Category: financial services

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

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

By Will Bugler

The UNEP Finance Initiative launched last month a technical background paper on adaptation finance which identifies barriers and opportunities for scaling up financing for climate change adaptation and resilience building. The paper, ‘Driving Finance Today for the Climate Resilient Society of Tomorrow’ refers to adaptation as “the biggest investment opportunity of this generation” with huge investment needs to build social and economic resilience.

The report was authored by an expert team led by Stacy Swann and Alan Miller of Climate Finance Advisors, with contributions from a review panel that included Acclimatise CTO Dr Richenda Connell and CEO John Firth who were joined by other experts from banking, investment, insurance, academia and government.

The release of this paper is a prelude to the first flagship report of the Global Commission on Adaptation (GCA), which is due to be presented on the 23rd September. Launched last year, the GCA aims to accelerate adaptation action, raising it up the political agenda and encouraging bold solutions such as smarter investments, new technologies and better planning.

The ‘Driving Finance Today’ paper identifies the barriers to scaling up financing for adaptation which include weak policies and conventions in the financial industry and a low technical capacity for climate risk management amongst others. It reflects the fact that despite a great deal of demand for climate adaptation finance, with UN estimates suggesting that by 2030 it will take $140 to 300 billion of investment per year to strengthen the resilience of societies and economies to climate change, progress to mobilise funding has been slow.

The paper also identifies a range of opportunities to accelerate the investment required to prepare the planet for climate change, though these face additional barriers such as the perceived lack of private benefits and the immaturity of business models. It presents six recommendations, with illustrative case studies, to promote resilience investment:

  1. Accelerate and promote climate-relevant financial policies;
  2. Develop, adopt, and employ climate risk management practices;
  3. Develop and adopt adaptation metrics and standards;
  4. Build capacity among all financial actors;
  5. Highlight and promote investment opportunities; and
  6. Use public institutions to accelerate adaptation investment.

Collectively, these recommendations provide the outline of a program that is ambitious, actionable, and can directly impact how finance can be unlocked for adaptation and resilience.

Download the UNEP FI / GCA background paper on adaptation finance here.

Listen to the webinar held for the launch of the paper here.

Using Earth Observation data in climate risk assessment for financial institutions

Using Earth Observation data in climate risk assessment for financial institutions

By Robin Hamaker-Taylor and Jennifer Steeves

Working with financial institutions to understand analyse and disclose physical climate risks and opportunities to loans, investments and across portfolios demands the application of the most up-to-date climate data and information. By deploying data from historic climate observations, modelled projections of future climate and various social, environmental and economic datasets it is possible to begin to build a picture of risk exposure to financial institutions. In recent years, Acclimatise has also been working with new data sources such as Earth Observation (EO) data, which offer the potential to develop our understanding of real-time risk exposure, especially in areas where other data is sparse.

Acclimatise worked with leading programmes, such as the European Space Agency’s Earth Observation for Sustainable Development Climate Resilience (EO4SD CR) cluster, to demonstrate the potential of EO data to build climate resilience. The potential of EO data is enormous, and the developments in the temporal and spatial resolution of satellite data is a powerful tool of analysis. In recognition of this, Acclimatise this month became an Associate Member of Group on Earth Observations (GEO). The GEO is an intergovernmental partnership that improves the availability, access and use of EOs for a sustainable planet.

What is EO and EO data?

EO is the collection, analysis and presentation of information about the Earth’s physical, chemical and biological systems and has the capability to do so across remote and inaccessible terrain. It involves monitoring and assessing the status of and changes in the natural and man-made environment. There are now thousands of data buoys operating in the world’s oceans, hundreds of thousands of land-based environmental monitoring stations, tens of thousands of observations from aircraft platforms and numerous environmental satellites orbiting the globe, according to GEOSS and other academic research.

EO satellites can collect real-time data on a wide range of indicators such as water distribution, land use, water cycles, atmospheric profiles, heat mapping, sea surface evaluations, and global-regional energy exchanges. EO data provide large quantities of timely and accurate environmental information, which, when combined with other datasets, can give unique insights into managing climate risks.

Of the 50 Global Climate Observing System (GCOS) essential climate variables, roughly half can only be observed from space, making EO an irreplaceable component of climate monitoring. EO datasets are critical in regions where insufficient information is available from weather stations (which is often the case), and its consistency facilitates coordination of information sharing. It is also very useful where on-the-ground assessments of infrastructure are not possible, for example, due to safety concerns.

Why is EO data useful for financial institutions?

Financial institutions (FIs) are accustomed to integrating data from various sources into their risk screening processes. As FIs become increasingly aware of the need to consider physical climate risks in their assessments, EO data offers enormous potential. FIs often lend or invest in diverse geographies with varying levels of available climate hazard data.

EO datasets can complement data held by FIs on their borrowers or investments including data on physical assets, on-site operations, supply chains, markets and logistics. High-quality data on climate parameters combined with other critical investment-relevant information helps investors and asset managers understand current and future risks to their investments across sectors. EO data is often used for post-disaster damage assessment. EO data can also be integrated into existing tools platforms and analyses used by FIs.

Evidence from current uses of EO data by financial institutions

To date, EO data has been used in the context of climate risk primarily by development finance institutions (DFIs), which indicates how commercial FIs could eventually use this type of data. The EO4SD Climate Resilience Cluster provides EO-based products and services to DFIs that have investments in developing countries to support climate resilience. DFIs and other agencies supported through the project include the World Bank, Asian Development Bank (ADB), Inter-American Development Bank (IDB), African Risk Capacity (ARC), Multilateral Investment Guarantee Agency (MIGA) and the International Finance Corporation (IFC).

For example, the EO4SD project is collaborating with a World Bank urban development initiative in Greater Monrovia, Liberia to provide EO-based products and services. An example of this is a coastal erosion service involving 41km of shoreline evolution monitored through a 34-year satellite series, which has been acquired through analysis of satellite images from Landsat, Sentinel 2 and Worldview 3. The analysis estimates that the land loss area from 1984 to 2019 in the 50 km coastline of Greater Monrovia is 0.8 km2. This can be overlaid with data on population and critical infrastructure to aid investment planning.

Flood mapping is also benefiting from EO-based services as EO data provides consistent historical information on floods. The 34-year high-resolution sea-level rise data was also used to identify coastal and inland flood risk areas in parts of Monrovia. The model integrates sea level rise projections to 2030, mapped against a digital terrain model to identify high flood risk areas. These flood maps help the World Bank and local authorities identify the most effective flood management actions and enable better planning decisions to avoid unnecessary development in risky areas.

The direction of travel: What next for EO?

EO data can help banks and lenders around the world understand and prepare for climate change impacts, accounting for future climate risks and opportunities in investment and lending decisions. As EO data gets easier to extract and apply, its use in climate risk assessments will continue to unfold.

One exciting potential application of EO data is in the context of trend analysis where past events are correlated to experienced losses to help paint a picture of risk. There is also potential to develop statistical information using EO data for certain climate hazards such as flooding. Processed climate data will soon be available on flood return periods, for example, as will statistics on flood extent and flood duration. Acclimatise are now gearing up for phase 2 of the EO4SD project, which will build the capacity of DFIs and partner agencies in the practical application of EO data.

Stay in touch with how this project unfolds and how we are using EO to build climate resilience here.

Australian corporate regulator updates guidance on climate-related disclosure

Australian corporate regulator updates guidance on climate-related disclosure

Earlier this month the Australian corporate regulator, ASIC published updates to clarify the application of its existing regulatory guidance to the disclosure of climate change-related risks and opportunities.

ASIC reviewed its guidance following the recommendations of a Senate Economics References Committee report on Carbon Risk and the Government’s response which encouraged ASIC to consider whether its high-level guidance on disclosure remained appropriate.

While ASIC’s review found that its existing, principles-based regulatory guidance remains fit for purpose, to help stakeholders to comply with their disclosure obligations, the organisation has updated its guidance to, amongst other things:

  • incorporate the types of climate change risk developed by the G20 Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD) into its list of examples of common risks that may need to be disclosed;
  • highlight climate change as a systemic risk that could impact an entity’s financial prospects for future years and that may need to be disclosed in an operating and financial review (OFR);
  • reinforce that disclosures made outside the OFR (such as under the voluntary TCFD framework or in a sustainability report) should not be inconsistent with disclosures made in the OFR; and
  • make a minor update to INFO 203: Impairment of non-financial assets: Materials for directors to highlight climate change and other risks that may be relevant in determining key assumptions that underly impairment calculations.

The guidance has also been updated to make clear that in ASIC’s view, the risk of directors being found liable for a misleading or deceptive forward-looking statement in an OFR is minimal provided the statements are based on the best available evidence at the time, have a reasonable basis and there is ongoing compliance with the continuous disclosure obligations when events overtake the relevant statement made in the OFR.

ASIC’s review of regulatory guidance follows last year’s publication of ASIC Report 593: Climate Risk Disclosure by Australia’s Listed Companies targeting listed companies, their directors and advisors. High-level recommendations set out in REP 593 included to:

  • adopt a probative and proactive approach to emerging risks, including climate risk;
  • develop and maintain strong and effective corporate governance which helps in identifying, assessing and managing risk;
  • comply with the law where it requires disclosure of material risks; and
  • disclose meaningful and useful climate risk-related information to investors –the voluntary framework developed by the TCFD has emerged as the preferred standard in this regard and ASIC strongly encourages listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.

ASIC commissioner John Price said, ‘Climate change is an area which ASIC continues to focus on. The updates to our regulatory guidance, together with the publication last year of Report 593, round out ASIC’s response to the Senate Report on Carbon Risk. Our updates will help stakeholders to comply with their disclosure obligations in prospectuses and the operating and financial review for listed companies’.

ASIC welcomes the continuing emergence of the TCFD framework as the preferred market standard, both here in Australia and internationally, for voluntary climate change-related disclosures. ASIC considers this to be a positive development and we again strongly encourage listed companies with material exposure to climate change to consider reporting voluntarily under the TCFD framework.

‘While disclosure is critical, it is but one aspect of prudent corporate governance practices in connection with the mitigation of legal risks. Directors should be able to demonstrate that they have met their legal obligations in consideringmanaging and disclosing all material risks that may affect their companies. This includes any risks arising from climate change, be they physical or transitional risks.’ Mr Price said.

In the coming year, ASIC will conduct surveillances of climate change-related disclosure practices by selected listed companies. ASIC will also continue to participate in the Council of Financial Regulators’ working group on climate risk and participate in discussions with industry and other stakeholders on these issues.

Read ASICS updated regulations here:

Acclimatise publishes response to EC consultation on update to the Non-Binding Guidelines on Non-Financial Reporting

Acclimatise publishes response to EC consultation on update to the Non-Binding Guidelines on Non-Financial Reporting

By Acclimatise staff

EU Directive 2014/95, the Non-Financial Reporting Directive requires large public interest entities with over 500 employees (listed companies, banks, and insurance companies) to disclose certain non-financial information. As required by the directive, the European Commission has published non-binding guidelines to help companies disclose relevant non-financial information in a more consistent and more comparable manner.

As part of its Action Plan for Financing Sustainable Growth the Commission has committed to updating the Non-Binding Guidelines on Non-Financial Reporting, specifically with regard to the reporting of climate-related information. The Commission intends to publish the new supplement on the reporting of climate-related information in June 2019, and held a public consultation with stakeholders on the update of the non-binding guidelines in early 2019. The consultation document can be found here.

Acclimatise responded to the Commission’s consultation document in March 2019. We understand that the Task Force on Climate-related Financial Disclosures (TCFD) recommendations have been an important step change in the climate risk governance landscape. As such, Acclimatise supports the integration of the TCFD recommendations within these guidelines. Aligning strategies to stabilise both financial and climatic systems is vital. Corporate and financial institutions have a significant role to play in this. The incorporation of climate risk analysis and disclosure in their governance systems and decision-making processes is key if we are to ensure a sustainable and climate compatible future.

Acclimatise’s responses, in full, are as follows:

On Chapter 2 ‘How to use these guidelines’:

1) In response to ‘According to the Non-Financial Reporting Directive,[…]’: Climate-related information can be considered to fall into the category of environmental matters.” It is important to establish, however, that climate change is not just an environmental issue, it is also a socio-economic challenge. As recently pointed out by Batten (2019) from the Bank of England (BoE), gradual global warming is likely to affect the productive capacity of the economy through several channels, such as through impacts to natural capital (e.g. natural resources), physical capital (e.g. infrastructure) and human capital (employees) among others. Similarly, climate change can impact human rights, affecting access to natural resources and generating social conflict. Climate change is therefore a cross-cutting issue that also needs to be accounted for when companies disclose information on non-environmental issues that are nonetheless affected by climate change. Acclimatise understands that climate change should not be considered as, primarily, an environmental issue; as this diminishes the social and economic impacts, the financial consequences and the scale and systemic responses needed.

2) In response to ‘climate-related risks’: It is worth noting that physical risks will also result in corporate liability. Attribution science is changing the ‘foreseability’ of climate extreme events, challenging the use of ‘force majeure’ clauses. This means companies may become liable in cases where potential risks are foreseen, yet not mitigated or avoided. The more foreseable any climate related peril, the less tenable will it be a force majeure defense, and the greater the more the incentive to manage the risk. In our report for the World Bank in 2016. ‘Emerging Trends in Mainstreaming Climate Resilience in Large Scale, Multi-sector Infrastructure PPPs’ we explored the challenges and risks around the use of force majeure clauses.

3) In response to ‘climate-related opportunities’: A framework to understand opportunities has been recently developed by Acclimatise under a UNEP FI led initiative with commercial banks, which could potentially be useful for Annex I on the Sector-specific disclosures for banks and insurance companies. The framework sets out a taxonomy of opportunities relevant to banks based on: i) managing existing risks, ii) responding to emerging risks and iii) preparing for market shifts. This framework can assist banks in understanding the potential finance needs of their clients, and their role in providing finance for climate resilience. The taxonomy could also be utilised by corporates. See section 4 of our ‘Navigating a changing climate’ report.

On Chapter 3.1: ‘Business Model’:

The nature of business network relationships strongly influences companies’ strategic identity and risk profile. Companies should therefore:

  • Examine how business relationships may increase/reduce their exposure to physical and transitional risks;
  • Identify how new opportunities to take climate action can stem from their existing network of relationships; and
  • Evaluate how new opportunities may also arise from the development of new business relations.

Regarding ‘Type 2 disclosures on the business model’:

Companies should consider how business interdependencies engrained in their market positioning might generate risks from a changing climate. Important considerations to account for are relationships across their value chain, for example, with input providers (e.g. are providers located in areas exposed to climate hazards?) and with customers (e.g. will costumer demands shift under a changing climate?).

On Chapter 3.2: ‘Policies and Due Diligence Processes’:

On type 2 disclosures: Further information relating to physical risks should be included. For example:

  • How the company’s engagement with its value chain is helping to tackle physical risks;
  • How managing physical risks would require an investment in employee´s skill sets, such as the development of geospatial in-house capabilities to evaluate the physical exposure of asset’s locations.

On Chapter 3.3: ‘Outcomes’:

In the process of better aligning climate action targets in the public sector with private sector activities, it would seem useful to further explore how companies’ climate related policy outcomes align with Government’s Nationally Determined Targets. There seems to be a general gap on how private sector targets contribute/complement national commitments; how they fit together to reach global goals. This document offers an opportunity to encourage companies to aggregate asset level data to the country level for disclosures to say something meaningful about how their contribution towards climate action align with UNFCCC government pledges.

However, there must be an incentive for companies to undertake additional reporting against national

government policy targets. Note also that this can only produce an accurate evaluation of the private sector contribution towards national targets if disclosure is regulated, is mandatory (at all levels, including SMEs) and follows a standardised process. It is not clear how such a process would command the support of the private sector.

On Chapter 3.4: ‘Principal Risks and Their Management’:

The 2018 report ‘Advancing TCFD guidance on physical climate risks and opportunities’ offers valuable recommendations that could provide further guidance to businesses on how to disclose principal risks and their management. This source is cited at the beginning of the document but has particular relevance to this section. Recommendations 1-7 on Risk management and 13-18 on Scenario Analysis could assist companies preparing their risk disclosures.

Further information can be found in the report commissioned by the European Bank for Reconstruction and Development (EBRD) and the Global Centre of Excellence on Climate Adaptation (GCECA) (2018) here.

On Chapter 3.5 ‘KPIs’:

Type 2 under physical risks: It is worth noting that the KPIs included for transition risks are not normative in the sense they collect ‘neutral’ information, whilst the KPIs on adaptation are directly asking to report on negative outcomes (e.g. ‘Assets committed in regions likely to become more exposed to acute or chronic physical climate risks’). KPIs for physical risks could also include indicators on financial performance (e.g. loss of income, increased OpEX and increased CaPEX).

There are no KPIs on physical risks addressing risk mitigation activities at the supply chain level. Consider referring to for indicators on climate impacts that could be turned into KPIs at the sector level.

On Annex I ‘Proposed disclosures for Banks and Insurance companies’:

A framework to understand opportunities has been recently developed by Acclimatise under a UNEP FI-led initiative with commercial banks, which could potentially be useful for Annex I on the Sector-specific disclosures for banks and insurance companies. The framework sets out a taxonomy of opportunities relevant to banks based on: i) managing existing risks, ii) responding to emerging risks and iii) preparing for market shifts. This can assist banks in understanding the potential finance needs of their clients, and the role of banks in providing finance for climate resilience. The taxonomy could also be applied to corporates. For more information, see section 4 of our ‘Navigating a changing climate’ report, available here.

Several questions stem from the review of this Annex:

  • Why are scenarios accounted for in the lending activities and not in investments?
  • Why do KPIs for asset management activities not link to risks and opportunities as for the other segments?

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 climate risk disclosure requirements, and assess and disclose physical climate risks and opportunities, please contact Laura Canevari: L.Canevari(a)

Cover photo by John Unwin on Unsplash.
Five months remain for UK banks to demonstrate their plan to address PRA’s new supervisory statement on climate risks

Five months remain for UK banks to demonstrate their plan to address PRA’s new supervisory statement on climate risks

By Robin Hamaker-Taylor

On 15 April 2019, the Bank of England’s Prudential Regulation Authority (PRA) issued a policy statement (PS11/19) on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. Importantly, PS11/19 included the final version of  supervisory statement (SS3/19) on managing the financial risks from climate change. The increased attention on climate change by UK financial regulators is the result of an extensive engagement and consultation with UK banks, insurers, and stakeholders throughout 2018 and early this year, set out in Consultation Paper (CP) 23/18.

Building on previous reviews of current practices in the banking and insurance sector, the PRA found that too few firms are taking a strategic approach toward managing climate related financial risks. For this reason, the new SS sets out clear expectations concerning the strategic approach that banks and insurers should take in relation to financial risks generated by climate change. The PRA has identified climate change as a future financial risk that is also relevant today.

As set out in PS11/19, firms should have an initial plan in place to address the PRA expectations and submit an updated Senior Management Function (SMF) form by 15 October, 2019. It is understood that the PRA is expecting senior managers to be up to speed with the PRA’s expectations by this date – in just under five months’ time – rather than just getting into grips with the new SS. The PRA’s expectations are summarised in our earlier piece, available here.

Acclimatise and Vivid Economics have developed a new guidance document which offers an overview of PRA expectations as set out in SS3/19. In it, we review our integrated suite of advisory services and analytical toolkits which support banks in meeting the expectations of the supervisory statement. Our approach draws on our extensive track records in physical and transition climate risk assessment and management in the real economy.

To find out more about how we can help your firm meet the PRA’s expectations on managing climate-related financial risks, and to obtain a copy of our new guidance document, please contact Robin Hamaker-Taylor: R.Hamaker-Taylor(at)  

Cover photo by John Unwin on Unsplash.
Central bank network issues warnings of climate-related financial risks and recommendations for central banks, supervisors and policymakers

Central bank network issues warnings of climate-related financial risks and recommendations for central banks, supervisors and policymakers

By Robin Hamaker-Taylor and Laura Canevari

Members of the Central Banks and Supervisors Network for Greening the Financial System (NGFS) have called for collective action to manage climate-related financial risks. In its first comprehensive report, the NGFS has issued six recommendations; four for central banks and supervisors, aimed at enhancing their role in greening the financial system, and a further two recommendations for policymakers aimed at facilitating the work of central banks and supervisors.

The NGFS brings together 36 central banks and supervisors – representing five continents, half of global greenhouse gas emissions and the supervision of two thirds of the global, systemically important, banks and insurers. The report is the result of the group’s work to identify environmental and climate risk management best practices in the financial sector. Over the last 16 months, the NGFS has found that climate change presents significant financial risks that can only be mitigated through an early and orderly transition.

The six recommendations in the NGFS report consider the distinctive elements of climate change-related financial risks and the need to ensure resilience in finance. They are as follows:

Recommendation 1 – Central banks and supervisors: Integrating climate-related risks into financial stability monitoring and micro-supervision. The NGFS calls on central banks and supervisors to start integrating climate-related risks into micro-supervision and financial stability monitoring. First, this means developing and applying comparable and consistent approaches to assess climate-related risks, such as scenario analysis. The report includes guidance on designing scenario analysis, and suggests that there are two important dimensions to consider when assessing the impact of physical risks and transition risks on the economy and the financial system:

  • (a) The total level of mitigation or, in other words, how much action is taken to reduce greenhouse gas emissions (leading to a particular climate outcome), and
  • (b) Whether the transition occurs in an orderly or disorderly way, i.e. how smoothly and foreseeably the actions are taken. These two dimensions allow for scenarios to be developed as they present a continuum of different outcomes and transition pathways to achieve them.

The guidance also indicates that further work is also required to translate economic scenarios into financial risk parameters for financial stability analysis, and that financial institutions should not delay their own analyses while central banks work out scenario analysis guidance. Second, this recommendation means integration of climate-related factors into prudential supervision and the report sets out a high-level 5-step framework for this, starting with awareness raising.

Recommendation 2 – Central banks and supervisors: Integrating sustainability factors into own-portfolio management. The NGFS encourages central banks to lead by example in their own operations. Without prejudice to their mandates and status, this includes integrating sustainability factors into the management of some of the portfolios at hand (own funds, pension funds and reserves to the extent possible).

Recommendation 3 – Central banks and supervisors: Bridging the data gaps. The NGFS recommends that the appropriate public authorities share data of relevance to Climate Risk Assessment (CRA) and, whenever possible, make them publicly available in a data repository. The NGFS sees merit in setting up a joint working group with interested parties to bridge existing data gaps. The deliverable of this group would be a detailed list of data items that are currently lacking but which are needed by authorities and financial institutions to enhance the assessment of climate-related risks and opportunities – for example, physical asset level data, physical and transition risk data or financial assets data. The report recognises that important challenges around data remain, including data availability, time horizon, and lack of expertise. The NGFS also indicates it is ready to initiate work with interested parties on setting out the list of currently lacking data items.

Recommendation 4 – Central banks and supervisors: Building awareness and intellectual capacity and encouraging technical assistance and knowledge sharing. The NGFS encourages central banks, supervisors and financial institutions to build in-house capacity and to collaborate within their institutions, with each other and with wider stakeholders to improve their understanding of how climate-related factors translate into financial risks and opportunities. The NGFS therefore encourages central banks, supervisors and financial institutions to:

  • allocate sufficient internal resources to address climate-related risks and opportunities;
  • develop training to equip employees with the necessary skills and knowledge;
  • work closely together with academics and think-tanks to inform thinking; and
  • raise awareness by sharing knowledge within the financial system.

The NGFS also encourages relevant parties to offer technical assistance to raise awareness and build capacity in emerging and developing economies when possible.

Recommendation 5 – Policymakers: Achieving robust and internationally consistent climate and environment- related disclosure. The NGFS emphasises the importance of a robust and internationally consistent climate and environmental disclosure framework. NGFS members collectively pledge their support for the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD recommendations provide a framework for consistent, comparable and decision-useful disclosure of firms’ exposures to climate-related risks and opportunities. The NGFS encourages all companies issuing public debt or equity as well as financial sector institutions to disclose in line with the TCFD recommendations. The NGFS recommends that policymakers and supervisors consider further actions to foster a broader adoption of the TCFD recommendations and the development of an internationally consistent environment disclosure framework. This includes authorities engaging with financial institutions on the topic of environment and climate-related information disclosures, aligning expectations regarding the type of information to be disclosed and sharing good disclosure practices.

Recommendation 6 – Policymakers: Supporting the development of a taxonomy of economic activities. The NGFS encourages policymakers to bring together the relevant stakeholders and experts to develop a taxonomy that enhances the transparency around which economic activities (i) contribute to the transition to a green and low-carbon economy and (ii) are more exposed to climate and environment-related risks (both physical and transition). Such a taxonomy would:

  • facilitate financial institutions’ identification, assessment and management of climate and environment-related risks;
  • help gain a better understanding of potential risk differentials between different types of assets;
  • mobilise capital for green and low-carbon investments consistent with the Paris Agreement.

Policymakers would thus need to:

  • ensure that the taxonomy is robust and detailed enough to (i) prevent green washing, (ii) allow for the certification of green assets and investments projects and (iii) facilitate risk analysis;
  • leverage existing taxonomies available in other jurisdictions and in the market and ensure that the taxonomy is dynamic and reviewed regularly to account for technological changes and international policy developments;
  • make the taxonomy publicly available and underline the commonalities with other available taxonomies. Eventually, it should strengthen global harmonisation to ensure a level playing field and prevent the dilution of green labelling.

Together this network of central banks has sent a powerful signal – that climate change presents significant financial risks that can only be mitigated through an early and orderly transition. Mark Carney, governor of the Bank of England, Banque de France governor Villeroy de Galhau, along with NGFS chair Frank Elderson, board member of De Nederlandsche Bank issued a stark warning about the financial risks of climate change last week in an open letter alongside the NGFS report. Published on the same day as the report, the letter calls for ambitious and collective leadership across countries, in order to ensure the stability of the wider financial system in the face of climate change.

The NGFS will now work to enable an orderly transition by supporting the development of additional resources, including a handbook on climate and environment-related risk management for supervisory authorities and financial institutions, voluntary guidelines on scenario-based risk analysis and best practices for incorporating sustainability criteria into central banks’ portfolio management.

Cover photo by Robert Bye on Unsplash.

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

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

By Laura Canevari and Robin Hamaker-Taylor

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

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

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

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

Cover photo by Floraine Vita on Unsplash.


UK regulators host first meeting of Climate Financial Risk Forum

UK regulators host first meeting of Climate Financial Risk Forum

By Will Bugler

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

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

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

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

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

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

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

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

PRI makes TCFD-style climate disclosures mandatory in 2020 reporting cycle

PRI makes TCFD-style climate disclosures mandatory in 2020 reporting cycle

By Robin Hamaker-Taylor

In February 2019, the Principles for Responsible Investing (PRI) initiative, announced it will make several of its climate risk indicators mandatory for PRI signatories. PRI requires signatories to annually report various environmental, social, and governance (ESG) metrics via the PRI reporting tool. In 2018, the PRI introduced TCFD-aligned indicators to its Reporting Framework, including reporting on four indicators of climate risks: governance, strategy, risk management, and metrics and targets. Until now, this reporting has been voluntary and disclose.  

Which indicators will be mandatory?

Starting in 2020, the PRI’s strategy and governance (SG) indicators will be mandatory to report, though it will remain voluntary to disclose responses publicly. These indicators include:

  • SG 01 CC: outline overall approach to climate-related risks;
  • SG 07 CC: provide overview of those in the organisation that have oversight, accountability and/or management responsibilities for climate-related issues; and
  • SG 13 CC: outline how strategic risks and opportunities are analysed.

PRI may require further climate risk reporting in the future

PRI currently has over 2,300 signatories, includingasset owners, investment managers, and service providers that collectively manage over $83 trillion in assets. This change in their reporting framework will greatly increase the amount of climate-related reporting within in its framework by signatories. This move also indicates the direction of travel regarding reporting on climate risks: the PRI has indicated that the remaining PRI climate risk indicators will stay voluntary with a view to becoming mandatory as good practice develops.

The climate change indicators of the overall Reporting Framework can be found here [pdf].

What is the PRI?

The PRI is a non-profit independent organisation that works to understand the investment implications of environmental, social and governance (ESG) factors. The PRI supports its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The organisation acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole.

What are the Principles for Responsible Investment?

The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles. Principle 6: We will each report on our activities and progress towards implementing the Principles

Photo by Sean Pollock on Unsplash

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

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

By Laura Canevari

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

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

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

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

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

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

Key conclusions and remarks

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

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

Photo by Chris Liverani on Unsplash