Category: Financial Services

Video: Introducing Acclimatise’s Special guidance report ‘Understanding Physical Climate Risks and Opportunities’

Video: Introducing Acclimatise’s Special guidance report ‘Understanding Physical Climate Risks and Opportunities’

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.

Download the full guidance here.

Top 5 considerations for climate-related corporate governance released in new analysis

Top 5 considerations for climate-related corporate governance released in new analysis

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.

View a PDF version of this report here.

View the press release here.


Cover photo by Charles Forerunner on Unsplash.
Call for members of the EU Sustainable Finance Platform, new Taxonomy Regulation, and closing public consultations – EU sustainable EU sustainable finance update part 2

Call for members of the EU Sustainable Finance Platform, new Taxonomy Regulation, and closing public consultations – EU sustainable EU sustainable finance update part 2

By Robin Hamaker-Taylor

The European Commission is continuing to progress the implementation of their Action Plan for Financing Sustainable Growth. New reports have been published, regulations have been established, and more are on the way. Much of this recent activity has implications for financial institutions. This is the second of a two-part article series that aims to round up these developments.

This article narrows focus to newly adopted EU regulations on the Taxonomy, the European Bond Standard, the European Green Deal, and a consultation on the updated EU Sustainable Finance strategy. The first article looked at the developments relating to the EU Sustainable Finance Taxonomy and impending regulation, and is available here.

Be sure not to miss the calls and consultations linked throughout this article, several of which end in mid-July 2020.

EU Taxonomy Regulation is adopted and call for members of the Sustainable Finance Platform

On 18 June 2020, European Parliament adopted the EU Taxonomy Regulation (TR). The TR creates a legal basis for the EU Taxonomy and sets out the framework and environmental objectives for the Taxonomy. It will be supplemented by delegated acts*, due to be established in 2020-2021. These acts will contain detailed technical screening criteria for determining when an economic activity can be considered sustainable, and hence when activities can be considered Taxonomy-aligned.

To help the Commission prepare the technical screening criteria and develop the taxonomy further, the Commission has launched a call for applications for members of the Platform on Sustainable Finance. This platform will be an advisory body composed of experts from the private and public sector, according to a Commission press release. Platform members will also advise the Commission on the further development of the EU Taxonomy to cover other sustainability objectives and provide advice on sustainable finance more broadly.

The deadline for applications is 16 July 2020. For more information on the Platform on Sustainable Finance and how to apply, please visit: Register of Commission expert groups – Calls for applications.

*Delegated acts are legally binding acts that enable the Commission to supplement or amend non‑essential parts of EU legislative acts, for example, in order to define detailed measures. Read more about the proposed timeline for EU Taxonomy delegated acts and what they mean for climate risk disclosures in part one of this two-part series.

European Bond Standard

The European Commission is exploring the possibility of a legislative initiative for an EU Green Bond Standard in the context of the public consultation on the renewed sustainable finance strategy. That consultation is running from 6 April to 15 July 2020. A targeted consultation on the establishment of an EU Green Bond Standard, that builds and consults on the work of the TEG, and is running for an extended period of 16 weeks between 12 June and 2 October 2020.

Based on the outcome of these two consultations, as well as ongoing bilateral stakeholder dialogues, the Commission will take a decision in Q4 2020 on how to take the Green Bond Standard. Read more about the EU Green Bond Standard here.

European Green Deal and sustainable finance

The European Green Deal is the EU’s roadmap for making the EU’s economy sustainable and make the EU climate neutral by 2050. It includes actions to boost the efficient use of resources by moving to a clean, circular economy and restore biodiversity and cut pollution, according to the European Commission’s dedicated Green Deal website.

The Green Deal outlines investments needed and financing tools available, and explains how to ensure a just and inclusive transition. Climate Action is one of nine policy areas of the Green Deal. Under the Climate Action umbrella, the Commission is proposing to establish the first European Climate Law which makes it a legal requirement for the EU to become climate-neutral by 2050. On the adaptation and resilience side, the Commission will adopt a new, more ambitious EU strategy on adaptation to climate change in early 2021, according to the Commission. The aim will be to strengthen efforts on climate-proofing, resilience building, prevention and preparedness, ensuring that businesses, cities and citizens are able to integrate climate change into their risk management practices. A public consultation will inform the design of the new adaptation strategy.

The EU recognises that Climate Action will require alignment of many key areas, including sustainable finance. While the EU will fund climate action itself, it expects that its efforts in establishing the Taxonomy Regulation and implementing the will also boost private sector investment in green and sustainable projects. So while the Green Deal may seem like a parallel initiative, it is very much intended to align with the EU’s current efforts to make finance and the wider economy sustainable.

Consultation on the renewed sustainable finance strategy

The European Commission is currently consulting on an update to the 2018 sustainable finance strategy. Building on the 2018 Action Plan on financing sustainable growth, the renewed sustainable finance strategy will provide a roadmap with new actions to increase private investment in sustainable projects and activities to support the different actions set out in the European Green Deal and to manage and integrate climate and environmental risks into our financial system. The initiative will also provide additional enabling frameworks for the European Green Deal Investment Plan. The public consultation is open until 15 July 2020.


Cover photo by Marius Badstuber on Unsplash
European Central Bank issues consultation on guidance for banks on managing and disclosing climate risks

European Central Bank issues consultation on guidance for banks on managing and disclosing climate risks

By Robin Hamaker-Taylor

On 20 May 2020, the European Central Bank (ECB) published a draft guide setting out its expectations for banks on managing and disclosing climate-related and environmental risks under the current prudential framework. The ECB wants banks to account for these risks given that they drive existing prudential risk categories and can substantially impact the real economy and banks.

The ECB issued this new guidance to clarify how ECB Banking Supervision is expecting banks to consider these risks in their in their governance and risk management frameworks and when formulating and implementing their business strategy, according to the ECB press release. Apart from setting out expectations around climate risk management, the guide also outlines expectations on enhancing banks’ climate-related and environmental disclosures. The ECB is pursuing transparency, with increased disclosures as a main route for this.

In issuing this guide, the ECB is moving in step with other central banks around the world. The guide was developed in close cooperation with European national authorities and aims to ensure high supervisory standards are applied consistently across the euro area. The ECB’s guidance, for example, echoes the Bank of England’s 2019 BoE Supervisory Statement (SS) on banks’ and insurers’ climate risks – read more about the BoE SS here. Importantly, the ECB’s guide is designed to fit within the boundaries of applicable European Union and national law. It aims to foster banks’ preparedness for managing climate-related and environmental risks under current prudential rules, in accordance with the European Commission’s Action Plan on financing sustainable growth and the European Banking Authority’s Action plan on sustainable finance. Click here to read our recent summary of the current status of the Commission’s Action Plan.

The ECB is now seeking feedback on their draft guide, with the consultation running until end of 25 September 2020. The guide itself and a list of frequently asked questions (FAQs) are available on the ECB’s Banking Supervision website. Following the end of the public consultation, the ECB will publish the comments received together with a feedback statement.


Cover photo by Martin Krchnacek on Unsplash.
Understanding Physical Climate Risks and Opportunities: New practical guidance for investors launched

Understanding Physical Climate Risks and Opportunities: New practical guidance for investors launched

By Robin Hamaker-Taylor

Acclimatise has led the development of a new guidance document on physical risk assessments for investors. 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 Understanding Physical Climate Risks and Opportunities guidance was developed over the last year, in close conjunction with IIGCC staff, leading investors, and Dr Rory Sullivan of Chronos Sustainability.

Download the full guidance here

The guidance helps investors understand physical climate risks and how they are measured. It also provides investors with practical guidance on how they can begin to analyse, assess and manage the risks and opportunities presented by physical climate hazards.

Written specifically with investors in mind, the guidance can be used without prior climate expertise. Examples of how peers have conducted physical risk assessments and processes are included throughout, and investors are provided with 20 key questions to help them to plan their assessments or sense-check what they have already done.

Report author and Acclimatise consultant, Robin Hamaker-Taylor talks through what the report covers.

Why does physical climate risk matter to investors?

The Earth’s climate has already warmed by approximately 1.0°C above pre-industrial levels, according to the IPCC. Current trajectories show temperatures are expected to rise by 3.2°C by the end of the century, even if all current unconditional commitments under the Paris Agreement are implemented, according to the UN Environment Programme.

More frequent and more extreme weather and climate events, as well as gradual shifts in rainfall patterns, temperature, sea levels, sea ice and glacial retreat, are some of the changes already underway. Physical risks are here now and will continue to unfold, with financial implications throughout the investment chain.

Many asset owners and managers recognise climate change as one of the largest systemic risks to their investment portfolios. To date, however, relatively little attention has been paid to how institutional investors might assess and report on the physical risks and opportunities arising from climate change. This is despite a growing evidence base demonstrating the economic consequences of increasingly severe climate change.

“As a changing climate alters the fabric of economies, societies and environments across the world, it pays to be prepared,” said John Firth, CEO, Acclimatise. “The investors that can act now to both manage physical climate risks and grasp the opportunities to invest in resilience stand to be in the most secure position in the long-term. This guidance acts as a first step to achieving this.”

What does the report cover?

The newly published guidance will help investors to:

  • Better understand the investment implications – both risks and opportunities – resulting from the physical impacts of climate change.
  • Take practical steps to identify, assess and manage climate-related physical risks across their portfolios, through the approaches covered in the guidance.
  • Identify ways to invest in solutions that support greater resilience to climate change as well protecting investments from physical-climate related risks. Both approaches are key to strengthening broader societal adaptation to climate change.
  • Draw on additional available tools and data sources in identifying and assessing specific risks, and opportunities, across different asset classes.

The guidance document provides a comprehensive overview of physical climate risk assessment and management, including the following chapters:

  • Review of physical climate risks and how are they measured;
  • Chapters which follow the steps of a physical risk assessment:
    • Understanding the context
    • Setting the objectives and scope
    • Physical climate risk assessment variable selection (timescale, scenarios);
  • Analysis of physical climate risk-related opportunities; and
  • Monitoring, management and reportingof physical climate risks.

Download the guidance here


The challenges of deploying complex financial products in the face of climate change

The challenges of deploying complex financial products in the face of climate change

By Laura Canevari

As countries respond to the COVID-19 pandemic, important lessons for climate action have started to emerge. In a recent article in Bloomberg Green, Kate Mackenzie reflects on the challenges of deploying complex financial products designed to attract investors and helping actors share the risks generated by large-scale disruptions.

Such is the case of pandemic bonds, a financial instrument inspired by catastrophe bonds and released by the World Bank in 2017 following the Ebola outbreak. These bonds are being triggered as a result of COVID-19; yet it seems that they are failing to provide the desired results in terms of rapidly mobilising resources to ensure an earlier, faster, better-planned and coordinated response.  In fact, it seems that the outbreak of the coronavirus pandemic failed to trigger pay-outs from these bonds in time to help countries avoid the worst outcomes. As noted by Tracy Alloway, former World Bank economist, “It has to be at least 12 weeks after the beginning of the outbreak before anything can be triggered […]. So that means it’s triggered much too late”. According to another Bloomberg source, due to their archaic structure, it has taken a total of 122 days since the start of the outbreak to unlock these bonds.

As noted by Tracy Alloway, the problem with the parametric risk financing mechanism is that “if it’s triggered earlier, the price of the insurance would be much higher because there is just so much uncertainty in the modelling”. This ultimately means delaying much needed early action in recipient countries and just as it is difficult to anticipate how an epidemic starts, it is also challenging to define when impacts triggered by climate change start being felt – especially in countries that lack adequate data on climate hazards.

Another problem presented by these bonds is that many resources that should be delivered as development money to the poorest countries ($115 million in total in the case of pandemic bonds) are being used to pay premiums, fees and interests to recipient investors; most (if not all) of which are in high-income countries. This means that the remaining resources have to be split between a large number of developing nations and will most likely be unable to satisfy their needs to respond to the outbreak.

Ultimately, mechanisms developed to share, mitigate and/or cope with certain risks (be it climate change or a pandemic) should not become a bottleneck; nor should they delay much needed early action. They need to be effective and speedy in delivering resources where these are most needed.

As countries continue to explore risk-sharing market mechanisms to deal with climate change, it will be important to closely examine whether these mechanisms truly deliver the results that they promise; and to consider what other investments are required in order to ensure that they can operate successfully. In the case of natural catastrophe bonds – which pay out in response to insurance claims from events such as hurricanes- it will be important to improve data collection and climate analytics in developing countries in order to reduce the levels of uncertainty of disaster risk models. Additionally, information systems that can assist a government’s ability to reach the most vulnerable during a crisis should also be strengthened. Moreover, building capacity at the local level for early intervention should be promoted alongside the deployment of any other risk management strategy. In the case of climate adaptation, we know that climate-proofing assets and infrastructure also means good business (e.g. it is estimated that for every dollar invested in climate-resilient infrastructure, six dollars are saved).  It is also unlikely that risk-sharing mechanisms will be able to cover losses from future (and more intense) climate events unless countries work on building their climate resilience, as these losses may become too unbearable.


Cover photo by NOAA on Unsplash.
Final EU Taxonomy report published, and regulation established – EU sustainable finance legislation Part 1

Final EU Taxonomy report published, and regulation established – EU sustainable finance legislation Part 1

By Laura Canevari and Robin Hamaker-Taylor

The European Commission is continuing to progress the implementation of their Action Plan for Financing Sustainable Growth. New reports have been published, regulations have been established, and more are on the way. Much of this recent activity has implications for financial institutions. This is the first of a two-part article series that aims to round up these developments.

This article narrows focus to the developments relating to the EU Sustainable Finance Taxonomy and impending regulation. The second part, to be published in May 2020, will cover new EU regulations on sustainability‐related disclosures in the financial services sector, the European Bond Standard, the ecolabel for financial products, and the European Green Deal.

Current status of the EU TEG and Sustainable Finance Taxonomy (‘EU Taxonomy’)

A final report on the EU Taxonomy was published in March 2020. Titled ‘Taxonomy: Final report of the Technical Expert Group on Sustainable Finance’, the report was developed by the EU’s Technical Expert Group (TEG) on Sustainable Finance, to share its final recommendations on the design of the EU Taxonomy. The final report takes into consideration feedback on the set of recommendation on the EU Taxonomy, set out by the TEG in a June 2019 technical report.

The March 2020 final report includes guidance on how companies and financial institutions can make disclosures using it, and its technical annex shares technical screening criteria for economic activities that can substantially contribute to climate change mitigation or adaptation. In addition, the TEG has prepared Excel-based tools to help with the implementation of the Taxonomy. The final TEG report and related outputs are available here.

Box 1 provides an overview of the EU Taxonomy.

Status of the EU Taxonomy Regulation and requirements

The Taxonomy Regulation (TR) was established in a political agreement of EU co-legislators in December 2019. The TR creates a legal basis for the EU Taxonomy and sets out the framework and environmental objectives for the Taxonomy. It will be supplemented by delegated acts* which contain detailed technical screening criteria for determining when an economic activity can be considered sustainable, and hence can be considered Taxonomy-aligned, according to the TEG final taxonomy report, Chapter 1.2.

As set out in the TEG final report, Chapter 3, the technical screening criteria will be issued as part of the explicit legal requirements from the European Commission by the end of 2020. Delegated acts containing technical screening criteria will be developed in two phases:

  1. Adaptation and mitigation environmental objectives- Technical screening criteria for activities which substantially contribute to climate change mitigation or adaptation:
    • adopted by the end of 2020, and
    • enter into application by the end of 2021.
  2. Other four environmental objectives – Technical screening criteria which cover economic activities substantially contributing to the other EU’s four environmental objectives (water, a circular economy, pollution prevention and control, and protection of ecosystems):
    • adopted by end 2021, and
    • enter into application by end of 2022.

* Delegated acts are legally binding acts that enable the Commission to supplement or amend non‑essential parts of EU legislative acts, for example, in order to define detailed measures. The Commission adopts the delegated act and if Parliament and Council have no objections, it enters into force, according to the European Commission.

The Taxonomy Regulation requires the European Commission to review all technical screening criteria regularly.

What does the Taxonomy Regulation stipulate, for who, and when?

The Taxonomy Regulation (TR) sets out legal obligations for financial market participants**, large companies, the EU and Member States. These entities will be required to do the following:

  • Financial market participants will be required to complete their first set of disclosures against the Taxonomy, covering activities that substantially contribute to climate change mitigation and/or adaptation. This is required by the 31st December, 2021.
  • Large companies will be required to disclose in the course of 2022.

An expanded set of disclosures covering activities that substantially contribute to all six environmental objectives will be required by the end of 2022.

In addition, the TR will introduce a new disclosure requirement for companies already disclosing under the Non-Financial Reporting Directive (NFRD). This is applicable to companies with more than 500 employees, including listed companies, banks and insurers. All companies subject to NFRD will include a description of how, and to what extent, their activities are associated with EUTaxonomy-aligned activities.

** Financial market participants are those firms offering financial products in the EU, including occupational pension providers.

The EU Taxonomy and climate adaptation

The EU Taxonomy sets out criteria specifically for adaption related activities. These are differentiated we “adapted activities” and “activities enabling adaptation”. The TEG has proposed three key guiding principles in order to identify economic activities that substantially contribute to climate adaptation:

  1. The economic activity reduces all material physical climate risks to the extent possible and on a best effort basis.
  2. The economic activity does not adversely affect adaptation efforts by others (it supports system adaptation).
  3. The economic activity has adaptation-related outcomes that can be defined and measured using adequate indicators.

The TEG have made available a list of 70 activities across eight sectors which are believed to make a substantial contribution to climate adaptation (see a summary in Table 1).

Table 1: Activities which make a substantial contribution to climate change adaptation , by sector, as shared in the final TEG report on the EU Taxonomy

The TEG’s final recommendations hold that the criteria for adaption related activities should ensure that an economic activity and its adaptation measures do not lead to increased climate risks for others, hamper adaptation elsewhere, and do not increase the risks of an adverse climate impact on other people, nature and assets. The criteria also ensure that adaptation measures consider the viability of “green” or “nature-based” solutions over “grey” solutions to address adaptation.

The report notes that the technical screening criteria to determine whether an economic activity makes a substantial contribution to climate change adaptation can be applied to any type of economic activity, but must necessarily comply also with the criteria for avoidance of significant harm to the other environmental objectives.

The full list of eligible activities is available here.

Next steps for the EU Taxonomy and how this relates to other taxonomy efforts

On 15 April 2020 the European Council adopted by written procedure its position at first reading with respect to the Taxonomy regulation.

The European Parliament will have to vote on the text pursuant to the “early second reading agreement” procedure. The Commission will only establish the actual taxonomy by defining technical screening criteria, in the form of delegated acts, as described above.

The taxonomy for climate change mitigation and climate change adaptation should be established by the end of 2020, in order to ensure its full application by end of 2021. For the four other objectives, the taxonomy should be established by the end of 2021 for an application by the end of 2022.

Further development of the EU Taxonomy will take place via a new Platform on Sustainable Finance, which is expected to be operating by autumn 2020. The first company reports and investor disclosures using the EU Taxonomy are due at the start of 2022.

Efforts to build green or sustainability taxonomies are proliferating across the globe. Within emerging markets, they are not all going in the same direction, as a recent IFC Sustainability Webinar Series highlighted. Harmonising some of these taxonomies on the climate mitigation side will be easier than doing so on climate adaptation side.  Taxonomies for adaptation related activities will have to happen in a context where not all of its elements can be applied or transferred across all geographies. For this reason, harmonisation of adaptation taxonomies globally is most likely going to be guided by principles with common interpretation across places. The IFC is building a green finance review protocol, for example, so that taxonomies from different countries can be compared. The protocol is due out in the second half of 2020.

Box 1: EU Taxonomy at a Glance (Source: Final report of the Technical Expert Group on Sustainable Finance, 2020)

Figure 1: EU’s six environmental objectives

Cover image from Wikimedia Commons, the free media repository.
Acclimatise CTO Richenda Connell leads GARP webinar on physical climate risk

Acclimatise CTO Richenda Connell leads GARP webinar on physical climate risk

Acclimatise’s Chief Technical Officer, Richenda Connell, led a webinar for the Global Association of Risk Professionals (GARP), providing insights on the ways in which the physical risks of climate change generate financial risks and how technology can be deployed to help banks integrate climate risk into their decision-making.

The second part of GARP’s Climate Risk webcast series, the webinar aimed to provide its viewers with an understanding of:

  • The key transmission channels of physical to financial risk
  • Emerging frameworks for embedding the physical risks of climate change into existing risk management practices
  • How new technology can be utilized in assessing and combating physical risk

To register and access the recording for free, click here.

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

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

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.