Category: Financial Services

Acclimatise responds to Bank of England 2021 climate stress test consultation – read our full response here
Acclimatise News

Acclimatise responds to Bank of England 2021 climate stress test consultation – read our full response here

By Robin Hamaker-Taylor

In December 2019, the Bank of England published a discussion paper which sets out its proposed framework for the 2021 Biennial Exploratory Scenario (‘BES’) exercise. The 2021 BES aims to test the resilience of the largest banks and insurers to the physical and transition risks associated with different possible climate scenarios, and the financial system’s exposure more broadly to climate-related risk. The Bank opened up consultation on the design of the exercise and sought feedback on the feasibility and the robustness of its proposals by 18 March 2020. 

Acclimatise has responded to the BES 2021 discussion paper and is delighted to see the Bank of England progress its oversight and management of climate risks in the UK banking and insurance sector. We are publishing our responses here for the benefit of our clients and those in the financial service sector. In our response, we draw on our extensive experience in the management of physical climate risks in the real economy and with financial institutions, to provide the Bank of England with feedback which we hope can shape the final 2021 BES.

Read our full response to the Bank of England’s 2021 BES here

When will the Bank of England climate stress test be released?

The final BES framework is due to be published in the second half of 2020 with the results of the exercise published in 2021. In light of the COVID-19 pandemic, the Bank of England announced on 20th March that it is taking stock of the responses as well as the evolving situation regarding the pandemic. It is not yet clear if the Bank will postpone the BES 2021, however, and the Bank stated it will announce the way forward for this exercise this summer.

Acclimatise develops methods to make the links between the physical climate risk evidence base and banks’ credit risk models

The Bank of England’s climate stress test comes on the back of similar moves from other countries – France announced similar plans in late 2019. Apart from regulators taking action, the financial sector themselves have responded to the climate crisis by beginning to grapple with its climate risk exposure. In 2017-18, sixteen leading banks, UN Environment Finance Initiative (UNEP FI) and Acclimatise, published new methodologies that help banks understand how the physical risks and opportunities of a changing climate might affect their loan portfolios.

The methodologies, published in the report “Navigating a new climate”, were piloted across three climate-sensitive industry sectors: agriculture, energy and real estate. Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics – Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.

An extension of this work began in 2019 – Phase II – which now involves 36 commercial and development banks. Acclimatise are working with banks in Phase II to coordinate and provide training on physical risk methodologies, including modules on hazard data, heatmapping, analytical tools, opportunities, and correlation analysis. A final report summarising the universe of tools and methods available to banks will be available later in summer 2020.

To discuss any of our responses or our physical climate risk analysis services for banks and insurers, please contact Robin Hamaker-Taylor: r.hamaker-taylor(at)acclimatise.uk.com

Cover photo by Images George Rex on Flickr.
Building climate resilience in Honduras: an investment opportunity
Acclimatise News

Building climate resilience in Honduras: an investment opportunity

By Laura Canevari

A new initiative has been established by IDB Invest, in partnership with the Asociación Hondureña de Instituciones Bancarias (AHIBA) and with support of Acclimatise. The initiative will help the banking sector in Honduras identify and appraise opportunities for investment that can help build climate resilience at high-risk sectors. The project has developed an approach that allows banks to evaluate the business opportunities associated with climate-resilient/adaptation financing, building on an understanding of climate risks, and which helps link their management response to physical climate risks with the development of new services.

In this article, we explore the preliminary findings of this project and reflect on what banks in Honduras can do to support resilience building in their country.

The business case for companies in sectors most affected by climate change

Honduras ranks as one of the countries at highest risk from climate change globally and is the most threatened within Central America, according to Germanwatch. Increase in temperatures and the intensity and frequency of droughts threaten the availability of adequate water supplies for sectors such as agriculture and hydroelectric generation, as well as for human consumption. Droughts in particular have become a recurrent hazard, especially along central and western parts of the country (part of “El Corredor Seco”). Higher temperatures and droughts also intensify the incidence of plagues and diseases, reducing the quality and volume of agricultural output and increasing the price of agro-processing supplies. In mountainous areas, for example, they have led to the propagation of “la roya” (or coffee leaf rust), menacing crops, and threatening more than 96,000 small coffee producers and a million workers, according to USDA Foreign Agricultural Service.

Extreme weather events, although less common than incremental changes such as increased temperatures, have also left their footmark in the country. The effects of Hurricane Mitch in 1998, for example, are still strongly recalled by local stakeholders – Honduras was devastated as the hurricane caused over 15,000 deaths and over 1 million people to become homeless. Industries, real estate and services (e.g. tourism, coastal infrastructure) are particularly at threat from the effects of extreme weather events, which can cause supply chain disruptions, damages to infrastructure, and increase maintenance and operational costs.

In order to increase their resilience and mitigate climate impacts, businesses in Honduras will need to take meaningful action. This means investing in products and services that help countering or reducing their vulnerability to climate hazards. If they fail to do so, they could experience significant changes in their cash flows, particularly as a result of a reduction in their earnings, due to lower productivity, a decrease in assets’ value (due to their higher exposure to climate hazards), and an increase in the cost of production. In addition, businesses may also experience greater (and unforeseen) capital expenditure and operating expenses.

The business case for financial institutions

If businesses fail to adapt, they could see a reduction in their creditworthiness, generating credit and liquidity risks for financial institutions. Thus, the reasons for Honduran banks to promote investments in resilient solutions are two-fold. First, investments in resilient solutions offers an opportunity for banks to extend their operations into new markets through the provision of financing products that help businesses invest in resilient solutions. Second, by helping businesses (their clients) adapt, banks also mitigate and reduce climate risks in their own portfolios, reducing the probability of default from businesses in at high-risk sectors.

As part of the IDB Invest project, a team from Acclimatise visited Honduras at the end of February (2020), to better understand the investment outlook for products and services that help businesses in at high risk sectors build their resilience. In order to identify sectors at highest risk, the team first carried out a high-level climate risk assessment using Aware for Projects, our in-house climate risk screening tool, using an aggregate commercial portfolio of credit loans in Honduras. Highest climate risk scores were found in Agriculture, Silviculture, Livestock, Fishing, Services and Transportation and Communication sectors. In addition to these sectors, industries and real estate were also identified as potentially at risk, due to their relevance and weight in the credit portfolio.

Building on this evaluation, the team developed a preliminary list of potential adaptation investments in sectors most at risk. This was followed by a series of consultations with technology providers, financial institutions and government agencies in order to assess the resilient investment opportunities available in the country that could help mitigate climate risks in these sectors. In addition, with the support of IDB Invest and AHIBA, the team organised a workshop for banks in Tegucigalpa, to raise awareness on the business opportunities and build the knowledge required to originate and place climate-resilient credits. During the event, banks were introduced to the risk-based approach proposed by the team for the identification of resilient solutions, helping them to reflect on the importance of incorporating climate considerations into governance and risk management processes. In addition, the event was also an opportunity to discuss key barriers and enablers affecting the development of financial products to support resilient investments.

A key finding from these consultations has been the strong signal from technology providers, who have experienced a significant increase in the demand for their resilient products and services, within sectors already experiencing the effects of climate change and also those affected by the steady increase in energy prices. Some of the technologies that could help actors in at high-risk sectors adapt are already available in Honduras and are being disseminated within Central America in response to food and energy security concerns. These include, for example: drip irrigation; solar pumping; climate tolerant seeds; greenhouses; energy efficient technologies; solar photovoltaic and solar thermal. According to some providers these technologies are already proving successful and profitable. Many businesses have in fact experienced a reduction in production costs driven for example by energy efficiency measures that reduce their energy bill. In addition, providers are also experiencing an increase in the demand for their products and services, which is most notably driven by the steady increase in energy prices, but also caused by changes in climate – in particular the increase in water scarcity in several parts of the country.

These technologies are not entirely new to banks in Honduras. As noted by the workshop participants, banks in Honduras have already started financing these types of products. But the interesting fact is that their perception of the demand for these investments has not led to the development of strategies to promote their uptake. In other words, whilst providers are seeing a steady increase for the demand of their products, the banks are yet to perceive the demand as worthy of a strategic response. And yet, it is clear that, as climate change impacts become more evident, the demand for resilient solutions is likely to increase. This offers an opportunity for banks to be more proactive and define what can they do to help clients become more climate resilient, and to reduce their own risk as well. The more prepared their clients are, the higher their creditworthiness and the lower the likelihood of climate impacts being transferred from clients to banks.

How can the banking sector in Honduras respond?

In order to reduce financial risks stemming from climate change impacts and to take advantage of emerging opportunities, financial institutions in Honduras must first understand which sectors are most at risk and how their clients’ operating in these sectors are affected by climate change and its effects on their cashflows. This is the first and soundest step to take in order to identify the type of services and products that clients need in order to increase their own climate resilience.

Building awareness inside the banks about climate solutions offered in the market is therefore important. In most cases, bank officers are unaware of the risks posed by climate change to their clients (and to the bank), and of the type of innovations that clients could embrace to reduce these risks. Equally, sensitising banks’ costumers about the need to respond to climate threats is needed. The business case of resilient solutions is well evidenced across a number of the existing technologies, but lack of familiarity with these products and lack of government support can make businesses reluctant to invest in resilient products.

To build greater awareness on the business opportunities stemming from resilient investments, banks, AHIBA and IDB Invest can foster partnerships with other key players such as technology providers and universities, in order to better disseminate information on climate risks and resilience needs across different sectors. These actors can also work together in order to support the uptake of resilient investments by generating greater access to technical assistance.

Challenges to support the expansion of resilient investments still remain. In particular, it is still difficult for many actors in the country to comply with loan requirements, especially for small and medium enterprises. Therefore, banks could explore financial products and credit conditions that can align with SMEs capacities and that reflect the performance curves of the technologies financed (e.g. considering grace periods during the installation of equipment or supporting providers in the provision of payment plans). In addition, adequate government support – through higher normativity, legal incentives and tax exemptions for the import and acquisition of resilient technologies– is very needed, in order to build an enabling environment that favours early action.

Our initial assessment has helped build the evidence of the business opportunities stemming from climate risks facing Honduran banks. These banks should embrace these opportunities in order to develop a more strategic approach to management of climate risks, and step into the role that financing has in helping build the resilience of the country. More importantly, the initial assessment is helping banks to understand that the identification and characterisation of resilient investment opportunities ought to be integrated into a wider framework that supports climate change risk management inside the banks. We foresee future exchanges with the banks and providers will help building a clearer view of the roadmap banks should follow to provide better access to finance and information on resilient solutions in Honduras.

European Commission opens consultation on changes to directive relating to climate and other disclosures
Acclimatise News

European Commission opens consultation on changes to directive relating to climate and other disclosures

By Robin Hamaker-Taylor

The European Commission has issued a public consultation on revisions to the Non-Financial Reporting Directive (NFRD) in February, 2020. In its 11 December 2019 Communication on the European Green Deal, the Commission committed to review the non-financial reporting directive in 2020 as part of the strategy to strengthen the foundations for sustainable investment. The Commission is answering global calls for changes to how non-financial risks are disclosed, and would like companies and financial institutions to improve their disclosure of non-financial information.

What is the NFRD?

The NFRD (EU Directive 2014/95) requires large firms with over 500 employees (listed companies, banks, and insurance companies) to publish regular reports on the social and environmental impacts of their activities. Specifically, the NFRD requires companies to disclose information  on  environmental,  social  and  employee  matters,  respect  for  human  rights,  and bribery and corruption, to the extent that such information is necessary for an understanding of the company’s development, performance, position and impact of its activities.

Climate-related information can be considered to fall into the category of environmental matters.

New guidelines on Non-Financial Reporting as it relates to climate disclosures

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 updated the Non-Binding Guidelines on Non-Financial Reporting in June 2019.

The new guidelines on reporting climate-related information, reflect and integrate the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board (FSB). Acclimatise responded to the Commission’s consultation document in March 2019, available here.

How to provide feedback to the proposed revisions to the NFRD?

The Commission is accepting feedback via an online questionnaire, available here, and this will be open until 14 May, 2020.

Cover photo Sara Kurfeß on Unsplash
Climate risk disclosure regulation continues to advance in the UK as new guidance for pension trustees released
Acclimatise News

Climate risk disclosure regulation continues to advance in the UK as new guidance for pension trustees released

By Robin Hamaker-Taylor

On the 12th of March, a new draft guidance for pension trustees with aims to help trustees assess, manage and report climate-related risks was released by the Pensions Climate Risk Industry Group (PCRIG). The PCRIG was set up by the UK Pensions Regulator and the Department for Work and Pensions (DWP) with guidance compiled to help trustees meet upcoming legal obligations under a bill tabled in February this year, as recently reported by Acclimatise. In February, DWP tabled an amendment to the Pension Schemes Bill which will allow it to require climate risk disclosures. Disclosures are expected to begin by 2022.

The guidance includes the following main elements:

Part 1 of the guidance introduces climate risk as a financial risk to pension schemes, trustees’ legal requirements and the TCFD recommendations;

Part 2 sets out a suggested approach for the integration and disclosure of climate risk within the typical governance and decision-making processes of pension trustee boards, including defining investment beliefs, setting investment strategy, manager selection, and monitoring;

Part 3 of the guide contains technical details on recommended scenario analysis and metrics that trustees may wish to consider using to record and report their finding.

The non-statutory draft guidance for pension trustees is open for consultation until the 7th of May this year. An online survey, organised by the DWP, is available here. The full text of the guidance document and a guide summary guide are available here.

Regulation on climate risk disclosure is advancing in other regulatory bodies in the UK this month.  On 6th March, the Financial Conduct Authority (FCA) published proposals outlining new climate-related disclosure requirements for premium listed issuers. As the FCA states, ‘The new rule will require all commercial companies with a premium listing to either make climate related disclosures consistent with the approach set out by the Taskforce on Climate-related Financial Disclosures (TCFD)or explain why not. The FCA will consider consulting on extending this rule to a wider scope of issuers.’

Acclimatise have partnered with IIGCC and Chronos Sustainability to develop guidance for institutional investors on how they can integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes. The guidance, titled ‘Understanding Physical Risks,’ will be launched in mid-April 2020. Acclimatise will lead a webinar to launch the guidance so make sure to stay tuned for more details.

Coverphoto by Sergiy Voronov on Unsplash
Private sector finance will play a key role at COP26
Acclimatise News

Private sector finance will play a key role at COP26

By Georgina Wade

The COP26 private finance agenda was unveiled at an event in London last week.  Mark Carney, who will step down as governor of the Bank of England next month to focus on his roles as UN special envoy for climate action and finance and the Prime Minister’s Finance Adviser for COP 26 unveiled the agenda. The event also shared a moving preview of Sir David Attenborough’s new film, a keynote from European Central Bank President Madame Christine Lagarde. Acclimatise Chief Technical Officer, Dr Richenda Connell, attended the event.

In his speech, Carney revealed that the objective for the private finance work for COP26, which will unfold in Scotland in November, was to “ensure that every financial decision take climate change into account”. Carney further explained that actions would be needed by regulators and government to catalyse the private financial sector’s efforts, calling on the private finance sector to “help refine and implement” disclosure based on the Task Force on Climate-related Disclosures (TCFD) framework.

Additionally, Carney mentioned a focus on the three Rs – reporting, risk management and return – in an effort to help unlock the private financial flows that are vital to the transition. Whereas increasing the quantity and quality of reporting is essential to driving a whole economy transition, stress tests allow banks to understand which of their borrowers are ready for the transition to a green economy, and which ones will struggle. Following suite, returns enable investors to make informed decisions on whether companies and portfolios are transition ready.

The UK-Italy COP26 presidency would be building on existing work and networks to build a large coalition of asset owners and managers who expect their portfolio companies to become net-zero aligned. Examples of such networks include the Net Zero Asset Owner Alliance, Climate Action 100+, and the Principles for Responsible Investment (PRI).

The event was generally well-received with some labelling it as a clear call to action for the finance industry. The event is perhaps the first time a COP host government has fully recognised the critical role finance has to play in climate action, and sought to prioritise its contribution. While Carney’s speech and associated strategy overview document lay out some steps to move forward, the clock is ticking. Private finance may have gotten its very own COP26 agenda in driving a whole economy transition, but there is still plenty of work to be done on the road to Glasgow.

Cover photo taken by Dr Richenda Connell.
The EU sets a milestone on sustainable and green finance
Acclimatise News

The EU sets a milestone on sustainable and green finance

By Laura Canevari

On 18th December 2019 the European Council and the European Parliament reached a political agreement on the new Taxonomy Regulation. Soon to become a mandatory reference for sustainable finance products, this landmark regulation sets the first common “green” finance classification system in Europe – and the world.

To class as “environmentally sustainable”, this wide complex system has defined six objectives for economic activities, namely:

1)   Climate Change Mitigation

2)   Climate Change Adaptation

3)   Sustainable Use and Protection of Water and Marine Resources

4)   Transition to a Circular Economy

5)   Pollution Prevention and Control

6)   Protection and Restoration of Biodiversity and Ecosystems

To qualify as green, activities must also:

  • provide a substantial contribution to at least one of the six environmental objectives above,
  • cause “No significant harm” to any of the other environmental objectives,
  • comply with robust and science-based technical screening criteria, and
  • comply with minimum social and governance safeguards

In alignment with the Commission’s Action Plan on Sustainable Finance, the Taxonomy highlights the commitment of the EU towards sustainable finance. Moreover, it is designed to guide investors on what “green financing” means, overcoming barriers such as fragmentation in green investment practices, as well as “greenwashing” (whereby an investment is labelled as “green” when truly it is not).

What’s in the Taxonomy?

The Taxonomy is supported by the work of the Technical Working Group on Sustainable Finance (TEG). Up until now, the group has established technical criteria for 67 activities contributing to climate mitigation, and a methodology for evaluating contributions to adaptation, as well as guidance and case studies for investors. It now has the responsibility to develop delegate acts, through which the Taxonomy is expected to be further developed, and to provide its final recommendations to the European Commission next month.

Although the final list of criteria is still in draft form, once released it will substantially affect financial flows, investments and asset allocation. What remains certain is that nuclear nor gas investments will be labelled as “green”.

What are the implications to companies and financial institutions?

All EU-listed companies with over 500 employees will have to disclose how much of their revenue and capital expenditure aligns with green or environmentally sustainable activities.  A number of funds and pension products, as defined in the regulation, will need to disclose how and to what extent their underlying investments support economic activities that meet the Taxonomy Regulation. Member States and the European Union will need to implement the Taxonomy where financial products or corporate bonds are labelled as environmentally sustainable. In addition, future European labelled sustainable financial products, such as the European Green Bond Standard or the Ecolabel for Financial Products, are respectively expected to be totally and partially aligned with the Taxonomy.

According to Pascal Canfin (French MEP leading the European Parliament’s environment Committee), the Taxonomy is ultimately expected to become “the EU standard for investment managers and clients”. This means that any business claiming to undertake environmentally sustainable activities will need to account for the criteria in the Taxonomy.

Banks such as the European Investment Bank and the European Central Bank have already expressed the usefulness of this system. However, is still unclear how other financial actors (e.g. rating agencies) will embrace it.

What’s next?

The delegated act pertaining to the first two climate-related objectives (i.e. mitigation and adaptation) should be adopted by the Commission by the 31 of December 2020 and will apply from 31 December 2021. In addition, delegated acts for the other four objectives will be adopted by 31 of December 2021 and will apply from 31 December 2021.

Cover photo by Hafiz Issadeen, Climate Visuals CC by 2.0
UK Government to make climate disclosure mandatory for pension schemes
Acclimatise News

UK Government to make climate disclosure mandatory for pension schemes

By Will Bugler

The UK government has today put forward new reforms that would force large pensions schemes to show exactly how they are managing the risks of climate change. The Department for Work and Pensions tabled an amendment to the Pension Schemes Bill today to mandate for disclosure against the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure.

The decision will add more impetus to the efforts of the financial services sector to understand and manage its climate risk exposure. “Financial institutions must take responsibility for their impact on the planet and the money they manage on our behalf, so we’re delighted that the UK government is taking steps to implement TCFD on a mandatory basis.” said Fergus Moffatt, head of UK policy at ShareAction a UK charity that campaigns for responsible investing. “The level of disclosure required under these laws will make it plain to see which pension schemes are really walking the talk on tackling the climate crisis and the risks it poses to our savings. As the UK hosts COP26 this year, all eyes will be on the current government to ensure this ambition reaches all areas of finance.”

The UK’s largest 25 pension schemes have over £560 billion invested. In 2018 the Environmental Audit Committee published responses it received from the UK’s 25 largest pension funds detailing the funds’ approach to climate change risk and whether it is – or is not – incorporated into their investment decision-making. 12 of the 25 schemes were listed as “more engaged” meaning that they are taking steps to assess and minimise their exposure to the physical and transition risks posed by climate change. Pension funds in this group support TCFD and most have committed to – or are considering – reporting in line with recommendations on climate-related financial disclosures.

However, 12 schemes also said that they had “no plans” to report against the TCFD recommendations. Today’s announcement will mean that all funds will have to engage with climate risk and work to understand their exposure. Acclimatise has been working closely with banks and other corporates in the financial services sector to develop tools and methodologies to assess physical climate risk to investments and loan portfolios.

The announcement will have implications for the entire financial services sector, showing a willingness from the government to take action if engagement on climate change is perceived to be lagging. It also sends a clear signal to corporates in other sectors, that investors will be expecting them to be able to report to them on their climate risk exposure, with loans and credit ratings likely to become contingent on taking action to manage climate risks.

Acclimatise have partnered with IIGCC and Chronos Sustainability to develop guidance for institutional investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes. The guidance, titled ‘Understanding Physical Risks,’ will be launched in mid-March 2020. Acclimatise will lead a webinar to launch the guidance, stay tuned for more details.

Cover photo by Yulia Chinato on Unsplash
The IIF/EBF Global Climate Finance Survey find that the demand for climate data services and sustainable products is on the rise, but challenges remain
Acclimatise News

The IIF/EBF Global Climate Finance Survey find that the demand for climate data services and sustainable products is on the rise, but challenges remain

By Laura Canevari

A recent survey conducted by the Institute of International Finance (IIF) and the European Banking Federation (EBF) finds that the demand for climate services and sustainable products is on the rise, but the need to improve risk management processes and streamlining disclosure frameworks remains. 

70 member firms representing nearly $40trillion in assets responded to the survey. 29% claim that they are already aligned with the TCFD Recommendations and another 30% believe that they are aligning, but only partially. Firms that have not aligned but plan to (30%), or that have not started to consider it (10%), highlighted a number of challenges including a lack of data available, a lack of regulatory guidance and the lack of streamlined and standardised processes to report climate related financial data. Whilst over 45% of participants acknowledge that their risk management process includes procedures to identify and assess climate related risks and opportunities, only 17% believe they have fully integrated these procedures into the overall risk management framework.

In terms of sustainability instruments and products, 90% of respondents believe that client demand will increase and that demand will be more pronounced in Europe, followed by other mature markets. Over 65% believe that current regulatory initiatives, in particular the EU Action Plan for Financing Sustainable Growth (followed by the TCFD and NGFS workstreams), are having a material impact on the market environment for sustainable finance. More than half of the financial firms surveyed are issuing their own sustainable instruments, in particular green bonds (75%) and green loans (65%). Yet, nearly 70% of the respondents believe there is currently a relative lack of sustainable products.

Landscape fragmentation is a source of concern for respondents. In fact, many raised their apprehension over the increasing number of initiatives with similar or overlapping goals or disclosure processes, as well as the limited usage of metrics and targets to assess climate risks and opportunities, and the lack of standardised practices for the development of sustainable finance products.

The results, therefore, highlight a rising need for collaboration among stakeholders. 70% of the organisations surveyed said that they would be interested in collaborating through the IIF Sustainable Finance Working Group, particularly on the development of an open-source framework for assessing climate finance risks at the client level. It’s too early to know what this framework might look like. But having a shared understanding of disclosure information requirements and standardised procedures to mainstream climate risk management will certainly help secure greater buy-in from firms that currently remain hesitant and doubtful about what steps to take, and will help to promote transparency and collective action for sustainable finance.

Cover photo byBrian (Ziggy) Liloia (CC BY-NC 2.0)

Major UK pension fund tells asset managers “reduce climate risk exposure or face sack”
Acclimatise News

Major UK pension fund tells asset managers “reduce climate risk exposure or face sack”

By Will Bugler

Brunel Pension Partnership, one of Britain’s biggest pension fund managers, has told its 130 asset managers that they have two years to reduce their exposure to climate risk, or the scheme will withdraw its investment. The bold announcement coming during the Davos summit, signals continued momentum in the financial sector to understand and manage climate risk.

Policymakers including outgoing Bank of England Governor Mark Carney are pushing investors to do more to ensure they reduce the exposure of their investment portfolios to climate risk. Brunel Pension Partnership, a scheme that manages over £30 bn, for over 700,000 members, also threatened to vote against directors at companies it invests in, if they do not demonstrate significant progress on managing climate risk by 2022.

In the pension fund’s first ever climate policy document, it said that “climate change presents an immediate systemic and material risk to the ecological, societal and financial stability of every economy and country on the planet,” adding that it is a “strategic investment priority for us.”  

“Climate change is a rapidly escalating investment issue,” said Mark Mansley, chief investment officer at Brunel. “We found that the finance sector is part of the problem, when it could and should be part of the solution for addressing climate change. How the sector prices assets, manages risk and benchmarks performance all need to be challenged.”

Investors, asset managers, banks and others in the financial services industry continue to look for ways to measure climate risk to their portfolios. Acclimatise has been especially active in this area helping to create tools and methods to help the sector align with the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure.

Cover Photo by Marc Ruaix on Unsplash
2019 picks from the Acclimatise article archive – Financial Services
Acclimatise News

2019 picks from the Acclimatise article archive – Financial Services

The start of a new year is a time for setting new resolutions for the year ahead, whilst giving consideration to moments that shaped us over the past year. With that spirit of reflection in mind, we sifted through our network’s article archive and selected some of our favourites from the past year. We’ve sorted our favourite articles by topic, to make up a six-part series throughout the month of January.

We kick off with six articles related to climate adaptation for the financial services sector. 2019 was another important year of progress with momentum continuing to grow behind the recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD). The noises from central banks including Bank of England Governor, Mark Carney, indicate that they are prepared to take further action, if banks and investors are perceived to be dragging their heals on the issue. The Bank of England and the French financial regulator have both indicated that they will begin climate stress testing of banks this year.

In the meantime, there remains a need for more standardisation of approaches for climate risk disclosure in the industry. Acclimatise continues to work with leading banks and investors to develop methodologies to help them understand, measure and manage the physical climate risks to their loan portfolios and investments.

Advancing climate-related financial risk discourse in the financial sector

By Laura Canevari

The financial sector must play a fundamental role in the transition to a low carbon and climate-resilient future. To do this, there is a need for a systemic shift in the way the financial system operates and in the way investment decisions are made. Through the release of the TCFD Recommendations in 2017, financial institutions, along with corporates, have been given a robust compass with which to navigate climate disclosures.

Read the full article here.

Bank of the England plans to test climate resilience of UK banks

By Acclimatise news

Mark Carney, governor of the Bank of England, said the central bank has plans to include the impact of climate change in its UK bank stress tests. Since 2017, the Bank of England assesses on a yearly basis how well the UK’s biggest lenders could withstand a shock without needing a bailout from taxpayers. This announcement comes after a survey completed by the Bank of England in 2018 showed that only 10% of banks were considering their long-term climate change risks.

Read the full article here.

Climate change adaptation is the “biggest investment opportunity of this generation,” says new UNEP FI report

By Will Bugler

In September 2019, the UNEP Finance Initiative launched a technical background paper on adaptation finance, identifying barriers and opportunities for scaling up financing for climate change adaptation and resilience building. The paper, ‘Driving Finance Today for the Climate Resilient Society of Tomorrow’ refers to adaptation as “the biggest investment opportunity of this generation’.

Read the full article here.

Investor portfolios failing to account for climate risk says BlackRock

By Acclimatise News

A report by the BlackRock Institute accuses investors of under-pricing the impact of climate-related risks and advises a restructuring of assessments of asset vulnerabilities. The report, ‘Getting physical: Scenario analysis for assessing climate risk’ marks an important next step.

Read the full article here.

Climate poses direct risk to real estate investment says ULI report

By Will Bugler

In a recent published just last year, 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 disclosure.

Read the full article here.

COP 25 signals public and private sectors coming together to green the financial system

By Caroline Fouvet

Multiple side events involving green finance emerged at the 2019 UNFCCC climate negotiations this past year. One common thread was the importance of collaboration between public sector-led efforts and financial institutions’ (FIs) initiatives to build a sustainable low-carbon and climate resilient financial system.

Read the full article here.