaries and officers under existing law.

Following the release of the recommendations of the High-Level Expert Group on Sustainable Finance, in March 2019 the EU published is Action Plan on Sustainable Finance. With its declared ambitions to become a global leader in this area, the European Commission has announced that it will review reporting frameworks on non-financial information in line with TCFD and update accounting standards. The Commission is steadily laying the groundwork for sustainable finance regulation based on the Action Plan, whilst the European Parliament is also considering amendments to the IORP II Directive, that could require investment firms to consider and disclose ESG risks associated with occupational pensions. In the United States, there are legislative proposals to strengthen disclosure of climate risks to the SEC. From 2020, signatories to the widely-adopted Principles for Responsible Investment Reporting Framework will be required to report (not disclose) climate-related risks consistent with the TCFD.

A rapidly evolving legal and climatic context is shifting the context in which firms are operating. As firms and legal systems adjust to this new regime, litigation can be expected to hold firms accountable, test expectations, and clarify the law. Failing to keep pace with demands to manage and disclose climate risk in a dynamic climatic setting is likely to increase litigation risk, such as for breaches of duty, false or misleading disclosure, or non-disclosure. Organisations will need to ensure that disclosures are based on rigorous assessment and are accurately communicated to minimise litigation risk.


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

To discuss how changes and developments in climate-related regulations may affect your operations, please contact Nadine Coudel: N.Coudel(a)acclimatise.uk.com

Cover photo by Kelvin Zyteng on Unsplash.