Category: Finance

Enabling access to the Green Climate Fund: Sharing country lessons from South Asia

Enabling access to the Green Climate Fund: Sharing country lessons from South Asia

The Green Climate Fund (GCF) aims to support developing countries to take ambitious action on climate change. It helps to facilitate the flow of climate finance from rich countries to developing ones.

Accessing the GCF is a time-consuming process, and capacity constraints and the complicated procedures for accessing funding are affecting many developing countries’ ability to compete fairly and effectively for finance through the Fund.

In a newly released learning paper, and associated learning brief, the Action on Climate Today (ACT) programme provides lessons from its experience helping partners to access GCF funding in South Asia.

The paper, “Enabling access to the Green Climate Fund: Sharing country lessons from South Asia”, presents a framework for strengthening access to the GCF, looking at entry-points and strategies that governments, funders and practitioners can use.

The paper draws on ACT’s experience supporting national and sub-national governments in five South Asian countries: Afghanistan, Bangladesh, India, Nepal and Pakistan. It explores some of the challenges that countries face and the strategies that they have employed to overcome them. The paper presents a framework that shows entry-points and measures that governments funders and practitioners can use. Entry-points at the global level include the GCF’s own resources and capabilities, and at the national level includes national institutional capabilities, the design of projects, and the sustainability of financing.

ACT is a £23 million UK government-funded regional programme managed by Oxford Policy Management (OPM) in collaboration with many consortium partners. It has been working since 2014 in partnership with national and sub-national governments of Afghanistan, Bangladesh, India, Nepal and Pakistan to assist the integration of climate adaptation into development policies and actions while transforming systems of planning and delivery, including leveraging additional finance.

The full ACT learning paper “Enabling access to the Green Climate Fund: Sharing country lessons from South Asia” and a learning brief can be accessed here.

Action on Climate Today (ACT) is an initiative funded with UK aid from the UK government and managed by Oxford Policy Management (OPM).

Key Contact

Elizabeth Gogoi, Senior Consultant, Oxford Policy Management (OPM) +91 98 11 55 2951

Cover photo by Stephane Hermellin on Unsplash.
The PRA issues a new supervisory statement setting out expectations for banks and insurers on managing the financial risks from climate change

The PRA issues a new supervisory statement setting out expectations for banks and insurers on managing the financial risks from climate change

By Laura Canevari and Robin Hamaker-Taylor

On 15th April, 2019, the Prudential Regulation Authority (PRA) has released a supervisory statement relevant to all UK banks and insurance firms and groups. This SS is in alignment with PRA´s commitment to enhancing its approach to supervising the financial risks from climate change and to enhancing the resilience of the UK financial system by supporting an orderly market transition to a low-carbon economy.

Building on previous reviews of current practices in the banking and insurance sector, the PRA finds that few firms are taking a strategic approach toward managing climate related financial risks. For this reason, the new SS has set out clear expectations concerning the strategic approach that banks and insurers should take in relation to financial risks generated by climate change. Four key expectations are outlined in the SS:

  • Governance:
    The PRA expects firms to fully embed the consideration of the financial risks
    from climate change into their governance framework. This includes ensuring board-level
    engagement and accountability, and the designation of clear responsibilities
    for managing the financial risks from climate change at the board level and within
    relevant sub-committees. Additionally, firms are expected to ensure the adequate
    oversight of the risks according to the firm’s business strategy and risk
  • Risk
    : The PRA expects firms to address
    the financial risks from climate change through their existing risk management
    frameworks, in line with their board-approved risk appetite, while recognising
    that the nature of financial risks from climate change requires a strategic
    approach. Accordingly, firms are expected to identify, measure, monitor,
    manage, and report on their exposure to these risks. Evidence for these
    activities are expected to be provided in the written risk management policy,
    management information and board risk reports.
  • Scenario Analysis: Where proportionate,
    the PRA expects firms to use scenario analysis to assess the impact of the financial
    risks from climate change on current business strategy, and to inform the risk
    identification process. The scenarios used should explore the resilience and vulnerabilities of a firm’s
    business model to a range of outcomes, relating to different transition
    pathways to a low-carbon economy. They should also, where appropriate, include
    a short and a longer-term assessment of financial risks associated with a
    changing climate.
  • Disclosure:
    Firms should develop and maintain an appropriate approach to the disclosure of
    climate-related financial risks, considering not only the interaction with
    existing categories of risk, but also the distinctive elements of the financial
    risks arising from climate change, as described in the supervisory statement.
    These elements are: Impacts are far-reaching in breadth and magnitude; There
    are uncertain and extended time horizons; The risks have a foreseeable nature; There
    is a dependency on short-term actions.

Click here to access the full supervisory statement from the PRA.

Cover photo by Floraine Vita on Unsplash.


UK regulators host first meeting of Climate Financial Risk Forum

UK regulators host first meeting of Climate Financial Risk Forum

By Will Bugler

On Friday 8 March, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) hosted the first meeting of the Climate Financial Risk Forum (CFRF). The objective of the CFRF is to build capacity and share best practice across financial regulators and industry to advance financial sector responses to the financial risks from climate change.

The event brought together senior representatives from across the financial sector, including banks, insurers, and asset managers and will meet three times a year to discuss climate risks to the financial system. The event recognises that climate change and society’s response to it presents financial risks that are relevant to the PRA’s and FCA’s objectives.

‘The first forum meeting today was an important step in tackling a major threat to the future stability of the financial system’ said Andrew Bailey, Chief Executive of the FCA, ‘The Climate Financial Risk Forum will seek to encourage approaches in the financial sector, managing the financial risks from climate change as well as supporting innovation in green finance.’

The financial services sector is becoming increasingly concerned with both physical and transition risks. The recommendations of the Financial Stability Board’s (FSB) Taskforce on Climate-Related Financial Disclosure (TCFD) have spurred the industry to take action. Recently, UNEP FI and Acclimatise worked with 16 major banks to pilot methodologies  for assessing climate risks to loan portfolios and investments.

Firms are enhancing their approaches to managing these risks, but barriers remain to implement the strategic approach necessary to minimise the risks. The CFRF aims to reduce these barriers by developing practical tools and approaches to address climate-related financial risks.

‘The challenge we face in mitigating [climate] risks is unprecedented, and we need to begin to act now if we are to ensure an orderly transition to a low-carbon economy,’ said Sam Woods, Deputy Governor and CEO of the PRA.

At its first meeting, the forum decided to set up four working groups to focus on risk management, scenario analysis, disclosure, and innovation. Each working group will be chaired by a member of the forum and will meet more frequently than the CFRF, reporting back at each CFRF meeting. The aim is to produce practical guidance on each of the four focus areas. The final outputs will be shared with industry more widely. Membership of the working groups will be wider than the forum to allow them to draw on expertise as necessary, such as from academia and industry.

Cover photo by M.B.M. on Unsplash.

Comparing existing tools for assessing physical climate risks in the finance sector: Recent outputs from the ClimINVEST Research Project

Comparing existing tools for assessing physical climate risks in the finance sector: Recent outputs from the ClimINVEST Research Project

By Laura Canevari

Understanding the implications of physical climate risk to financial institutions is a complex challenge. The ClimINVEST initiative aims to facilitate improved financial decision-making in the face of climate change by offering tailored indicators, tools and maps for financial institutions. As part of the project, the Institute for Climate Economics (I4CE) has undertaken a useful review of existing tools and approaches, that can assist financial actors assessing their own physical climate risks.  

Physical climate impacts can increase risk for the financial sector and the economy in several ways. However, the translation from physical risk to financial impacts is not always straightforward. As noted in I4CE’s review, very few service providers have developed approaches to analyse how climate risks can impact counterparties’ financial statements (e.g. in their balance sheets and profit and loss calculations) and how they affect the operation of financial activities. The review therefore focusses on assessing the functions, target uses and outputs of the tools currently available in the market, including those developed by Acclimatise and other service providers. The review summarises several key differences.

Firstly, the target use and target users for each approach differ: from those designed to be used as pre-screening tools by project managers to those carrying more comprehensive assessments target to risk managers. Similarly, the level of analysis also varies, from tools focusing on risks at the project level, to those operating at counterparties level, upstream/downstream value chains, on sovereign counterparties; or even incorporating the larger socio-economic environment. Equally, the methodologies incorporated in the tools can tackle the assessment of different types of impacts, with some focusing only on economic impacts and others also incorporating an assessment of financial implications.

Another important difference found between the tools is their use of climate change scenarios, and the sources of information these scenarios build on. Some of the tools have built their scenarios using trend analysis and thus are based on past and observed weather records. Contrastingly, other tools use an exploratory approach, based on either IPCC data or outputs from Integrated Assessment Models (IAMs). Generally, the time horizon chosen determines the type of climate scenario used: It is common, for example, to find the use of trend analysis on short term horizons, whilst long term analyses tend to be more exploratory in nature.

The tools reviewed in the report also differ in their mechanisms to deal with uncertainty. In some cases, the approaches developed have dealt with uncertainty by considering the worst-case future climate scenario (a conservative approach); others have used multi-model approaches for climate projections. In the case of the Acclimatise Aware tool, the Global Climate Model agreement was used as indicator for uncertainty; this indicator is then integrated when weighting the exposure to location- specific climate hazard data.

Output formats provided by the different tools and approaches were also found to be very diverse, ranging from qualitative analysis using scoring systems, to quantitative assessments providing financial estimates. Results are also aggregated differently by each instrument: they can be aggregated according, to scenario, type of impact, time horizon, counterparty, or hazard type.

Key conclusions and remarks

Whilst service providers are developing sophisticated methodologies to help financial actors assess physical climate risks, they still face barriers to exploit their full potential. Data availability remains an important challenge, especially access to data on corporate counterparties. Information is still needed at macro and sectoral scales in order to better characterise financial implications caused by changing business environments; but it is also needed at the counterparty or asset scale in order to define exposure, sensitivity and adaptive capacity to a diverse range of climate impacts.

There is no “one-size-fits all” approach, and financial actors will have to choose what type of tool is better suited to their assessments needs and which can be better integrated into their existing risk management approaches. Existing tools can nonetheless be further refined to better fit user needs and new approaches can also be developed to match emerging assessment and disclosure demands. Close collaboration between financial actors and service providers will be a key factor determining the successful refinement and application of tools and approaches. Acclimatise, will continue to work closely with financial institutions in order to keep advancing the development of suitable tools and approaches able to support financial actors identifying and dealing with physical climate risks.

Photo by Chris Liverani on Unsplash

PRA and FCA establish a joint Climate Financial Risk Forum

PRA and FCA establish a joint Climate Financial Risk Forum

By Robin Hamaker-Taylor

The Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) of the Bank of England have established the Climate Financial Risk Forum (CFRF) in early March 2019. The Forum is comprised of firms from across the financial system. The fill list of 17 current members is as follows:

  • Banks: BNP Paribas; HSBC; JP Morgan; RBS; Yorkshire Building Society
  • Insurers: Aviva; Legal & General; Lloyd’s of London; RSA Insurance Group; Zurich
  • Asset Managers: Blackrock; Hermes; Invesco; Schroders; Standard Life Aberdeen
  • Others: Greening Finance Initiative; London Stock Exchange Group

Four working groups have been set up, which will develop guidance in each of the following areas: risk management, scenario analysis, disclosure, and innovation. Working groups will allow wider membership, including academics and other members of industry, in order to allow them to draw on expertise as necessary.  

Bank of England Governor, Mark Carney, explained the reasoning behind the establishment of the CFRF during his 21st March speech at the European Commission High-Level Conference. The Prudential regulation Authority (PRA) and the Financial Conduct Authority (FCA) established the Forum as it recognised the need for capacity building within the finance industry and need to develop best practices.

Regulators understand that despite the progress of firms toward climate-related risk management, there is still work to do with regards to their strategic approach to minimise these risks, including scenario analysis. The Forum aims to allow progress in this area by “developing practical tools and approaches to address climate-related financial risks,” according to a statement to the press. The Forum will meet three times per year and will report back to executives of both the PRA and FCA. Each of the four working groups will be chaired by a member of the Forum and will meet more frequently than the CFRF, reporting back at each CFRF meeting.

Photo by Colton Jones on Unsplash

Bank of England Governor indicates new climate risk rules are imminent

Bank of England Governor indicates new climate risk rules are imminent

By Robin Hamaker-Taylor

On 21st March, 2019, Bank of England Governor Mark Carney gave a speech at the European Commission High-Level Conference in Brussels, where he indicated that new rules from the UK’s financial regulators on climate risk are imminent.

Carney’s speech gives several indications as to the content of the upcoming PRA supervisory statement (SS) on banks’ and insurers’ approaches to managing the financial risks from climate change. The PRA’s SS will apply to banks, insurers and investment firms and will set out the PRA’s expectations regarding firms’ approaches to managing the financial risks from climate change, including with respect to: 

  • Governance, where firms will be expected to embed fully the consideration of climate risks into governance frameworks, including at board level, and assign responsibility for oversight of these risks to specific senior role holders;
  • Risk management, where firms will need to consider climate change in line with their board-approved risk appetites;
  • The regular use of scenario analysis to test strategic resilience; and
  • Developing and maintaining an appropriate disclosure of climate risks.

There have been important advances in both the supply and demand for climate reporting following the release of the final TCFD recommendations in 2017; support from both finance actors and companies has been resounding. Yet actual action on disclosure is lacking. According to Carney, financial implications are often not yet disclosed, and where they are, they are made in multiple reports making comparisons harder. Disclosures also vary considerably by industry and region.

Carney set out a vision for climate disclosure and made the case for regulatory action relating to it, stating that “in the future, disclosure will move into the mainstream, and it is reasonable to expect that more authorities will mandate it.” The role of financial regulators was delineated as well, suggesting that it is not their role to drive the transition to a low-carbon and resilient economy. Instead, financial regulators such as the PRA need to smooth the flow of investment into green technologies and encourage firms to plan over longer time horizons than normal; they ultimately operate within the climate policy frameworks that governments set.

A call was made for financial institutions to take a more strategic approach to climate, which Carney suggested requires scenario analysis; firms will need to consider scenario analysis as part of their assessments of the impact of climate risks on their balance sheet and broader business strategy. Specifically, Carney suggested scenarios should be:

  • Comprehensive, rigorous and challenging;
  • Transparent: the assumptions and methodologies in the models – such as the assumed global temperature rise, the energy mix, or whether the transition happens smoothly or abruptly – should allow for comparisons and external challenge; and  
  • Scenarios should be implemented consistently across the business, linking identification of risks and opportunities to both strategy and disclosure.

Scenario developments will be assisted by the PRA and FCA joint Climate Financial Risk Forum, which will work with industry to review tools and metrics, for the publication of reference scenarios and standard assumptions.

Finally, Carney explains that supervisors will require climate-related stress testing that links ‘high-level data-driven narratives on the evolution of physical and transition risks to quantitative metrics to measure the impact on the financial system.’ In conducting these stress tests, financial institutions would aim to:

  • Consider whether, across the financial system, financing flows are consistent with an orderly transition to the climate outcome set out in the Paris agreement. These long-term scenarios can facilitate discussions between firms and their clients about possible risks across different sectors and geographies; and
  • Consider whether the financial system would be resilient to shorter-term shocks – including a climate “Minsky moment” when climate risks materialise suddenly. 

The Bank of England will also work closely with colleagues in the Network for Greening the Financial System (NGFS) to develop a small number of high-level scenarios. Following the issuance of the draft supervisory statement and subsequent consultation in October 2018-January 2019, the final supervisory statement will be released in mid-April 2019.

Cover photo by Robert Bye on Unsplash.

Final meeting to approve country work programme that aims to boost capacity of Belize to access world’s largest climate fund

Final meeting to approve country work programme that aims to boost capacity of Belize to access world’s largest climate fund

Like other low-lying coastal nations, Belize is particularly vulnerable to the effects of climate change. Its geographical location leaves the country exposed to the risk of rising sea levels and increasing frequency and intensity of tropical storms and hurricanes that have traditionally hit the area with catastrophic consequences. Additionally, its economic dependence on natural resources heightens its vulnerability to rising temperatures and the resulting impacts on a variety of socio-economic sectors and on the environment of coastal areas and forests.

Research indicates that climate change impacts could cost the twenty-four island nations of the Caribbean a total $11 billion by 2025, but these figures are likely to be an underestimate. The costs of inaction cannot be ignored. And while preparing for such impacts and a low carbon pathway are critical, they are costly. The Green Climate Fund (known as the GCF), offers an attractive source of funding to achieve these goals. The GCF is currently capitalised at USD 10.3 Billion and is the largest climate change fund in the world.

To date, GFC has funded two projects involving Belize, including a multi-country project on energy efficiency and renewable energy implemented through the European Investment Bank (EIB), approved in April 2017; and a national project promoting climate-smart agricultural production implemented through the International Fund for Agriculture and Development (IFAD), approved more recently, in February 2019.

Belize has also received support through grant funding from the GCF to boost the capacities of the country to access international finance for investments in climate change projects. Since February 2018, the Belize’s  Ministry of Economic Development and Petroleum (MEDP) in collaboration with the Caribbean Community Climate Change Centre (CCCCC) has been running a project, “Capacity Building of National Designated Authority (NDA) and Preparation of Country Strategic Framework”, to strengthen the capacities of the MEDP and to prepare a Country Strategic Framework to guide Belize’s engagement with the GCF.

The project is approximately 14 months in duration, expected to end in April 2019, and is being delivered with the support of Acclimatise, a UK-based climate change adaptation and climate finance consultancy, together with a national consultant.

The MEDP plays an important role in facilitating access to the GCF in Belize and is responsible for acting as the focal point for communications with the GCF and national organisations, identifying national funding priorities, giving no-objection to project proposals, and nominating national organisations for accreditation.

Since the project inception, a broad consultative process has been set up, involving all relevant public sector agencies, businesses and business associations as well as academia and civil society organisations in Belize. Through three workshops and a large number of one-to-one meetings with key stakeholders and donors, conducted between April and November 2018, the MEDP and the project team have built a Country Programme containing a pipeline of potential projects to be funded by GCF and key steps for their implementation. This pipeline not only provides funding priorities for climate change but also aligns with the country’s sustainable development priorities and key sectors.

A final meeting will be hosted by MEDP on 27th March 2019 from 8:30 to 4:30 pm at the Radisson Hotel in Belize City.

The meeting aims to present key aspects of the draft Country Programme and the priority projects proposed for GCF funding and receive feedback from participants. All relevant stakeholders in Belize have been invited to provide comments on the draft document and to participate to the consultative process to inform and validate the Country Programme. By project completion, Belize will have significantly increased its capacity on accessing GCF finance.


About Ministry of Economic Development and Petroleum (MEDP)

The Ministry of Economic Development and Petroleum in Belize formulates and recommends national development policies, strategies and programmes to promote macroeconomic stability, sustainable socioeconomic development and the reduction of poverty.

About the Caribbean Community Climate Change Centre (CCCCC):

The Belize-based Caribbean Community Climate Change Centre (CCCCC) coordinates the region’s response to climate change. Officially opened in August 2005, the Centre is the key node for information on climate change issues and the region’s response to mitigating and adapting to climate change. CCCCC sought accreditation to the GCF in 2015 to undertake and scale up both mitigation and adaptation projects across the region in order to drive a paradigm shift in the region’s development patterns.

About the Green Climate Fund

The Green Climate Fund (GCF) is a global fund created to support the efforts of developing countries to respond to the challenge of climate change. GCF helps developing countries limit or reduce their greenhouse gas (GHG) emissions and adapt to climate change. It seeks to promote a paradigm shift to low-emission and climate-resilient development, taking into account the needs of nations that are particularly vulnerable to climate change impacts.

It was set up by the 194 countries who are parties to the United Nations Framework Convention on Climate Change (UNFCCC) in 2010, as part of the Convention’s financial mechanism. It aims to deliver equal amounts of funding to mitigation and adaptation, while being guided by the Convention’s principles and provisions.


Ms. Yvonne Hyde, of the Ministry of Economic Development and Petroleum:

Cover photo from Wikimedia Commons
Climate change and the macroeconomy

Climate change and the macroeconomy

By Laura Canevari

Through a critical review of the literature, Sandra Batten of the Bank of England reflects on the key theoretical and modelling challenges facing central banks when trying to analyse macroeconomic risks derived from climate change. The paper explores how climate risks, both physical and transitional, are transmitted to the macroeconomy through either unpredictable economic shocks or as a result of more predictable longer-term impacts. The review offers valuable insights pertaining current challenges and limitations of modelling the macroeconomic impacts of climate change and the ways forward to improve existing modeling techniques.

In this article, we highlight key insights on the effects of physical climate risks on macroeconomic factors and the ways in which these impacts are assessed. This information will be of interest to any financial institution looking to incorporate climate change considerations into their existing macroeconomic models.

Supply and demand impacts of extreme events and gradual global warming

It is important to note that climate impacts can be caused by either gradual (chronic) or extreme (acute) climatic events. Gradual refers to incremental changes in climate (such as changes in temperature or rainfall), whilst extreme encompasses extreme weather events such as hurricanes and drought. From a macroeconomic standpoint, both gradual and extreme climatic events can generate effects in both demand and supply.

Supply and demand impacts caused by gradual global warming include:

  • Demand side
    1. Changes in consumer choices
    2. Changes in labour productivity and migration
  • Supply side
    1. Tradeoff between reductions in GHG emissions and lower short-term growth

Supply and demand shocks caused by extreme events include:

  • Demand side shocks (affecting aggregate demand), such as:
    1. Impacts to households reducing private consumption
    2. Reduced investments due to damage of physical and financial assets
    3. Trade disruptions
  • Supply side shocks (affecting the productive capacity of the economy)
    1. Shortage of inputs and natural resources
    2. Damage to capital stock and infrastructure

Whilst it is possible to describe these effects conceptually, in practice, it is very difficult to quantify these impacts in monetary terms.

The macroeconomics of gradual global warming

Gradual global warming is likely to affect the productive capacity of the economy through a number of channels, such as through impacts to natural capital (e.g. natural resources), physical capital (e.g. infrastructure) and human capital among others. Integrated Assessment Models (IAMs) are the main analytical tool used to assess the damage posed by global climate change to the economy. As highlighted by Batten, IAMs suffer from a number of severe limitations including their broad scope and simplified representation of individual climate and economic components. Despite these limitations, IAMs remain the best available tool to integrate the effects that different GHG emission trajectories exert on changes in temperature. In doing this, IAMs give an indication of the corresponding the effects of climate change (as driven by temperature) on economic variables such as productivity output and consumption.

Many of the IAMs models currently available focus on the relationship between temperatures and output per capita. However, depending the approach taken, models may reach different conclusions. Some, for example, suggest that a 1°C rise in temperature in a given year can reduce economic growth in that year by 1.1 % (see Dell et al., 2012). Others suggest that for each 1°C increase in daily average temperature above 15°C, productivity declines by roughly 1.7% (Deryugina and Hsiang, 2014). Additionally, studies have also looked at the effects of increased temperatures on the labour force. For example, Graff Zivin and Neidell (2014) stipulate that at daily maximum temperatures above 29°C, workers in industries with high exposure to climate reduce daily time allocated to labour by as much as 1 hour, whereas climate-insulated industries do not suffer labour-market impacts.

The macroeconomics of extreme weather events

Impacts from extreme weather events can be direct and indirect. Direct impacts (both market and non-market losses) include effects on mortality, morbidity and damage to fixed assets and infrastructure. Indirect impacts are losses not caused by the disaster itself, but as consequence to impacts on the economy. Indirect impacts can be felt in the long term and may include damages such as the depreciation of the value of physical assets as well as affecting the longevity of infrastructure.

Most of the literature has focused on the short-term effects of extreme weather events and natural disasters. Whilst information on long-term effects is scarce, there are three different hypotheses describing these effects on economic output:

  • The “creative destruction” hypothesis: Extreme events generate demand for goods and services (e.g. for reconstruction) and can thus lead to a period of faster growth –
  • The “recovery to trend” hypothesis: Extreme events slow down the economy in the aftermath of an extreme event and productivity eventually returns to its pre-disaster state
  • The “no recovery” hypothesis: Extreme events destroy productive capital and/or durable consumption and result in the slow-down of the economy.

Although there are studies in support of each of the three hypotheses, the “no recovery” hypothesis is supported by the largest number of empirical studies. Under this scenario, the continued reallocation of capital investment towards adaptation measures (and the use of capital in repair and reconstruction investments rather than in innovation and knowledge transfer) could further undermine economic growth, leading to lower output growth (see Pindyck, 2013). It is worth noting that unlike IAMs used to predict future impacts of gradual global warming, most studies on extreme events lack a forward-looking outlook.

Conclusions and future areas of research

Batten’s review offers valuable insights into the different channels for transmission of climate impacts into macroeconomic outcomes, either through gradual climate change or extreme weather events. The review also reflects on the difficulty of measuring such impacts, especially when trying to capture the effects of gradual changes in the climate.

In light of the increasing need to disclose climate change impacts, it is important to promote the use of techniques able to quantify its macroeconomic impacts and to further advance the development of more refined methods. For this purpose, three key suggestions to improve economic modelling of climate change are proposed:

  • Use recent empirical studies to inform modelling choices for the climate damage function
  • Inclusion of predictive outputs on the occurrence of extreme events in macroeconomic models (both in short and long-term run).
  • Studies that account for both the effects of gradual climate change and extreme events are currently missing

As noted by the author, there is strong potential to design a modelling framework that takes complex global linkages into account and projects near-future climate damage. There is also scope for the construction and calibration of disaggregated multi-sector economic models that include more detailed descriptions of climate changed induced damage. By monitoring and tracking current climate impacts in their activities, financial institutions will be able to improve the calibration of these models and tailor them to their internal use.

Finally, it is important to take climate policy into account when conducting economic modelling of climate risks, as climate policy should not be seen in isolation and it feeds back into the climate system. Rather, it should be considered an integral part of the broader policy agenda to promote economic growth.

To access the full document click here.

Other sources cited in this article:

  • Deryugina T. and S. M. Hsiang (2014) ‘Does the environment still matter? Daily temperature and income in the United States,’ NBER Working Paper 20750.
  • Graff Zivin, J. and M. J. Neidell (2014) ‘Temperature and the Allocation of Time: Implications for Climate Change,’ Journal of Labor Economics, 32(1):1–26.
  • Pindyck R. S. (2013) ‘Climate Change Policy: What Do the Models Tell Us?’ Journal of Economic Literature, 51(3):860–872.
Cover photo by Vlad Busuioc on Unsplash
EU lawmakers move toward regulations facilitating a sustainable finance system – Part 2

EU lawmakers move toward regulations facilitating a sustainable finance system – Part 2

By Robin Hamaker-Taylor

European legislative institutions are making important progress toward facilitating a European financial system that supports the EU’s climate and sustainable development agenda. This is the second of a two-part series that reviews the legislative proposals, actions, and reports made by the European Commission, Council and Parliament in their efforts to facilitate a sustainable finance system. This article narrows focus to the progress made by the European Parliament (EP) and Council whereas the first part of the series covered the European Commission’s activities.

The EP has sent a clear signal to the finance sector and other stakeholders that it supports the Commission’s efforts in developing legislation on sustainable finance.In May 2018, following the release of the Commission’s Action Plan on Sustainable Investment, the EP passed a resolution on sustainable finance. The resolution emphasises the vital role of financial markets in the transition to a sustainable economy and the need for a policy framework to encourage investments into sustainable assets. The resolution passed easily with 455 votes to 87, (with 92 abstentions), indicating that Members of the European Parliament strongly back plans to align EU capital markets to long-term sustainable goals.

Sustainability taxonomy

As discussed in Part 1 of this series, one of the main activities the Commission is focusing on is the establishment of a standardised sustainability taxonomy. The EP is currently also actively considering this legislative proposal. As it stands, the EP’s Committee on Economic and Monetary Affairs (ECON) and the Committee on the Environment, Public Health and Food Safety (ENVI) have issued a draft report on the sustainability taxonomy in November 2018. Amendments have been tabled and the wider EP will now consider the proposed regulation during its plenary session to be held from 25 to 28 March. Review in the European Council is happening in parallel and is ongoing, though very little information has thus far reached the public eye. This taxonomy will help in the governance of financial markets by building familiarity and consistency around climate-related investments.

Regulation on disclosures

The EP’s ECON committee is also reviewing regulation on sustainable investment and sustainability risk disclosures, which could have implications for financial institutions involved in pension investing as it could require additional disclosures. The legislative proposal centres around amending Directive (EU) 2016/2341 on the activities and supervision of institutions for occupational retirement provision, also known as IORP II. While the current Directive requires investment firms and insurance intermediaries providing advice to act in the best interest of their clients, there is no requirement for these entities to explicitly consider environmental, social, or governance (ESG) risks in their advice nor to disclose those considerations.

The proposed regulation introduces additional requirements to existing elements of Directive 2016/2341 including:

  • A dedicated and coherent disclosure framework on the integration of ESG risks;
  • Such framework should be used by financial intermediaries both in investment decision-making or advisory processes;
  • End-investors should receive coherent and comparable disclosures on financial product and services relating to sustainable investments and sustainability risks.

In autumn 2018, a draft report was released, and amendments were tabled within the ECON Committee. The ENVI Committee have provided its opinion and the ECON committee voted to enter into interinstitutional negotiations (trilogue) in November 2018. Trilogues between the European Commission, Council, and Parliament are ongoing. The wider EP will consider the proposed regulation during its plenary session, to be held from 15 to 18 April. In the Council, in December 2018, EU ambassadors agreed the Council’s negotiating mandate on the Commission’s proposal.

Tracking the progress and next steps

The wider EP will now begin the review of proposed regulations and amendments relating to both the sustainability taxonomy and disclosure of sustainability risks in spring 2019. The EP’s consideration of regulations relating to the sustainability taxonomy have been assigned procedure number 2018/0178(COD), and regulations relating to sustainability disclosures is procedure number 2018/0179(COD). The full status of both procedures can be checked on the EP’s Legislative Observatory system.

At the time of writing, only the regulations relating to disclosure have entered trilogue. While European regulations are still unfolding, the manner and speed with which lawmakers are considering climate and sustainability disclosures provide a strong signal to financial institutions. Those who are aware of and actively preparing for future legislation in this space may be well placed when regulations drop. Getting to grips with the voluntary TCFD recommendations could be a useful place to start internal discussions and capacity building ahead of more formal regulations.

Acclimatise will be keeping a close eye on how this regulation progresses at the EU level and we will continue to reflect on its implications for financial institutions in Europe. Members of our team are actively engaged in providing technical expertise to the European Commission’s Technical Expert Group, which is developing a framework for the sustainability taxonomy.

Cover photo by Diliff/Wikimedia Commons (CC BY-SA 3.0): The Hemicycle of the European Parliament in Strasbourg during a plenary session in 2014.
Acclimatise selected to provide expertise to the EU TEG

Acclimatise selected to provide expertise to the EU TEG

By Robin Hamaker-Taylor

 As highlighted in a recent article, the European Commission is moving forward with their Action Plan for Financing Sustainable Growth. Now, Acclimatise have been selected as part of a group of experts that will advise the Commission’s Technical Expert Group (TEG).

Specifically, Acclimatise will provide technical input to the development of criteria which will help identify economic activities expected to make a substantial contribution to climate change adaptation objectives of the European Union. Co-founders of the company John Firth and Dr Richenda Connell will focus on providing input to the adaptation sub-group working on identifying financial services and insurance sector activities. The sub-group is co-chaired by experts from the European Bank for Reconstruction and Development and German development bank KfW.

Additional sectors that are also included for the development of adaptation-specific criteria are agriculture and forestry, information and communications technology (ICT), professional, scientific and technical activities and water supply, sewerage, waste management and remediation activities. These have been selected as they are among the most vulnerable sectors to the negative effects of climate change, and enable to test the adaptation taxonomy approach in natural resources, asset- and service-based sectors.

This input will contribute to the establishment of the EU classification system, known as the sustainability taxonomy, which will be used in the future to determine whether an economic activity is environmentally sustainable. In addition to establishing the sustainability taxonomy, the European Commission set up the TEG to assist it in developing the following:

  • an EU Green Bond Standard;
  • benchmarks for low-carbon investment strategies; and
  • guidance to improve corporate disclosure of climate-related information, including resilience.

The TEG commenced its work in July 2018. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies work both through formal plenaries and sub-group meetings for each work stream. The TEG will operate until June 2019, with a possible extension until year-end 2019. Acclimatise’s input into the adaptation elements of the sustainability taxonomy will carry on throughout spring 2019.

The full list of selected experts can now be found on the European Commission’s website for Sustainable Finance and is accessible via this link.

Cover photo by David Bruyndonckx on Unsplash.