The Australian Council of Superannuation Investors (ASCI)
published a report on the status of climate reporting among ASX200 companies*
in late September 2020. The ASCI is comprised of 37 Australian and
international asset owners and institutional investors who collectively own around
10 per cent of every ASX200 company. To develop a picture of how these
corporates are taking climate action and disclosing, the ASCI analysed all
publicly available documents produced by ASX200 entities (as of 31 March 2020).
This includes Annual Reports, Sustainability Reports, standalone TCFD Reports,
company websites and ASX announcements.
The report indicates that there has been a surge in
disclosure against the Task Force on Climate-related Financial Disclosures
(TCFD) recommendations. In 2017, just 11 companies disclosing against the TCFD
framework, which has grown to 60 ASX200 companies by 2019. A further 14
companies have also committed to disclose against the recommendations.
The research also shows that there has been an increase in the action on climate transition risks. For example, there has been increased adoption of net-zero emissions commitments, as net-zero commitments have emerged as the latest strategic front in managing climate change exposures, according to the ASCI. The research also shows that science-based targets are gaining traction.
While the report generally showcases increased action in
relation to transition climate risks, it also flags how firms are taking action
in relation to physical climate risk. ASX200 companies are starting to disclose
physical climate risks in a meaningful way, though at present just 10 firms
were identified in this category, including a variety of corporates, ranging
from commercial banks to natural resources and oil & gas companies. ASCI’s
research shows that physical risk analysis and disclosure is still in early
stages. As it stands, quantification of the financial impacts of physical
climate risks and necessary capital expenditures for climate adaptation are not
yet disclosed by ASX200 companies.
Corporates in Australia and beyond can look to this report
to understand how large corporates are taking climate action and disclosing
that. The report rightfully points out that investors and other stakeholders
need companies to begin to quantify the potential financial impacts of physical
climate risk or the cost of capital expenditure to build resilience. Whilst the
TCFD recommendations provided a framework for disclosing transition and
physical climate risks and opportunities, they left organisations to develop
their own methodologies and approaches for implementing the disclosure
recommendations. Acclimatise, along with the European Bank for Reconstruction
and Development (EBRD), the Global Centre on Adaptation (GCA), a range of
partners from the financial, corporate and regulatory sector as well as
consultancy firm Four Twenty Seven, developed a set of recommendations on how
institutions can include physical climate risks and opportunities into their
financial and corporate reporting. This is available on the EBRD’s physical climate risk knowledge hub,
accessible by clicking
here.
* The ASX200 is a stock market index listed on the Australian Securities Exchange. It is based on the 200 largest ASX listed stocks, which together account for around 80% of Australia’s sharemarket capitalisation, according to ASX200 List, 2020.
Late
summer 2020 has seen a flurry of activity relating to climate risk disclosure
requirements, frameworks and consultations, with several milestone
announcements and in the last few weeks from Australia, the US, and New Zealand
in particular. We bring these announcements together here, as well as highlight
a UK consultation on climate risk governance and reporting in pension schemes,
closing 7 October 2020.
Australia
On September 14th, a set of guidelines on physical climate risk assessment and disclosure was launched in Australia by The Climate Measurement Standards Initiative (CMSI). The CMSI is an Australian industry-led collaboration established to assist with, and support, climate-related financial disclosures. CMSI involves insurers, banks, scientists, reporting standards professionals, service providers and supporting parties.
The CMSI has recommended financial
disclosure guidelines and developed scientific scenario specifications for the
purpose of disclosure of scenario analyses for climate-related physical damage
to buildings and infrastructure. The open-source guidelines are voluntary, and
provide Australian banks, financial institutions and insurers with robust
scientific and technical information on how to assess the risk of
climate-related damage associated with a set of acute and chronic risks. The
guidelines aim to allow Australian firms to determine their physical risks from
these extreme events in a credible and consistent way, and to disclose physical
risks under the TCFD recommendations. Importantly, this guidance sets out a
potential framework for regulation of climate risks, should regulators decide
to mandate disclosures in Australia.
Involved parties include: QBE, Suncorp, IAG, RACQ, NAB, Westpac, Commonwealth Bank, HSBC Australia, Munich Re, Swiss Re, Leadenhall CP, MinterEllison and Investor Group on Climate Change. The new CMSI guidelines can be downloaded here.
New Zealand
All eyes were
on New Zealand this month as well, when the Government announced plans to make
climate-related financial disclosures mandatory for certain firms, on 15
September. The Cabinet agreed to introduce a mandatory regime through an
amendment to the 2013 Financial Markets Conduct Act. Disclosures would be
required from around 2023, if approved by Parliament, on a ‘comply-or-explain’
basis. At present, around 200 entities in New Zealand would be required to
produce climate-related financial disclosures in line with the TCFD
recommendations:
All registered banks, credit unions, and building societies with total assets of more than $1 billion;
All managers of registered investment schemes with greater than $1 billion in total assets under management;
All licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million;
All equity and debt issuers listed on the NZX; and
Crown financial institutions with greater than $1 billion in total assets under management.
Read more about this announcement on the New Zealand Government website, which provides links to useful climate risk assessment guidance documents, such as those from the IIGCC and UNEP FI.
United
States
There is
emerging evidence that key organisations in the United States are starting to
understand climate risk as a financial risk. Specifically, the US Commodity
Futures Trading Commission (CFTC) released a report on 9 September 2020, entitled:
Managing Climate Risk in the U.S. Financial System. The report, produced
by the Climate-Related Market Risk Subcommittee of the Market Risk Advisory
Committee is the first of-its-kind effort from a US government entity.
The work was instigated by CFTC Commissioner Behnam, and comes after the CFTC announced in 2019 that a climate sub-committee of the Commission on climate risk would be established. Commissioner Benham recognised the global progress toward climate risk supervision, not least by the network of 60+ central banks and supervisors (known as the NGFS) who are sharing best practice on the matter. The US is not yet a member of the NGFS, and though some states, private sector actors and financial institutions have been assessing and disclosing climate risks, the federal government progress on this is sluggish.
The report brings together a set of over 50 recommendations to mitigate the risks to financial markets posed by climate change. Though regulation of climate risk and mandated disclosure is perhaps a ways off in the US, and in many other countries, this landmark report could help pave the way for improved oversight of climate risks, in particular as the report finds that Existing statutes already provide U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now. The full report can be downloaded here.
UK
In late
August, the UK Department for Work and Pensions (DWP) put out a consultation
which seeks views on policy proposals to require
trustees to address climate risks and opportunities. In particular, this would
be for trustees of larger occupational pension schemes and authorised schemes.
It also invites responses on proposals to disclose these in line with the
recommendations of the international industry-led Task Force on Climate-related
Financial Disclosures (TCFD).
It is proposed
that among the activities required would be calculating the ‘carbon footprint’
of pension schemes and assessing how the value of the schemes’ assets or
liabilities would be affected by different temperature rise scenarios,
including the ambitions on limiting the global average temperature rise set out
in the Paris Agreement. The disclosures would be required to be made publicly
available, referenced from the schemes’ Annual reports and Accounts, and
pension savers informed of the availability of the information via their annual
benefit statement.
The consultation closes on 7 October 2020, and more information on responding to the consultation can be found here.
The Adaptation
SME Accelerator Project (ASAP) and The Lightsmith Group released the Adaptation
Solutions Taxonomy, identifying solutions from private companies that
support climate adaptation and resilience on 10 September, 2020. This taxonomy
is the first peer-reviewed set of definitions and eligibility criteria
specifically focused on climate adaptation solutions being offered by private
sector companies.
The ASAP Taxonomy was developed through ASAP, which is supported by the Special Climate Change Fund (SCCF) of the Global Environment Facility, Conservation International, and the Inter-American Development Bank and IDB Lab. It builds upon existing definitions and international standards around climate finance, such as the European Union’s Sustainable Finance Taxonomy, the Intergovernmental Panel on Climate Change, the Task Force on Climate-related Financial Disclosures (TCFD), and the UNFCCC Climate Technology Centre and Network (CTCN) Taxonomy, among others, in order to foster harmonization and uptake. Acclimatise is delighted to have been one of the expert reviewers of the ASAP Taxonomy.
The
Taxonomy is actively being applied to identify hundreds of private companies
across the globe that offer climate adaptation solutions.
“Identifying
companies that can help manage drought, flood, wildfire, supply chain
disruption, disease, and other climate impacts is a critical first step to
building resilience to climate,” added Koh. “Most of these companies do not
call what they do ‘climate change anything’ but if we can find them, we can
invest in and scale up their solutions as the challenge of climate change
grows.”
ASAP recognizes the important role that small and medium-size enterprises (“SMEs”) can play in supporting climate adaptation. SMEs generate at least 45% of employment and as much as 33% of GDP in developing countries. The ASAP Taxonomy offers a systematic approach to identify SMEs that produce technologies, products, and services that support adaptation to climate change (“Adaptation SMEs”) and enables investors and governments to target investment and support.
“The
timing of the new ASAP taxonomy is crucial. With SMEs in developing regions and
especially Latin America and the Caribbean confronting both the economic
fallout of the pandemic and worsening climate impacts, we should take full
advantage of this new taxonomy to support them to continue to capitalize on the
business opportunities to develop solutions for climate adaptation and
resilience,” said Graham Watkins, Climate Change Division Chief of the
Inter-American Development Bank.
The ASAP
Taxonomy specifically focuses on SMEs in developing countries but can be easily
extended to apply to businesses of all sizes, operating in all geographies. The
ASAP Taxonomy is comprised of (i) a definition of an “Adaptation SME”, (ii)
eligibility criteria to determine what types of companies qualify as an
“Adaptation SME”, (iii) classification systems for climate adaptation
solutions, and (iv) a results framework to measure, monitor and report on
climate adaptation- related outcomes.
The ASAP
Taxonomy can be used by investors, funders, companies, and other stakeholders
to:
Identify climate adaptation investments, thereby enabling more accurate tracking and reporting;
Sets out a menu of classification approaches for categorising, tracking, measuring and reporting climate adaptation solutions based on the technology, product, service provided;
Inform companies on how their solutions may support climate adaptation and resilience;
Provide initial guidance on approaches for measuring companies’ contributions to climate adaptation; and;
Create a framework that can be used to align climate adaptation and resilience investment strategies with international standards and definitions.
“The
release of ASAP Taxonomy is an important contribution to increasing private
sector investment in climate change adaptation. Through a common language, the
taxonomy will help classify climate adaptation business solutions and
eventually support investors and SMEs understand market opportunities and track
investments. The taxonomy’s focus on Adaptation SMEs will contribute to climate
resilient and inclusive global economic recovery from the COVID-19 pandemic”,
said Chizuru Aoki, Lead Environmental Specialist and Manager of the Least
Developed Countries Fund and the Special Climate Change Fund.
“The ASAP
Taxonomy is a significant step toward building the case for climate adaptation
as an investment asset class and mobilizing much needed capital flows to
adaptation-focused SMEs,” said Agustin Silvani, Senior Vice President of
Conservation Finance at Conservation International (CI). “Both investors and
businesses will benefit from a better understanding of the scope of climate
adaptation investing. CI congratulates Lightsmith and all involved in the
production of this valuable resource.”
By using
the ASAP taxonomy, investors, funders, companies, governments, and policymakers
can enhance the supply and uptake of climate adaptation solutions globally, and
especially in the places where they are needed most.
The full ASAP Adaptation Solutions Taxonomy can be downloaded here.
8 September 2020 – UN Environment Programme Finance Initiative (UNEP FI) has released a report on physical climate risks and opportunities from Phase II of its Task Force for Climate-related Financial Disclosures (TCFD) Banking Program with climate risk advisory and analytics firm, Acclimatise. The report, “Charting a New Climate”, provides a state-of-the-art blueprint to support financial institutions to navigate the changing physical climate risk landscape.
For banks, investors and financial institutions the COVID-19
pandemic has demonstrated the widespread consequences of systemic, global
risks. As such, the financial sector has continued to recognize the importance
of responding effectively to climate risks and seizing opportunities. More firms than ever
before are disclosing their climate risks and opportunities under the TCFD
framework. At the same time, regulators and investors are demanding greater
transparency on the way climate change will impact future business operations.
The TCFD Phase II banking pilot engaged thirty-nine global financial
institutions on six continents. The program empowered participants to identify,
assess, and manage their climate risks and opportunities. Participating banks
were led through a series of modules designed to expand their physical risk and
opportunities toolkits. Other climate experts were consulted throughout the
program including analytics providers and leading climate scientists.
Phase II of UNEP FI’s Banking Pilot began in 2019 and builds upon the outcomes and findings of Phase I. The Phase I Pilot involved 16 commercial banks and developed initial methodologies for undertaking forward-looking scenario-based assessments of climate risks and opportunities in loan portfolios, in line with the TCFD recommendations. For physical risks and opportunities, it culminated in the publication of “Navigating a New Climate” in 2018.
The new report, “Charting a New Climate”, provides financial institutions with a state-of-the-art blueprint for evaluating physical risks and opportunities. Complete with case studies from participating banks, the report investigates leading practices for five critical topics related to physical risks and opportunities:
Extreme events data and data portals – reviewed examples of climate and climate-related extreme events data and portals from both public (free to use) and commercial data providers[1].
Portfolio physical risk heatmapping – recognized the benefits of examining total portfolio exposure and identifying where higher physical risks may lie before moving on to ‘deep-dive’ assessments of at-risk portfolio segments.
Tools for physical risk assessment of financial
risk – aimed to improve banks’ understanding of commercially-available tools
and analytics, as well as training the Phase II banks to use the Phase I
Excel-based methodologies.
Physical risk correlation analysis of finance
institution portfolios – was developed as banks recognized the value of having
a deeper understanding of observed relationships between loan performance
metrics and climate-related events.
Analysis of opportunities driven by physical
climate risk – aimed to provide insights into the climatic, business, policy
and market-led drivers of physical risk-related opportunities.
The TCFD
provides a useful framework for assessing and reporting on physical risks and
opportunities; “Charting a New Climate” gives firms an expanded toolbox with
which to approach this important work. Despite the tangible benefits to
participating institutions, the insights contained within the report are also
relevant for organisations across the finance sector. The toolkit developed in
Phase II provides a comprehensive way for organisations to consider their
physical risks and opportunities and move from assessment to action.
“Charting a New Climate” marks the beginning, not the end, of the journey for financial institutions looking to holistically consider physical impacts. Banks need to continue to improve the external and internal streams they rely on for climate data about their borrowers. Tool providers will increasingly need to consider the interaction effects of simultaneous hazards in a warming world and the complex cause-effect chains linking those hazards to investment performance. Governance and risk management functions will need to integrate climate into their existing policies. The banking sector has a major role to play in implementation of the Paris Agreement by mobilizing financial flows to deliver adaptation and climate resilience.
For media enquiries and a copy of the embargoed report, please contact Mustafa Chaudhry on Mustafa.chaudhry@un.org
The Phase II pilot aimed to provide active
guidance to banks on some of the pressing challenges in assessing physical
risks and opportunities, focused on key methodological issues highlighted in
Phase I. It took as its starting point the ‘future directions’ identified in
the final chapter of the Phase I report, which identified key challenges and
proposed ways forward to begin to address them. It aimed to deepen and improve
upon the Phase I methodologies. This Phase II report therefore provides richer
technical guidance, and more information on resources available to assess
physical risks and opportunities than its Phase I forerunner.
Case Study from [Redacted]: Physical risk analytics are not homogenousbetween vendors even for listed companies, while there are particular
challenges in assessing physical risks for SMEs due to a lack of data on those
companies. Scenarios are not granular enough and not all the hazards are
integrated. Overall, there is still a lot of room for improvement in the
information area. Key areas of improvement we would wish to see from physical
risk analytical tools include greater flexibility, accuracy and easy management
of massive volumes of information (e.g. retail mortgages).
Previous correlation studies show that storm surges, wildfires, sea level
rise, inland flooding, drought, and other hazards are already impacting
financial portfolios. This is because globally significant climate models such
as El Niño and the Pacific Decadal Oscillation drive extreme weather, physical
risks, and related socio-economic impacts. By discovering opposing associations
(such as floods in one region coinciding with droughts in another) it may
eventually be possible for portfolio managers to hedge against such physical
risks.
Physical climate change impacts are often
considered as a risk management challenge. What is missing is a recognition of
the banking sector’s critical role in the implementation of the Paris Agreement
by mobilizing financial flows to deliver adaptation and resilience. It is
essential that banks assess and explore the opportunities to provide finance
within their markets and to their counterparties. The opportunities framework
has been designed to enable banks to explore how they can align their strategic
and operational activities with the Paris Agreement and play a major role in
the mobilization of private sector finance towards adaptation. This chapter
explores several key drivers which will influence the demand for finance from
counterparties as they respond the impacts of a changing climate.
Physical risk correlation analysis of FI
portfolios – was developed as banks recognized the value of having a deeper
understanding of observed relationships between loan performance metrics and
climate-related events. Some banks have reported that borrowers are already
being affected by climate and weather events, and these effects provide early
signals of a changing climate, and empirical evidence which may help to
calibrate forward-looking physical climate risk assessments. The module
provided a step-by-step process for banks to undertake correlation analysis
with a worked example using actual property values for an anonymized coastal
city and its neighborhoods in the US. The results revealed neighborhoods and
types of house experiencing ‘climate gentrification’ – a term used to describe
increases in real estate values in neighborhoods that are more resilient to
climate-related threats. The module also summarized recent developments in scientific
research on correlation analysis and more sophisticated statistical techniques,
based on a review of more than 50 studies investigating flood, drought and
wildfire risks within the real estate and agriculture sectors.
Quotes
The Working Group
The Working Group includes the following thirty-nine banks:
ABN-AMRO, ABSA, Access Bank, Bank of Ireland, Barclays, BMO, Bradesco, Caixa
Bank, CIBC, CIMB, Citibanamex, Credit Suisse, Danske Bank, Deutsche Bank, DNB,
EBRD, FirstRand, ING, Intesa Sanpaolo, Itau, KBC, Lloyds, Mizuho, MUFG, NAB,
Nat West, Nedbank, NIB, Nomura, Nordea, Rabobank, Santander, Scotia Bank,
Shinhan, Standard Bank, Standard Chartered, TD Bank, TSKB and UBS to develop a
blueprint for assessing the climate-related physical risks and opportunities
for banks’ corporate credit portfolios.
Acclimatise is a specialist advisory and analytics company
providing world-class expertise in climate change adaptation and risk
management. Founded in 2004, their mission is to help clients understand and
adapt to climate risk and take advantage of the emerging opportunities that
climate change will bring. With offices in the UK, US, India and mainland
Europe, Acclimatise has worked in over 60 countries worldwide. Working with financial
institutions, national and local governments, multilateral organisations, and
major corporations, Acclimatise has been at the forefront of climate change
adaptation for over a decade.
UNEP FI is a partnership between UNEP and the global
financial sector to mobilize private sector finance for sustainable
development. UNEP FI works with more than 300 members – banks, insurers, and
investors – and over 100 supporting institutions – to help create a financial
sector that serves people and planet while delivering positive impacts. UNEP FI
aims to inspire, inform and enable financial institutions to improve people’s
quality of life without compromising that of future generations. By leveraging
the UN’s role, UNEP FI accelerates sustainable finance.
[1] While there are many portals providing data on projected future
incremental changes in temperature and precipitation, the Phase I pilot
identified a lack of data on future changes in extreme events.
Investors and asset managers are increasingly taking action to advance their transition to a low carbon, climate resilient economy and prepare for the financial impacts of climate change. Such is the case, for example, of Macquarie Group Limited, a multinational independent investment bank and financial services company headquartered in Sydney, Australia. As part of their continued efforts to align to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), Macquarie conducted heat-mapping and climate scenario analysis on physical and transition risks in its holdings. The bank has released a new report reflecting on its progress to date against the four pillars of the TCFD (governance, strategy, risk management, and metrics).
Acclimatise deployed its HeatMapR toolkit to help Macquarie undertake a high-level analysis of physical
climate risks on its global
equity and lending portfolios against two climate scenarios. The heatmapping exercise used 1.5°C and 4°C warming scenarios*, representing good practice by selecting a high and
low-risk scenario. The HeatMapR tool pulled climate hazards data for three time
horizons, namely 2020, 2030 and 2050. A wide range of hazards were analysed in
the exercise, including chronic climate change variables (e.g. temperature,
precipitation, sea level rise) and extreme weather events such as bushfires. The results of these analyses were presented as a set of summary heatmaps, and a similar exercise for
transition risk was conducted alongside Acclimatise’s physical heatmapping
workstream.
As noted in Macquarie’s report, the Acclimatise HeatMapR outputs provide
a strategic tool to identify potential areas of their holdings where more
detailed analysis is needed; heatmapping can also be used to guide further
analysis and investment decision making. The findings of the heatmapping exercise for
physical climate risks show that most severe impacts are expected to occur
after 2050, but also that climate vulnerabilities are different across sectors
and sub-sectors and in particularly are highly dependent on the country of
exposure.
Thorough its climate risk heatmapping and scenario analysis, Macquarie determined that physical and transition risks present in its holdings were not considered to be material. Reasons for this include the fact that the firm has a sufficiently diverse portfolio, and the their exposures to counterparties at risk are short term, as compared to the time scenarios examined. Finally, the exercises revelated that Macquarie has limited lending exposure to risky sectors.
Over the course
of 2020 and beyond, Macquarie will
continue implementing its guidelines on climate risk governance and continue to
refine and embed climate change considerations within its existing risk
management frameworks. In particular, it aims to continue refining scenario
analysis and to further integrate these exercises into their existing risk
procedures and stress testing. In addition, it also aims to assess the
resilience of its business premises to physical climate risks in the coming
year.
The Network for Greening the Financial System
(NGFS) has released a set of high level and harmonised Reference Scenarios in
June, 2020. Central banks and supervisors have the responsibility to prepare
for the potential impacts from climate change. Yet, there are great
uncertainties regarding what climate change impacts may look like in the
future, as the way that climate risks will take shape is dependent on the
carbon-intensity development pathways that countries decide to take. The use
and application of foresight tools such as scenario analysis allows
organisations to test the robustness of their strategies against a number of
plausible and coherent future storylines.
The use of scenario analysis as a tool for robust decision-making is already being promoted in the private sector through the efforts of the Task force on Climate-related Financial Disclosures (TCFD). Organisations can face many challenges when trying to develop and apply scenario analysis for financial planning. In particular, it is difficult for non-experts to penetrate the technical parameters and assumptions behind climate change models, ultimately to decide which climate and emissions scenarios to use in order to explore a good range of plausible futures. Set out in the publication, ‘NGFS climate scenarios for central banks and supervisors’, the Reference Scenarios are therefore well-placed to help organisations (central banks, supervisors, other financial institutions and corporates) explore the impacts of transition and physical climate risks to the economy and the financial system in a consistent and transparent way.
Apart from setting out Reference Scenarios, the new NGFS climate scenarios guide offers a four-step process for scenario analysis, which are briefly described in Figure 1. (Source: NGFS, 2020)
In Step 1, central banks and supervisors
should first consider how the exercise will relate to their objectives and
define whether the scenarios are going to be used to:
Assess
specific risks to financial firms,
Assess
financial system-wide risks
Assess
macroeconomic impacts
Assess risks
to a central bank’s own balance sheet
As part of this first step, central
banks and supervisors need to define what are the most material risks to the
institution’s objectives, which can help in the identification of physical and
transition risks that are likely to have the greatest impact. At this stage, it
is also important that central banks and supervisors consider how different
stakeholders (e.g. financial institutions, financial standard setters,
governments) will be involved in the scenario analysis.
In
Step 2, central banks and regulators are suggested to make a number of
informed choices on the climate scenarios assumptions they will use for
scenario design (e.g. Greenhouse Gas (GHG) concentration and socio-economic
pathways as well as policy, technology and market trends). At this stage,
central banks and supervisors should consider the types of climate risks that
they want to explore and the NGFS strongly encourages the use of multiple
scenarios in order to explore a range of futures in order to unveil the broad
spectrum of transition and physical risks that could emerge under different
economic development pathways. As noted
in the guidance report, “The number of scenarios that central banks and
supervisors choose to analyse will depend on the objective of the exercise, the
materiality of the macro-financial risks, and resources available.” (p. 14). This
also applies to the choice of scenario granularity and choice of time horizons.
For
the NGFS Reference scenarios, multiple models were used to capture a range of
uncertainty in the results, although they were all build against the
assumptions of the same socio-economic pathways (namely the SSP2 “middle of the
road” pathway). But each varies according to how policy and technology are
assumed to evolve. A number of scenarios
are thus developed according to these assumptions, namely:
Three orderly transition scenarios: One which is
representative and assume immediate action is taken to reduce emissions in alignment
with the Paris Agreement and that all CDR technologies needed to reach net zero carbon
are available; and two additional ones which are even more ambitious;
Three disorderly
transition scenarios, which
assume delayed policy action and limited access to CDR technologies but differ
in the extent of dependence on Carbon Dioxide Removal (CDR )technologies;
Two “Hot
house world” scenarios [i.e. the current
trajectory]:
One scenario
which assumes only current policies are implemented and the goals of the Paris
Agreement are not met, leading to substantial physical risks over time and
another that accounts for all; and
One scenario which
incorporates all pledges from Paris
(even if not yet implemented) and leads to substantial, yet less,
physical impacts.
In
Step3, central banks and supervisors will use the scenarios to
assess economic and financial impacts. There are many challenges for doing
this. For example:
It is difficult to anticipate and model the extent of
macro-financial impacts caused by physical impacts due to tipping points in the
Earth system that we are just starting to understand (e.g. loss of ice sheet,
permafrost and forest loss).
Current economic models are ill-suited to study climate risks so
central banks may need to deploy a combination of approach to tackle
limitations of existing models.
The channels through which economic impacts translate to financial
impacts are complex
Additional variables may be needed due to the limited number of
macro-financial outputs available from climate models underpinning the
scenarios.
There is limited data and research to support scenario analysis
To refine the scenarios, the NGFS also encourages central banks and regulators to revise scenario assumptions, address more comprehensively systemic risks, further elaborate on transmission channels, and perform a second round of the exercise. This recommendation is already being taken forward, for example, by the Bank of England (BoE) in its 2021 Biennial Exploratory Scenario (BES) exercise.
Step
4, the final step set out in the guidance, helps central banks and
supervisors define their communication strategy of scenario analysis results.
It includes guidance on the type of information that should be disclosed, the
intended audiences and methods to communicate the results.
As noted by Frank Elderson (Chair of NGFS) and Sarah Breeden (BoE and Chair of Macrofinancial workstream) in the Foreword of the report, “Challenges and shortcomings remain. Indeed, we are close to the start of this intellectual journey not at its end.” The effort to harmonise scenario approaches and provide relevant guidance to central banks and regulators achieved in this document, however, is commendable and offers a good foundation for future developments in climate scenario analysis. Not only are the Reference Scenarios and guidance relevant for central banks and regulators, they can in fact be instrumental for financial firms and corporates that want to explore their exposure to these emerging risks.
The new CFRF guide aims to help
financial firms understand the risks and opportunities that arise from climate
change and provides support for how to integrate them into their risk, strategy
and decision-making processes. As part of this, the guide considers how firms
can plan for the impact of climate policies over different time horizons and
assess their exposure to climate-related financial risks so that they can adapt
their businesses in response.
Written by industry, for
industry, this guide is based on CFRF discussions that have been convened and
facilitated by the PRA and the FCA. The forum, similar to the Task force on
Climate-related Financial Disclosures (TCFD), has brought together expertise
from both financial firms and corporates to develop this guidance. Over the
course of 2019 and 2020, the forum’s four working groups (Disclosures,
Innovation, Scenario Analysis and Risk Management) have shared good
practice and analysis to advance thinking on how firms can better manage the
risks posed by climate change and support the transition to a net-zero carbon
economy.
Each of the four working groups
wrote a chapter of the final guide, and a summary document was co-produced
by the FCA and PRA. The PRA and FCA have convened and facilitated CFRF
discussions but the views expressed in this guide do not necessarily represent
the view of the regulators and does not constitute regulatory guidance.
Acclimatise is proud to be
featured in the Risk Management Annex: list of data and tools providers. We are
a specialist advisory and
analytics company, providing world-class expertise in climate change adaptation
and resilience. With experience in more than 90 countries, our work plays an
important role in shaping the international adaptation agenda. We work closely
with corporates and financial institutions on their physical climate risk
analysis, by interpreting climate science and information in the context of
their own strategies, processes, capacities.
Click here for more information on Acclimatise’s TCFD-aligned disclosure services.
Click here to learn more about Acclimatise’s corporate climate risk and adaptation services.
Acclimatise’s Climate Finance team,
in partnership with the Caribbean Community Climate Change Center (CCCCC), has designed
and launched a five-week virtual training course on GCF project requirements as
part of Belize’s Green Climate Fund (GCF) Readiness 2 Support – “Building
Capacity for Direct Access to Climate Finance”. One of the objectives of this
Readiness support is to strengthen the capacity of Belize’s National Designated
Authority (NDA) – the Ministry of Economic Development (MED) – to effectively
mobilise, manage and monitor climate finance with a view to achieving national
development and climate change priorities.
This course was specifically tailored
to members of Belize’s National Climate Change Committee (BNCCC) which is the committee
that sits under the NDA, and designed so they can perform their GCF
responsibilities, which includes appraising projects received from project
developers and providing constructive feedback to national and international
stakeholders.
About the course
The course was developed by Acclimatise’s Virginie Fayolle, Caroline Fouvet and Maya Dhanjal, with facilitations support from in-country expert Ann Gordon. Since commencing the course on 29th June 2020, we have had a successful first three weeks of the course which will continue until 7th August 2020. Overall, the course equips BNCCC members to:
Understand GCF project requirements and what a good
GCF project looks like;
Grasp key GCF or general project preparation
concepts, such as climate rationale, theory of change, logical framework,
paradigm shift, and gender mainstreaming;
Align a project with the GCF’s six investment
criteria to appraise concept notes; and
Provide constructive feedback on GCF concept notes
received by the Belize’s NDA.
Adapting to a post-pandemic world
This training was originally designed
for a face-to-face format where our instructors would travel to Belize to
deliver it over a 2-week period. However, in response to travel restrictions
due to coronavirus, Acclimatise adapted the format into a virtual training,
following a human-centric design approach. This conversion required an
understanding of the constraints faced by both parties including availability
of and access to technology, using web-based products that allowed for
collaboration and real-time communication, and lastly, a sense of what life is
now like for BNCCC members who may be working from home, have children to home-school
or dependents to take care of, and have religious observances to attend to.
Through a set of interactive plenary
presentations from guest speakers, recorded videos that are accessible at
participants’ own pace, as well as quizzes and live calls with featured polls
to gauge participant knowledge, understanding and comfortability with the
topic, the training course has been successfully re-designed for participants into
a blended learning classroom where we are currently holding some “live-on-air”
events as well as asynchronous activities so participants could tackle the content
at their own pace. The live sessions in particular brought a range of
participants together to exchange and share meaningful experiences across a
broad group of stakeholders, including multiple regional government agencies
and private sector organisations.
Future trainings on GCF project
requirements under Readiness Support
Acclimatise has a wealth of experience
designing and executing training services for clients looking to access, manage
and utilise funding from the GCF. Although typically done in a face-to-face
format, Acclimatise has now successfully approached adapting this training into
a virtual format that maximises the potential of the participants to absorb
knowledge and strengthen their success of securing funding from the GCF.
Some topics covered in the training
include:
Climate Change in Belize and Belize’s relevant
climate-related national priorities – two presentations by Colin Mattis, Deputy
Climate Change Officer at NCCO
Challenges and opportunities for demonstrating the
climate rationale of a GCF project and related data needs – a panel discussion
with Olivia Avilez from Belize Sugar Industries, Ryan Zuniga from CCCCC and Ronald
Gordon from National Meteorological Services
The relevance of adaptation in Belize: the business
perspective – a presentation by Olivia Avilez at Belize Sugar Industries
You can find more information about how Acclimatise can help you
mobilise, catalyse, and leverage public and private capital to deliver your
climate investment strategies and financing for climate-resilience solutions on
our website.
If you are interested in our training offering on the topic, contact: Ms. Virginie Fayolle
Acclimatise’s special guidance report “Understanding Physical Climate Risks and Opportunities” is designed to help investors assess physical climate risk assessments to their portfolios.
Developed with the Institutional Investors Group on Climate Change (IIGCC), the guidance collates good practice for physical risk assessments across the stages of a typical risk assessment process. The guidance was published in June 2020. It was developed in close conjunction with IIGCC staff, leading investors, and Dr Rory Sullivan of Chronos Sustainability.
In this video, report author and Acclimatise consultant Robin Hamaker-Taylor talks through what the report covers.
MinterEllison, a commercial law firm in the Asia-Pacific, has published new analysis which indicates that companies have not been prioritising their surveillance of their climate change risk disclosures. In their analysis of annual reports for the 2019 financial year, MinterEllison found that only 21 (7%) of ASX300 companies had ‘meaningful’ climate change risk disclosures, compared with 137 (45.5%) of reports containing little or none.
This does
not bode well for many listed companies in light of the Australian Securities
& Investments Commission’s (ASIC) recent announcement that it will
prioritise this in the 2020 financial year. So how do boards assure themselves
that they are having meaningful climate change risk disclosures? To answer this
question, MinterEllison has set out their top 5 climate change-related
governance issues for directors to consider this reporting season.
Narrative disclosures – TCFD and stress-testing move from gold standard to base expectation
An increasing proportion of mainstream institutional investors now expect investee companies to apply the governance, strategy, risk metrics and disclosure framework set out in the 2017 Recommendations of the Bloomberg Taskforce on Climate-related Financial Disclosures (TCFD). One of the key TCFD Recommendations relates to stress-testing and scenario planning of business strategies against a plausible range of climate futures, emphasising the inclusion of information on the impact of climate change on financial performance, position and prospects.
Consider how your business has
made credible inroads on the journey towards compliance with the
Recommendations of the TCFD in FY20.
‘Net zero’ emissions transition
Mainstream investors and large
proxy advisors are increasingly voting in favour of activist shareholder
resolutions that seek corporate disclosure of net zero emission strategies –
often against the recommendation of management.
Consider how you envision your
business will continue to thrive in a ‘net zero’ economy, and your strategy for
transitioning your business.
…and a roadmap for achieving Paris Agreement goals
Bare pledges of ‘support for
Paris Agreement goals’ are not enough. In FY20, investors are looking for a roadmap
of short- and medium-term targets against which to assess a corporation’s net
zero transition commitment, and evidence of credible progress on that journey.
Consider your business plans
and their progression towards achieving emissions reduction commitments and
your strategy for achieving these goals.
Valuation and impairment – relevance of climate change-related assumptions to financial reporting and audit
Standard setters made clear that
they expect climate change-related assumptions to be clearly stated,
highlighting the potential to be a material accounting estimation variable,
impacting on asset useful lives, fair valuation, impairments and provision for
bad and doubtful debts.
What consideration has been
given to the climate-related variables that may materially impact on your
accounting estimates (financial position) and prospects?
Governance, executive remuneration and their relationship with climate change strategy.
Companies should benchmark their
governance of climate change strategy and risk management against the
recommendations of the TCFD and ensure that a portion of the discretionary
remuneration of relevant senior officers is linked to progress against the
business’ climate targets.
Consider your company’s
governance structures and if they are benchmarked against the TCFD.
