Category: Climate Finance

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.
Climate poses direct risk to real estate investment says ULI report

Climate poses direct risk to real estate investment says ULI report

By Will Bugler

The known and growing risks posed by climate change to large-fixed asset investments, has done little to put off some lenders from financing real-estate in some of the world’s most vulnerable areas. Such actions are coming under increasing scrutiny, with many investors and forecasters calling them ‘insane’. In a recent report, the Urban Land Institute and real-estate investment management firm Heitman assess the potential impacts of climate change on real estate assets and give some direction as to what investment managers and institutional investors might do to understand and reduce their climate risk exposure.

The report shows that while although many assets held by real estate investors are in cities vulnerable to the effects of climate change, most still rely on insurance to guide their risk decisions. However, as premiums are based on historical events, they are not a robust guide to climate change risk to investments. The report shows that physical risks from catastrophic events and chronic climate risk from slower changes to weather patterns, pose direct risk to real estate investments.

Derived from a series of interviews with leading institutional investors, investment managers, investment consultants and others, the report also shows that a growing group of investors and investment managers are exploring new approaches to find better tools and common standards to help the industry get better at pricing in climate risk in the future. These include:

  • Mapping physical risk for current portfolios and potential acquisitions;
  • Incorporating climate risk into due diligence and other investment decision-making processes;
  • Incorporating additional physical adaptation and mitigation measures for assets at risk;
  • Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets; and
  • Engaging with policymakers on city-level resilience strategies, and supporting the investment by cities in mitigating the risk of all assets under their jurisdiction.

Such tools and methods are becoming necessary to reassure institutional investors and other lenders that their investments are secure. The report points to a series of resources, standards and guidelines that form part of a rapidly developing toolkit that can be used to better understand and manage climate risk.

It is becoming increasingly likely that investors will be expected, and indeed required, to ensure appropriate risk management measures are in place to protect investments from climate risk exposure, and to encourage more robust practices in real-estate construction and development.

A copy of the ULI report “Climate risk and real estate investment decision-making” can be found here.


Cover photo by Chuttersnap on Unsplash.
CIF and GDI host first joint learning event

CIF and GDI host first joint learning event

By Acclimatise News

On June 6th and 7th The Climate Investment Funds (CIF) and Global Delivery Initiative (GDI) will host a two-day learning event at World Bank headquarters aimed at sharing lessons from their findings across Latin America, Asia and Africa. Acclimatise’s Virginie Fayolle will be a part of a panel speaking on how to rapidly drive private sector investment in climate adaptation in developing countries.

In 2017, CIF and GDI joined forces to better understand the operational challenges that constrain climate finance projects. The collaboration led to the development of six delivery cases, each mapping how practitioners working on climate finance projects are embedding adaptive management to address questions such as:

  • What are the inherent risks of private climate financing, and what instruments make projects bankable?
  • How do governments manage competing interests in climate-smart regulatory reform?
  • What beneficiary-selection strategies are most effective for managing collective action problems and maximizing welfare outcomes?

The cohort of speakers draws from diverse institutional perspectives – multilateral development banks, bilateral organisations, governments, the private sector, and civil society – thereby creating a well-rounded discourse that aids practitioners to deliver ground-breaking projects within challenging contexts.

Click here to register for the event.


Cover photo by Daniele Levis Pelusi on Unsplash.
Colombian financial sector has a long way to go to integrate climate risks finds SFC survey

Colombian financial sector has a long way to go to integrate climate risks finds SFC survey

By Will Bugler

The Financial Superintendence of Colombia (SFC), last month, published the results of a survey of climate risk perceptions in the financial services industry. The results show that, despite the progress made by the banking sector, the financial system has not yet integrated these risks strategically.

In fact, 63% of the general insurance companies, 53% of the life insurance companies, 66% of pension fund managers, and 60% of fiduciary companies, have not considered environmental issues within their risk management framework. Where climate change is considered, the most reported measures were in small administrative operations concerning energy and employee carbon footprint.

Very few companies have carried out any analysis of their exposure to physical or transition risks derived from climate change, with the exception of the general insurance companies where more than half had identified some of the risks of climate change. Worryingly, the survey also suggests that the industry is ill-prepared to manage climate risks as they do not consider them to be a strategic priority.

Only 42% of banks, 21% of general insurance companies, 20% of life insurance companies and 13% of fiduciary companies had a system or tools developed and implemented to manage climate risk. Worse still, none of the pension fund administrators has a robust climate risk management system in place.

Given Colombia’s vulnerability to the impacts of climate change, the SFC expressed surprise at the results of the survey. In an effort to improve the readiness of the financial service sector in the country the SFC developed a work plan that will allow it to strengthen the initiatives of the sector against physical risks. Working in conjunction with companies to better understand how to manage physical and transition risks the SFC has developed:

  1. A taxonomy, based on international experiences and local priorities, to help encourage more awareness of climate risk.
  2. Adoption of Environmental, Social and Governance (ESG) criteria by professional investors.
  3. Transparency and sharing of best practice information related to climate change.
  4. Capacity building efforts.

Download the report [Spanish only] from here


Cover photo of Nevado Del Ruiz, Colombia from Wikimedia Commons.
The French Government announces the creation of “France Transition Ecologique”

The French Government announces the creation of “France Transition Ecologique”

During the first Ecological Defense Council held on Thursday, May 23rd, French Prime Minister Edouard Philippe announced the creation of “France Transition Ecologique”. This announcement aimed at implementing the recommendations made by Mr Pascal Canfin, as the CEO of WWF France and Mr Philippe Zaouati, as Chair of Finance for Tomorrow and CEO of Mirova, in a report submitted in December to the Minister of State of Ecological and Inclusive Transition and the Minister for the Economy and Finance.

The main recommendation of the report was to implement a “French Green Juncker Plan” by bringing together public and private financiers to leverage private financing for the ecological transition. The goal is to develop risk-sharing financial instruments in France, so that 1 billion euros of public money can leverage private investment and deliver a total of 10 billion euros of investment in the energy and ecological transition. The final objective is to finance the deployment of new economic models and new uses that will accelerate the energy and ecological transition.

Prime Minister Edouard Philippe, said: “We have therefore decided to launch the ‘France Transition Ecologique’ initiative, which is the translation into reality of the report proposed by Pascal Canfin and Philippe Zaouati, which aims to bring together public and private financial actors – I am thinking of Ademe (French Environment & Energy Management Agency), the Caisse Des Dépôts and BPI France (The French Public Investment Bank) in particular – to facilitate access by project leaders to financing”.

Philippe Zaouati, CEO, Mirova, said: “We are delighted by the announcement of the creation of France Transition Ecologique and more broadly by the government’s desire to implement the recommendations of the report submitted last December with Pascal Canfin. The question of financing the ecological transition is a major subject. The funding is there, the solutions also, and we think that the collaboration between the public and private sector will be essential in order to respond to this challenge”.

During the summer of 2018, Nicolas HULOT, Minister of State of Ecological and Inclusive Transition, and Bruno LE MAIRE, Minister for the Economy and Finance, entrusted Pascal CANFIN, as CEO of WWF France, and Philippe ZAOUATI, as Chair of Finance for Tomorrow and CEO of Mirova,  with the drafting of a report to explore the interest of risk-sharing financial instruments in the context of financing France’s transition to carbon neutrality.

In this context, the mission aimed to produce recommendations for the implementation of financial instruments in which public money is used as a risk-sharing tool (blended finance). The objective is to increase the involvement of private investors in the financing of the transition sectors that currently face such an investment deficit that their development does not meet the public policy objectives.

As a reminder, the recommendations submitted in the Canfin-Zaouati report:

Recommendation no. 1: bring together a public investment team from different existing institutions dedicated to energy and environmental transition in a unique approach: France Transition;

Recommendation no. 2: develop a French doctrine for the use of public-private risk-sharing financial instruments within France Transition;

Recommendation no. 3: focus France Transition’s interventions on the deployment of the transition  with an initial public funding budget of 1 billion euros to generate 10 billion in private investments over 3 years, which corresponds to 10% to 30% of the investment needs of the French policy objectives (SNBC-PPE);

Recommendation no. 4: optimise France Transition’s interventions in coherence and coordination with the European Union and the future Invest EU scheme;

Recommendation no. 5: create the conditions for greater private and public sector collaboration in ET funding.

Discover the report here.


Cover photo by Rob Potvin on Unsplash.
Acclimatise publishes response to EC consultation on update to the Non-Binding Guidelines on Non-Financial Reporting

Acclimatise publishes response to EC consultation on update to the Non-Binding Guidelines on Non-Financial Reporting

By Acclimatise staff

EU Directive 2014/95, the Non-Financial Reporting Directive requires large public interest entities with over 500 employees (listed companies, banks, and insurance companies) to disclose certain non-financial information. As required by the directive, the European Commission has published non-binding guidelines to help companies disclose relevant non-financial information in a more consistent and more comparable manner.

As part of its Action Plan for Financing Sustainable Growth the Commission has committed to updating the Non-Binding Guidelines on Non-Financial Reporting, specifically with regard to the reporting of climate-related information. The Commission intends to publish the new supplement on the reporting of climate-related information in June 2019, and held a public consultation with stakeholders on the update of the non-binding guidelines in early 2019. The consultation document can be found here.

Acclimatise responded to the Commission’s consultation document in March 2019. We understand that the Task Force on Climate-related Financial Disclosures (TCFD) recommendations have been an important step change in the climate risk governance landscape. As such, Acclimatise supports the integration of the TCFD recommendations within these guidelines. Aligning strategies to stabilise both financial and climatic systems is vital. Corporate and financial institutions have a significant role to play in this. The incorporation of climate risk analysis and disclosure in their governance systems and decision-making processes is key if we are to ensure a sustainable and climate compatible future.

Acclimatise’s responses, in full, are as follows:

On Chapter 2 ‘How to use these guidelines’:

1) In response to ‘According to the Non-Financial Reporting Directive,[…]’: Climate-related information can be considered to fall into the category of environmental matters.” It is important to establish, however, that climate change is not just an environmental issue, it is also a socio-economic challenge. As recently pointed out by Batten (2019) from the Bank of England (BoE), gradual global warming is likely to affect the productive capacity of the economy through several channels, such as through impacts to natural capital (e.g. natural resources), physical capital (e.g. infrastructure) and human capital (employees) among others. Similarly, climate change can impact human rights, affecting access to natural resources and generating social conflict. Climate change is therefore a cross-cutting issue that also needs to be accounted for when companies disclose information on non-environmental issues that are nonetheless affected by climate change. Acclimatise understands that climate change should not be considered as, primarily, an environmental issue; as this diminishes the social and economic impacts, the financial consequences and the scale and systemic responses needed.

2) In response to ‘climate-related risks’: It is worth noting that physical risks will also result in corporate liability. Attribution science is changing the ‘foreseability’ of climate extreme events, challenging the use of ‘force majeure’ clauses. This means companies may become liable in cases where potential risks are foreseen, yet not mitigated or avoided. The more foreseable any climate related peril, the less tenable will it be a force majeure defense, and the greater the more the incentive to manage the risk. In our report for the World Bank in 2016. ‘Emerging Trends in Mainstreaming Climate Resilience in Large Scale, Multi-sector Infrastructure PPPs’ we explored the challenges and risks around the use of force majeure clauses.

3) In response to ‘climate-related opportunities’: A framework to understand opportunities has been recently developed by Acclimatise under a UNEP FI led initiative with commercial banks, which could potentially be useful for Annex I on the Sector-specific disclosures for banks and insurance companies. The framework sets out a taxonomy of opportunities relevant to banks based on: i) managing existing risks, ii) responding to emerging risks and iii) preparing for market shifts. This framework can assist banks in understanding the potential finance needs of their clients, and their role in providing finance for climate resilience. The taxonomy could also be utilised by corporates. See section 4 of our ‘Navigating a changing climate’ report.

On Chapter 3.1: ‘Business Model’:

The nature of business network relationships strongly influences companies’ strategic identity and risk profile. Companies should therefore:

  • Examine how business relationships may increase/reduce their exposure to physical and transitional risks;
  • Identify how new opportunities to take climate action can stem from their existing network of relationships; and
  • Evaluate how new opportunities may also arise from the development of new business relations.

Regarding ‘Type 2 disclosures on the business model’:

Companies should consider how business interdependencies engrained in their market positioning might generate risks from a changing climate. Important considerations to account for are relationships across their value chain, for example, with input providers (e.g. are providers located in areas exposed to climate hazards?) and with customers (e.g. will costumer demands shift under a changing climate?).

On Chapter 3.2: ‘Policies and Due Diligence Processes’:

On type 2 disclosures: Further information relating to physical risks should be included. For example:

  • How the company’s engagement with its value chain is helping to tackle physical risks;
  • How managing physical risks would require an investment in employee´s skill sets, such as the development of geospatial in-house capabilities to evaluate the physical exposure of asset’s locations.

On Chapter 3.3: ‘Outcomes’:

In the process of better aligning climate action targets in the public sector with private sector activities, it would seem useful to further explore how companies’ climate related policy outcomes align with Government’s Nationally Determined Targets. There seems to be a general gap on how private sector targets contribute/complement national commitments; how they fit together to reach global goals. This document offers an opportunity to encourage companies to aggregate asset level data to the country level for disclosures to say something meaningful about how their contribution towards climate action align with UNFCCC government pledges.

However, there must be an incentive for companies to undertake additional reporting against national

government policy targets. Note also that this can only produce an accurate evaluation of the private sector contribution towards national targets if disclosure is regulated, is mandatory (at all levels, including SMEs) and follows a standardised process. It is not clear how such a process would command the support of the private sector.

On Chapter 3.4: ‘Principal Risks and Their Management’:

The 2018 report ‘Advancing TCFD guidance on physical climate risks and opportunities’ offers valuable recommendations that could provide further guidance to businesses on how to disclose principal risks and their management. This source is cited at the beginning of the document but has particular relevance to this section. Recommendations 1-7 on Risk management and 13-18 on Scenario Analysis could assist companies preparing their risk disclosures.

Further information can be found in the report commissioned by the European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) (2018) here.

On Chapter 3.5 ‘KPIs’:

Type 2 under physical risks: It is worth noting that the KPIs included for transition risks are not normative in the sense they collect ‘neutral’ information, whilst the KPIs on adaptation are directly asking to report on negative outcomes (e.g. ‘Assets committed in regions likely to become more exposed to acute or chronic physical climate risks’). KPIs for physical risks could also include indicators on financial performance (e.g. loss of income, increased OpEX and increased CaPEX).

There are no KPIs on physical risks addressing risk mitigation activities at the supply chain level. Consider referring to www.adaptationcommunity.net for indicators on climate impacts that could be turned into KPIs at the sector level.

On Annex I ‘Proposed disclosures for Banks and Insurance companies’:

A framework to understand opportunities has been recently developed by Acclimatise under a UNEP FI-led initiative with commercial banks, which could potentially be useful for Annex I on the Sector-specific disclosures for banks and insurance companies. The framework sets out a taxonomy of opportunities relevant to banks based on: i) managing existing risks, ii) responding to emerging risks and iii) preparing for market shifts. This can assist banks in understanding the potential finance needs of their clients, and the role of banks in providing finance for climate resilience. The taxonomy could also be applied to corporates. For more information, see section 4 of our ‘Navigating a changing climate’ report, available here.

Several questions stem from the review of this Annex:

  • Why are scenarios accounted for in the lending activities and not in investments?
  • Why do KPIs for asset management activities not link to risks and opportunities as for the other segments?

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 climate risk disclosure requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com


Cover photo by John Unwin on Unsplash.
Five months remain for UK banks to demonstrate their plan to address PRA’s new supervisory statement on climate risks

Five months remain for UK banks to demonstrate their plan to address PRA’s new supervisory statement on climate risks

By Robin Hamaker-Taylor

On 15 April 2019, the Bank of England’s Prudential Regulation Authority (PRA) issued a policy statement (PS11/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. Importantly, PS11/19 included the final version of  supervisory statement (SS3/19) on managing the financial risks from climate change. The increased attention on climate change by UK financial regulators is the result of an extensive engagement and consultation with UK banks, insurers, and stakeholders throughout 2018 and early this year, set out in Consultation Paper (CP) 23/18.

Building on previous reviews of current practices in the banking and insurance sector, the PRA found that too few firms are taking a strategic approach toward managing climate related financial risks. For this reason, the new SS sets out clear expectations concerning the strategic approach that banks and insurers should take in relation to financial risks generated by climate change. The PRA has identified climate change as a future financial risk that is also relevant today.

As set out in PS11/19, firms should have an initial plan in place to address the PRA expectations and submit an updated Senior Management Function (SMF) form by 15 October, 2019. It is understood that the PRA is expecting senior managers to be up to speed with the PRA’s expectations by this date – in just under five months’ time – rather than just getting into grips with the new SS. The PRA’s expectations are summarised in our earlier piece, available here.

Acclimatise and Vivid Economics have developed a new guidance document which offers an overview of PRA expectations as set out in SS3/19. In it, we review our integrated suite of advisory services and analytical toolkits which support banks in meeting the expectations of the supervisory statement. Our approach draws on our extensive track records in physical and transition climate risk assessment and management in the real economy.

To find out more about how we can help your firm meet the PRA’s expectations on managing climate-related financial risks, and to obtain a copy of our new guidance document, please contact Robin Hamaker-Taylor: R.Hamaker-Taylor(at) acclimatise.uk.com.  


Cover photo by John Unwin on Unsplash.
Global climate finance is still not reaching those who need it most

Global climate finance is still not reaching those who need it most

By Sennan Mattar, Stephen Kansuk, Tahseen Jafry

In the world of climate finance, the December 2015 Paris Agreement was a high point. One of the key outcomes of the summit was a pledge to mobilise US$100 billion per year by 2020 in “new and additional” funds to help developing countries avoid, or at least adapt to, the worst effects of climate change. By signing the agreement, developed countries accepted the principle that they bear historical responsibility for global warming, and thus must take the lead in doing something about it.

It is, therefore, welcome news that the Green Climate Fund (GCF), the main financial mechanism in UN climate policy, has attracted more pledges than any other fund in a short period of time, with US$10.3 billion pledged as of January 2019.

That said, there is little indication that the US$100 billion pledge will be achieved, yet alone more ambiguous targets. The withdrawal of the US from the Paris Agreement has cast a long shadow over the developed world’s obligations to the developing world. Australia’s recent decision to stop its own contributions to the Green Climate Fund is the latest disappointment.

Adding to these funding woes, the gap between what is needed and what is available grows deeper with each passing year. Post-Paris euphoria has since dissipated as it has become apparent that the pledged money will only cover a fraction of the true cost of tackling climate change. Mitigation alone will cost developing countries US$600 billion per year. The initial pledge in the Paris Agreement may only cover the US$60-US$100 billion per year needed for adaptation measures as proposed by the IPCC. And achieving this initial pledge is far from certain.

Chad has been ranked the country most vulnerable to climate change. mbrand85 / shutterstock

What is thus far missing from these financial instruments is climate justice – a consideration of the needs and well-being of the most vulnerable communities. Climate change will be particularly devastating for the poorest countries and communities, as the ability to adapt to factors like rising sea levels or droughts is closely related to developmental status.

In theory, the Green Climate Fund is targeted at exactly this problem. However, advanced economies have their own priorities, and these rarely align themselves with the intended purpose of climate finance or the developmental objectives of developing countries.

Who is it for?

The Green Climate Fund requires countries seeking funding to provide substantial co-financing from their own tax base or the private sector to mitigate financial risk. What this means in practice is if a country like Bangladesh wants a million dollars to pay for cyclone shelters, it would also have to raise a similar amount from private investors and its own taxpayers. For the poorest countries, this is a significant barrier.

This raises the question of whether the fund is really for those developing countries that are most vulnerable to climate change, or instead those countries with the most profitable investment opportunities. There is an absence of formal or clear criteria by which contributions to the Green Climate Fund must reach those who need it the most.

It is no surprise, then, that world’s least developed countries have repeatedly been left behind. In 2015, they received just 30% of international public climate finance. One of us (Sennan) went through every single project approved by the Green Climate Fund, and found it also falls into this pattern – just 18% of funds went to projects in the poorest countries, while 65% went to projects in middle-income countries like Mexico or India.

Middle-income Indonesia has more access to climate finance than extremely poor countries. Andreas H / shutterstock

These nations are preferred as they are better able to generate income and attract private investment. For instance, a state-owned geothermal developer in Indonesia was given a US$160m grant, the largest grant given to a single country by the GCF, to mitigate financial risk from developing geothermal projects. This project, co-financed by the World Bank with a US$325m loan, was made possible by Indonesia’s ability to generate income and attract co-financers as a middle-income country.

In contrast, Ethiopia, the third-poorest country in the world, struggled to gain approval for a US$45m grant to build resilience among its most vulnerable communities through measures such as improving basic access to food and water. The board of the Green Climate Fund initially did not agree to Ethiopia’s original proposal asking for a US$99.6m grant, citing lack of co-finance as one critical element. The proposal was eventually approved after the Ethiopian government put forward US$5m in co-finance and reduced the grant request by more than half.

The dilemma this poses for poorer nations is seen clearly in countries such as Ghana. To deliver on its commitments under the Paris Agreement, the West African country needs to mobilise nearly US$22.6 billion in investment over the next decade. The government is expected to request more than US$5 billion from the Green Climate Fund.

It’s an overly ambitious request, and one that is also likely doomed to fail as Ghana’s rising public debts, weak institutions, lack of transparency and limited expertise in developing low-carbon investments means it will struggle to attract co-financers. But, of course, it is exactly these sorts of factors that mean countries like Ghana or Ethiopia are more vulnerable to climate change in the first place, compared to wealthier nations on similar latitudes like Indonesia or Costa Rica.

In recognition of this dilemma, there needs to be a global effort to prioritise climate finance for those who need it the most and to ensure it actually helps developing countries to develop. It is, therefore, encouraging to see the International Development Committee at Westminster has embraced this view in its recently published report, UK Aid for Combating Climate Change.

The report recommends explicitly adopting “climate justice” as a guiding principle to reform global climate financing structures and aid programmes. Without a fundamental change in the way we mobilise and deliver finance, the poorest and most vulnerable developing countries will continue to be left behind.


This article was originally published on The Conversation.
Cover photo by Hermes Rivera on Unsplash.
Video: Collaborative approaches to climate resilience at the heart of Adaptation Fund’s work

Video: Collaborative approaches to climate resilience at the heart of Adaptation Fund’s work

As the urgency of climate change has grown with increasing floods, droughts and intense storms around the world, the Adaptation Fund has been innovative in adapting to countries’ needs. A good example can be found in the Fund’s Programme of Regional Projects, which helps countries come together to address climate change impacts that cross borders. It has grown markedly since it began as a pilot in 2015, to more than 10 projects and a robust pipeline today.

In this video, Adaptation Fund officials, as well as implementing partners from the World Meteorological Organization and the Development Bank of Latin America discuss the programme’s benefits and examples of current Adaptation Fund-funded regional adaptation projects on the ground in Ethiopia, Kenya and Uganda, and in Ecuador and Chile.

Image: Lake Bunyonyi, Uganda. Photo by Random Institute on Unsplash

Central bank network issues warnings of climate-related financial risks and recommendations for central banks, supervisors and policymakers

Central bank network issues warnings of climate-related financial risks and recommendations for central banks, supervisors and policymakers

By Robin Hamaker-Taylor and Laura Canevari

Members of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) have called for collective action to manage climate-related financial risks. In its first comprehensive report, the NGFS has issued six recommendations; four for central banks and supervisors, aimed at enhancing their role in greening the financial system, and a further two recommendations for policymakers aimed at facilitating the work of central banks and supervisors.

The NGFS brings together 36 central banks and supervisors – representing five continents, half of global greenhouse gas emissions and the supervision of two thirds of the global, systemically important, banks and insurers. The report is the result of the group’s work to identify environmental and climate risk management best practices in the financial sector. Over the last 16 months, the NGFS has found that climate change presents significant financial risks that can only be mitigated through an early and orderly transition.

The six recommendations in the NGFS report consider the distinctive elements of climate change-related financial risks and the need to ensure resilience in finance. They are as follows:

Recommendation 1 – Central banks and supervisors: Integrating climate-related risks into financial stability monitoring and micro-supervision. The NGFS calls on central banks and supervisors to start integrating climate-related risks into micro-supervision and financial stability monitoring. First, this means developing and applying comparable and consistent approaches to assess climate-related risks, such as scenario analysis. The report includes guidance on designing scenario analysis, and suggests that there are two important dimensions to consider when assessing the impact of physical risks and transition risks on the economy and the financial system:

  • (a) The total level of mitigation or, in other words, how much action is taken to reduce greenhouse gas emissions (leading to a particular climate outcome), and
  • (b) Whether the transition occurs in an orderly or disorderly way, i.e. how smoothly and foreseeably the actions are taken. These two dimensions allow for scenarios to be developed as they present a continuum of different outcomes and transition pathways to achieve them.

The guidance also indicates that further work is also required to translate economic scenarios into financial risk parameters for financial stability analysis, and that financial institutions should not delay their own analyses while central banks work out scenario analysis guidance. Second, this recommendation means integration of climate-related factors into prudential supervision and the report sets out a high-level 5-step framework for this, starting with awareness raising.

Recommendation 2 – Central banks and supervisors: Integrating sustainability factors into own-portfolio management. The NGFS encourages central banks to lead by example in their own operations. Without prejudice to their mandates and status, this includes integrating sustainability factors into the management of some of the portfolios at hand (own funds, pension funds and reserves to the extent possible).

Recommendation 3 – Central banks and supervisors: Bridging the data gaps. The NGFS recommends that the appropriate public authorities share data of relevance to Climate Risk Assessment (CRA) and, whenever possible, make them publicly available in a data repository. The NGFS sees merit in setting up a joint working group with interested parties to bridge existing data gaps. The deliverable of this group would be a detailed list of data items that are currently lacking but which are needed by authorities and financial institutions to enhance the assessment of climate-related risks and opportunities – for example, physical asset level data, physical and transition risk data or financial assets data. The report recognises that important challenges around data remain, including data availability, time horizon, and lack of expertise. The NGFS also indicates it is ready to initiate work with interested parties on setting out the list of currently lacking data items.

Recommendation 4 – Central banks and supervisors: Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing. The NGFS encourages central banks, supervisors and financial institutions to build in-house capacity and to collaborate within their institutions, with each other and with wider stakeholders to improve their understanding of how climate-related factors translate into financial risks and opportunities. The NGFS therefore encourages central banks, supervisors and financial institutions to:

  • allocate sufficient internal resources to address climate-related risks and opportunities;
  • develop training to equip employees with the necessary skills and knowledge;
  • work closely together with academics and think-tanks to inform thinking; and
  • raise awareness by sharing knowledge within the financial system.

The NGFS also encourages relevant parties to offer technical assistance to raise awareness and build capacity in emerging and developing economies when possible.

Recommendation 5 – Policymakers: Achieving robust and internationally consistent climate and environment- related disclosure. The NGFS emphasises the importance of a robust and internationally consistent climate and environmental disclosure framework. NGFS members collectively pledge their support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations provide a framework for consistent, comparable and decision-useful disclosure of firms’ exposures to climate-related risks and opportunities. The NGFS encourages all companies issuing public debt or equity as well as financial sector institutions to disclose in line with the TCFD recommendations. The NGFS recommends that policymakers and supervisors consider further actions to foster a broader adoption of the TCFD recommendations and the development of an internationally consistent environment disclosure framework. This includes authorities engaging with financial institutions on the topic of environment and climate-related information disclosures, aligning expectations regarding the type of information to be disclosed and sharing good disclosure practices.

Recommendation 6 – Policymakers: Supporting the development of a taxonomy of economic activities. The NGFS encourages policymakers to bring together the relevant stakeholders and experts to develop a taxonomy that enhances the transparency around which economic activities (i) contribute to the transition to a green and low-carbon economy and (ii) are more exposed to climate and environment-related risks (both physical and transition). Such a taxonomy would:

  • facilitate financial institutions’ identification, assessment and management of climate and environment-related risks;
  • help gain a better understanding of potential risk differentials between different types of assets;
  • mobilise capital for green and low-carbon investments consistent with the Paris Agreement.

Policymakers would thus need to:

  • ensure that the taxonomy is robust and detailed enough to (i) prevent green washing, (ii) allow for the certification of green assets and investments projects and (iii) facilitate risk analysis;
  • leverage existing taxonomies available in other jurisdictions and in the market and ensure that the taxonomy is dynamic and reviewed regularly to account for technological changes and international policy developments;
  • make the taxonomy publicly available and underline the commonalities with other available taxonomies. Eventually, it should strengthen global harmonisation to ensure a level playing field and prevent the dilution of green labelling.

Together this network of central banks has sent a powerful signal – that climate change presents significant financial risks that can only be mitigated through an early and orderly transition. Mark Carney, governor of the Bank of England, Banque de France governor Villeroy de Galhau, along with NGFS chair Frank Elderson, board member of De Nederlandsche Bank issued a stark warning about the financial risks of climate change last week in an open letter alongside the NGFS report. Published on the same day as the report, the letter calls for ambitious and collective leadership across countries, in order to ensure the stability of the wider financial system in the face of climate change.

The NGFS will now work to enable an orderly transition by supporting the development of additional resources, including a handbook on climate and environment-related risk management for supervisory authorities and financial institutions, voluntary guidelines on scenario-based risk analysis and best practices for incorporating sustainability criteria into central banks’ portfolio management.


Cover photo by Robert Bye on Unsplash.