Category: Financial Services

IIGCC moving ahead with investors’ guidance on physical climate risks and opportunities
Acclimatise News

IIGCC moving ahead with investors’ guidance on physical climate risks and opportunities

By Caroline Fouvet and Robin Hamaker-Taylor

During the first ever London Climate Action Week, members of the Institutional Investors Group on Climate Change (IIGCC) came together for a roundtable focusing on physical climate risks for investors. Part of a wider IIGCC initiative launched this spring, the roundtable aimed to support investors in their identification assessment and management of the physical risks associated with a changing climate.  Opportunities for investment in resilience have also emerged as an important part of physical climate risk management. The wider IIGCC initiative will produce a guidance document on understanding physical climate risks, due out this Autumn.

Facilitated by Acclimatise and Chronos Sustainability, the roundtable was a well-attended event, gathering a wide range of stakeholders from the investment industry, from infrastructure to impact investors. The event enabled participants to share insights into their progress to date on physical climate analysis and to discuss proposed guiding elements to undertake such work. Investors expressed the difficulty they faced to rely on current corporate disclosures, and how the guidance document could help them fill knowledge gaps regarding the key issues to consider when climate screening investments.

Five high-level messages on physical risk were presented by Acclimatise, which are crucial for investors to consider when looking at physical climate impacts. Among these, the team framed the difference between transition and physical-related risks as well as acute and chronic climate risks. Delving deeper, we stressed the need to look at previous impacts and the usefulness of conducting analysis that correlates weather and climate hazards with impacts on counterparties. This will be particularly useful for those looking to determine climate impacts over the next 10-20 year period, given the current locked-in levels of climate change. The need to design scenarios that consider a 4°C world was also highlighted, for those interested in assessing risks in the longer term. The discussion also included the importance of identifying climate-related thresholds for assets, and consideration of indirect climate effects at the macro-economic level, beyond damage to fixed assets.

The IIGCC guidance for investors on physical climate risks will be finalised this summer and undergo peer review from IIGCC members before its publication in autumn this year.

Cover photo by Jamie Street on Unsplash.
Voluntary climate disclosures can reduce litigation risk
Acclimatise News

Voluntary climate disclosures can reduce litigation risk

By Robin Hamaker-Taylor, Richard Bater, Nadine Coudel

Climate risk disclosures are now a crucial part of the voluntary disclosure activities of many corporates and financial institutions. As these disclosures grow, questions around the extent to which they may leave disclosers exposed to litigation linger. Recent analysis from the accounting literature indicates that voluntary disclosures can actually lead to reduced litigation risk however. This article looks to these recent studies in other areas of voluntary disclosure to explore this question, and reviews changes underfoot that could increase litigation risk in the medium-term.

Does voluntary disclosure reduce or increase litigation risk? 

As capital markets began to grow and open up in the last century, it soon became clear that traditional financial reporting frameworks were not able to fill the information gaps between shareholders (investors) and corporate management according to researchers Schuster and O’Connell. Voluntary disclosure grew out of the need to fill the gap between the management’s view of the company’s value and what the market or investors saw as the view of the company’s value.

Corporates’ key performance data, for example, was not fully captured in conventional financial reports. As such, a number of frameworks for value-based reporting emerged in the 1990’s, which call for a range of voluntary disclosures such as forecasts of threats and opportunities, information on tangible and intangible assets, and management, among others. Coupled with the advent of technological advancements such as the internet, which for the first time allowed for rapid information dissemination via corporate websites, voluntary disclosures among corporates took off and are now part and parcel of firms’ external communications.

As public interest in the transparency around the procedures, policies, governance structures, and risk management strategies of corporates and financial institutions continues to grow, an important debate has unfolded around the relationship between voluntary disclosures and litigation risk. Litigation risk is, simply put, the potential that legal action could be taken because of a corporation’s products, actions, inaction, etc. The current debate centres around whether or not voluntary disclosure reduces or increases litigation risk, and following that, if litigation risk increases voluntary disclosures.

Researchers Dong and Zhang find evidence – in the US context – that litigation risk increases voluntary disclosure. The authors hypothesise that this may be the case either because disclosures could work to invalidate claims the firm is withholding information from investors, or because disclosures can help prevent one trigger of investor lawsuits – namely stock price crashes. Further analysis also indicates in the US, in instances of lower litigation risk, the likelihood and frequency of disclosures (e.g. earnings forecasts) are reduced, in particular for companies conveying negative news. This is a much-studied question in the accounting literature, however, and empirical evidence suggests litigation risk may deter disclosures. This may be the case because lawsuits could emerge after forward-looking disclosures are proven untrue after the fact.

Disclosing climate change-related risks may reduce litigation risks

Climate risk disclosures are now firmly part of the voluntary disclosure landscape, in part due to voluntary carbon disclosure frameworks such as the CDP and the more recent Task Force on Climate-related Financial Disclosures (TCFD) recommendations. The Financial Stability Board (FSB) established the TCFD in 2015, who published its final voluntary recommendations for climate risk and opportunity assessment and disclosure in 2017. The FSB was concerned that because of the information asymmetry between financial markets and those they are lending to, investing in, and insuring, climate risks are a threat to the stability of the wider financial system.

The TCFD recommendations have been taken up with gusto among corporates and financial institutions, with over 500 official supporters as of early 2019. Recent analysis shows that two out of three companies assessed have started to disclose climate change-related risks, though importantly, the quality of disclosures is still low, and disclosures have varied greatly across markets in the first few years of reporting, according an annual climate risk disclosure study. Given the growing number of finance and corporate actors starting to voluntarily disclose climate risks and opportunities, and the varying scope and quality of disclosures, the debate about the influence of voluntary disclosures on litigation risks is reawakened.

There is, however, a general anxiety among corporates and financial institutions that they could be held liable for their climate risks disclosures, concerns which have been used as reasoning for lack of action in this space. Others argue that companies and their directors are actually more likely to face litigation if they fail to assess and disclose climate-related financial risks. Evidence is emerging to that effect: in 2017, shareholders of the Australian Commonwealth Bank sued, alleging the Bank violated the Corporations Act of 2001 by failing to disclose climate-change risks in its 2016 annual report. Though the case was settled, it may be a sign of what is to come.

The Hutley opinion, a 2016 landmark legal opinion set out the ways that company directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence. The 2019 supplementary opinion, provided again by Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker, reinforces and strengthens the original opinion by highlighting the financial and economic significance of climate change and the resulting risks, which should be considered at board-level. As the 2016 opinion explains: “It is likely to be only a matter of time before we see litigation against a director who has failed to perceive, disclose or take steps in relation to a foreseeable climate-related risk that can be demonstrated to have caused harm to a company”.

There has been a marked increase in climate disclosure litigation since 2017, underpinned by innovations of legal argument, increasing awareness, and progress in scientific evidence. This can give rise to considerable legal and reputational costs regardless of outcome, especially where liabilities are not covered by liability insurance. The disclosure trajectory is clear, therefore firms that get ahead of the game stand to benefit from unearthing opportunities, win the confidence of investors and consumers, and minimise liability risk. To be clear, firms should follow best practice in order to reduce concerns around liability associated with TCFD-style scenario-analysis and disclosures. Further recommendations on this are available here.

Future legal developments

The legal and physical environment in which organisations (e.g. firms, municipalities, and financial institutions) are operating is in a period of rapid flux. Past knowledge and assumptions about the resilience of assets, investments and supply chains to climate risk may no longer be valid, potentially giving rise material financial risks that investors have a right to be informed about. Several changes are afoot that could increase litigation risk in the medium-term. In April 2019, the Bank of England’s Prudential Regulation Authority released a Supervisory Statement (SS) concerning banks’ and insurers’ management of climate risks. The SS sets out clear expectations regarding the strategic approach that banks and insurers will be expected to take, including appropriate disclosure of climate-related financial risks, with mandatory requirements not an impossibility in the medium term.

The obligations that Directors, boards, financial intermediaries are under are also in flux. New and existing reporting frameworks increasingly require reporting and / or disclosure of climate-related risks, whilst the attitude of investors, consumers, and regulators is hardening. All of this is serving to steadily evolve standards of professional practice and reasonable expectations of fiduciaries and officers under existing law.

Following the release of the recommendations of the High-Level Expert Group on Sustainable Finance, in March 2019 the EU published is Action Plan on Sustainable Finance. With its declared ambitions to become a global leader in this area, the European Commission has announced that it will review reporting frameworks on non-financial information in line with TCFD and update accounting standards. The Commission is steadily laying the groundwork for sustainable finance regulation based on the Action Plan, whilst the European Parliament is also considering amendments to the IORP II Directive, that could require investment firms to consider and disclose ESG risks associated with occupational pensions. In the United States, there are legislative proposals to strengthen disclosure of climate risks to the SEC. From 2020, signatories to the widely-adopted Principles for Responsible Investment Reporting Framework will be required to report (not disclose) climate-related risks consistent with the TCFD.

A rapidly evolving legal and climatic context is shifting the context in which firms are operating. As firms and legal systems adjust to this new regime, litigation can be expected to hold firms accountable, test expectations, and clarify the law. Failing to keep pace with demands to manage and disclose climate risk in a dynamic climatic setting is likely to increase litigation risk, such as for breaches of duty, false or misleading disclosure, or non-disclosure. Organisations will need to ensure that disclosures are based on rigorous assessment and are accurately communicated to minimise litigation risk.

Acclimatise – experts in physical risk for responding to TCFD recommendations

Acclimatise has worked on physical climate risk and adaptation with corporates and financial institutions for over a decade, helping them identify and respond to physical risks and to take advantage of emerging opportunities generated by a changing climate. We have witnessed the corporate, societal and environmental benefits stemming from the promotion of resilience-building strategies.

To discuss how your organisation can meet TCFD requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com

To discuss how changes and developments in climate-related regulations may affect your operations, please contact Nadine Coudel: N.Coudel(a)acclimatise.uk.com

Cover photo by Kelvin Zyteng on Unsplash.
Investor initiative to produce new guidance on understanding physical climate risks
Acclimatise News

Investor initiative to produce new guidance on understanding physical climate risks

By Robin Hamaker-Taylor

The Institutional Investors Group on Climate Change (IIGCC) has launched a new project to develop guidance for investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes.

The project will develop an IIGCC investor guide focusing on physical climate risk analysis with technical input from the specialist advisory firms Acclimatise and Chronos Sustainability, in collaboration with IIGCC members.

IIGCC is leading the initiative with the support of the Universities Superannuation Scheme (USS), one of the UK’s largest pension funds. Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change, explains: “In many ways, adaptation is the missing issue in the climate change debate. IIGCC’s new initiative will help investors to understand its importance and act on adaptation to climate change as an investment issue. This includes ensuring investors have the practical tools to account for the physical risks of climate change and are able to act on the opportunities found in addressing the issue, across both investment decisions and company engagement.”

David Russell, Head of Responsible Investment at USS, adds: “One of the key contributions of this project will be to focus on the risk posed by climate change across a range of asset classes. This will include sectors that are both dependent on access to water and other environmental resources, and those potentially impacted by a changing climate.”

The new guidance will include an introduction to the investment implications of physical climate hazards, and will collate information on tools and data sources needed to manage physical climate risks. Available later this summer, the guidance also aims to propose a process that investors can go through to identify, assess, manage and disclose climate-related physical risks and opportunities across their portfolios.

The United Nations Environment Programme has shown that the cost of necessary adaptation to climate change is between $140 to $300 billion per year across the global economy by 2030 alone, and point to a major gap in adaptation finance[. This offers potential new investment opportunities, in which investors can help build broader climate resilience, while also mitigating future losses otherwise incurred. This initiative will help investors better understand the nature of this opportunity.

The initiative is delivered as part of IIGCC’s ‘Investor Practices’ programme, which helps asset owners and managers better assess and manage both climate risk and opportunity, and to report on their actions more effectively.

Cover photo by Stephen Dawson on Unsplash.
Acclimatise becomes an official signatory of TCFD
Will Bugler

Acclimatise becomes an official signatory of TCFD

Acclimatise today became an official signatory of the Financial Sustainability Board’s (FSB) Taskforce on Climate-Related Financial Disclosure (TCFD). The initiative, established by Mark Carney and Michael Bloomberg, has been central in providing momentum for climate change action in the financial services industry.

Acclimatise has worked with UNEP FI and the world’s leading banks to help consider how they might implement the TCFD recommendations. Through its work, Acclimatise has helped develop methodologies for assessing physical climate risk to loan portfolios and is a leading advisor on climate risk and opportunity to the financial services industry.

The company’s supporting statement under the TCFD reads:

“Aligning strategies to stabilise our financial and climatic systems is vital. Corporate and financial institutions have a significant role to play in this. The incorporation of TCFD recommendations in their governance systems and decision-making processes is in fact key if we are to ensure a sustainable and climate compatible future, particularly in light of unmet governmental climate targets. We are proud to support this initiative and we will continue to excel at developing methodologies and metrics to help corporates and financial services organisations to identify, quantify, and disclose physical climate risks and opportunities.”

For more information about Acclimatise’s work on climate risk and financial services click here.

Image: World Economic Forum: Mark Carney, Governor of the Bank of England. World Economic Forum, Davos, Switzerland. CC by 2.0.

Update to landmark legal opinion highlights growing climate liability of company directors
Acclimatise News

Update to landmark legal opinion highlights growing climate liability of company directors

By Robin Hamaker-Taylor and Nadine Coudel

An update to the landmark 2016 Hutley opinion has been released by the Centre for Policy Development (CPD) on 29th March, 2019. The 2016 opinion set out the ways that company directors who do not properly manage climate risk could be held liable for breaching their legal duty of due care and diligence.

The supplementary opinion, provided again by Noel Hutley SC and Sebastian Hartford Davison on instruction from Sarah Barker, reinforces and strengthens the original opinion by highlighting the financial and economic significance of climate change and the resulting risks, which should be considered at board-level. It puts an emphasis on five key developments since 2016 that have built up the need for directors to take climate risks and opportunities into account and reinforced the urgency of improved governance of this issue. While the 2019 opinion is rooted in the Australian context, just as the 2016 opinion, it has much wider applicability, as much of the developments discussed in the update have been simultaneously happening in jurisdictions outside of Australia.

The five areas of development covered in the 2019 supplementary opinion include:

  1. Progress by financial supervisors: The 2019 opinion suggests statements made by Australian supervisory organisations such as the Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and the Reserve Bank indicate they now all see the financial and economic significance of climate change. Similar realisations have been happening among supervisory organisations in the UK, with the Prudential Regulation Authority (PRA) due to imminently release a supervisory statement on banks’ and insurers’ approaches to managing the financial risks from climate change, following a public consultation on the matter in late 2018 / early 2019. At the European level, the wider sustainability of the financial system is under review with the European Commission rolling out its Action Plan for Financing Sustainable Growth;
  • New reporting frameworks: Three new reporting frameworks have emerged since 2016. The most broadly applicable is The Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. In June 2017, the TCFD, a task force set up by the Financial Stability Board in 2015, published its final recommendations to help companies disclose climate-related risks and opportunities. The Principles for Responsible Investing (PRI) and CPD frameworks have now both aligned their climate-reporting frameworks with the TCFD recommendations. The other two reporting frameworks mentioned in the 2019 supplementary opinion are more relevant for the Australian context, and include the new recommendations on assessing climate risk materiality from the Australian Accounting Standards Board (AASB) and the Auditing and Assurance Standards Board (AUASB), as well as the updated guidance from the ASX Corporate Governance Council;
  • Mounting investor and community pressure: Investors and community groups are increasing voicing concern around climate risks;
  • Development of the scientific knowledge: The UN Intergovernmental Panel on Climate Change (IPCC) published a special report on the impacts of 1.5 °C warming in 2018. The opinion recognises this as a “notable development in the state of scientific knowledge” that affects the gravity and probability of climate risks which directors need to consider; and     
  • Advances in attribution science: Important developments in attribution science have now made it easier to identify the link between climate change and individual extreme weather events.

The opinion suggests management of climate risks will require engagement with company directors in certain sectors in particular. These include banking, insurance, asset ownership/management, energy, transport, material/buildings, agriculture, food and forest product industries.

CPD CEO Travers McLeod, explains the implications of this supplementary opinion for company directors, stating “the updated opinion makes it clear that the significant risks and opportunities associated with climate change will be regarded as material and foreseeable by the courts. Boards and directors who are not investing in their climate-related capabilities are exposing themselves and their companies to serious risks”, according to a press statement.

Mr Hutley and Mr Hartford Davis write “the regulatory environment has profoundly changed since our 2016 Memorandum, even if the legislative and policy responses have not” […]“These developments are indicative of a rapidly developing benchmark against which a director’s conduct would be measured in any proceedings alleging negligence against him or her.”

The 2019 update to the 2016 landmark Hutley opinion also provides ample evidence as to why company directors all over the world not only need to be aware of their firms’ contribution to climate change – it is just as important to assess and disclose their potential climate risks in a transparent manner. It is therefore vital to ensure that future business plans are in line with the Paris Agreement and to also anticipate and prepare for climate change impacts, both in terms of risks and opportunities. The voluntary TCFD recommendations provide a framework for both corporates and financial institutions for assessing and disclosing climate risks and opportunities, and mandated disclosures are on the horizon. 

Acclimatise – experts in physical risk assessment and disclosures

Acclimatise has worked on physical climate risk and adaptation with corporates and financial institutions for over a decade, helping them identify and respond to physical risks and to take advantage of emerging opportunities generated by a changing climate. We have witnessed the corporate, societal and environmental benefits stemming from the promotion of resilience-building strategies.

To discuss how your organisation can meet TCFD or other disclosure requirements, please contact Laura Canevari: L.Canevari(a)acclimatise.uk.com

Photo by Blogtrepreneur via Flikr.

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

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

By Laura Canevari

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

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

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

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

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

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

Key conclusions and remarks

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

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

Photo by Chris Liverani on Unsplash

PRA and FCA establish a joint Climate Financial Risk Forum
Acclimatise News

PRA and FCA establish a joint Climate Financial Risk Forum

By Robin Hamaker-Taylor

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

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

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

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

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

Photo by Colton Jones on Unsplash

Bank of England Governor indicates new climate risk rules are imminent
Will Bugler

Bank of England Governor indicates new climate risk rules are imminent

By Robin Hamaker-Taylor

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

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

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

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

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

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

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

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

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

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

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

Cover photo by Robert Bye on Unsplash.