Category: TCFD

New report reveals current state of climate disclosure amongst ASX200 companies

New report reveals current state of climate disclosure amongst ASX200 companies

By Robin Hamaker-Taylor

The Australian Council of Superannuation Investors (ASCI) published a report on the status of climate reporting among ASX200 companies* in late September 2020. The ASCI is comprised of 37 Australian and international asset owners and institutional investors who collectively own around 10 per cent of every ASX200 company. To develop a picture of how these corporates are taking climate action and disclosing, the ASCI analysed all publicly available documents produced by ASX200 entities (as of 31 March 2020). This includes Annual Reports, Sustainability Reports, standalone TCFD Reports, company websites and ASX announcements.

The report indicates that there has been a surge in disclosure against the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. In 2017, just 11 companies disclosing against the TCFD framework, which has grown to 60 ASX200 companies by 2019. A further 14 companies have also committed to disclose against the recommendations.

The research also shows that there has been an increase in the action on climate transition risks. For example, there has been increased adoption of net-zero emissions commitments, as net-zero commitments have emerged as the latest strategic front in managing climate change exposures, according to the ASCI. The research also shows that science-based targets are gaining traction.

While the report generally showcases increased action in relation to transition climate risks, it also flags how firms are taking action in relation to physical climate risk. ASX200 companies are starting to disclose physical climate risks in a meaningful way, though at present just 10 firms were identified in this category, including a variety of corporates, ranging from commercial banks to natural resources and oil & gas companies. ASCI’s research shows that physical risk analysis and disclosure is still in early stages. As it stands, quantification of the financial impacts of physical climate risks and necessary capital expenditures for climate adaptation are not yet disclosed by ASX200 companies.

Corporates in Australia and beyond can look to this report to understand how large corporates are taking climate action and disclosing that. The report rightfully points out that investors and other stakeholders need companies to begin to quantify the potential financial impacts of physical climate risk or the cost of capital expenditure to build resilience. Whilst the TCFD recommendations provided a framework for disclosing transition and physical climate risks and opportunities, they left organisations to develop their own methodologies and approaches for implementing the disclosure recommendations. Acclimatise, along with the European Bank for Reconstruction and Development (EBRD), the Global Centre on Adaptation (GCA), a range of partners from the financial, corporate and regulatory sector as well as consultancy firm Four Twenty Seven, developed a set of recommendations on how institutions can include physical climate risks and opportunities into their financial and corporate reporting. This is available on the EBRD’s physical climate risk knowledge hub, accessible by clicking here.

The full ASCI report is available by clicking here.

* The ASX200 is a stock market index listed on the Australian Securities Exchange. It is based on the 200 largest ASX listed stocks, which together account for around 80% of Australia’s sharemarket capitalisation, according to ASX200 List, 2020.


Cover photo by Jordan on Unsplash.
Launch of “Charting a New Climate: State-of-the-art tools and data for banks to assess credit risks and opportunities from physical climate change impacts”

Launch of “Charting a New Climate: State-of-the-art tools and data for banks to assess credit risks and opportunities from physical climate change impacts”

8 September 2020 – UN Environment Programme Finance Initiative (UNEP FI) has released a report on physical climate risks and opportunities from Phase II of its Task Force for Climate-related Financial Disclosures (TCFD) Banking Program with climate risk advisory and analytics firm, Acclimatise. The report, “Charting a New Climate”, provides a state-of-the-art blueprint to support financial institutions to navigate the changing physical climate risk landscape.

For banks, investors and financial institutions the COVID-19 pandemic has demonstrated the widespread consequences of systemic, global risks. As such, the financial sector has continued to recognize the importance of responding effectively to climate risks and seizing opportunities. More firms than ever before are disclosing their climate risks and opportunities under the TCFD framework. At the same time, regulators and investors are demanding greater transparency on the way climate change will impact future business operations.

The TCFD Phase II banking pilot engaged thirty-nine global financial institutions on six continents. The program empowered participants to identify, assess, and manage their climate risks and opportunities. Participating banks were led through a series of modules designed to expand their physical risk and opportunities toolkits. Other climate experts were consulted throughout the program including analytics providers and leading climate scientists.

Phase II of UNEP FI’s Banking Pilot began in 2019 and builds upon the outcomes and findings of Phase I. The Phase I Pilot involved 16 commercial banks and developed initial methodologies for undertaking forward-looking scenario-based assessments of climate risks and opportunities in loan portfolios, in line with the TCFD recommendations. For physical risks and opportunities, it culminated in the publication of “Navigating a New Climate” in 2018.

The new report, “Charting a New Climate”, provides financial institutions with a state-of-the-art blueprint for evaluating physical risks and opportunities. Complete with case studies from participating banks, the report investigates leading practices for five critical topics related to physical risks and opportunities:

  1. Extreme events data and data portals – reviewed examples of climate and climate-related extreme events data and portals from both public (free to use) and commercial data providers[1].
  2. Portfolio physical risk heatmapping – recognized the benefits of examining total portfolio exposure and identifying where higher physical risks may lie before moving on to ‘deep-dive’ assessments of at-risk portfolio segments.
  3. Tools for physical risk assessment of financial risk – aimed to improve banks’ understanding of commercially-available tools and analytics, as well as training the Phase II banks to use the Phase I Excel-based methodologies.
  4. Physical risk correlation analysis of finance institution portfolios – was developed as banks recognized the value of having a deeper understanding of observed relationships between loan performance metrics and climate-related events.
  5. Analysis of opportunities driven by physical climate risk – aimed to provide insights into the climatic, business, policy and market-led drivers of physical risk-related opportunities.

The TCFD provides a useful framework for assessing and reporting on physical risks and opportunities; “Charting a New Climate” gives firms an expanded toolbox with which to approach this important work. Despite the tangible benefits to participating institutions, the insights contained within the report are also relevant for organisations across the finance sector. The toolkit developed in Phase II provides a comprehensive way for organisations to consider their physical risks and opportunities and move from assessment to action.

Charting a New Climate” marks the beginning, not the end, of the journey for financial institutions looking to holistically consider physical impacts. Banks need to continue to improve the external and internal streams they rely on for climate data about their borrowers. Tool providers will increasingly need to consider the interaction effects of simultaneous hazards in a warming world and the complex cause-effect chains linking those hazards to investment performance. Governance and risk management functions will need to integrate climate into their existing policies. The banking sector has a major role to play in implementation of the Paris Agreement by mobilizing financial flows to deliver adaptation and climate resilience.

For media enquiries and a copy of the embargoed report, please contact Mustafa Chaudhry on Mustafa.chaudhry@un.org

Download “Charting a New Climate” here.

Excerpts from Charting a New Climate

  • The Phase II pilot aimed to provide active guidance to banks on some of the pressing challenges in assessing physical risks and opportunities, focused on key methodological issues highlighted in Phase I. It took as its starting point the ‘future directions’ identified in the final chapter of the Phase I report, which identified key challenges and proposed ways forward to begin to address them. It aimed to deepen and improve upon the Phase I methodologies. This Phase II report therefore provides richer technical guidance, and more information on resources available to assess physical risks and opportunities than its Phase I forerunner.
  • Case Study from [Redacted]: Physical risk analytics are not homogenous between vendors even for listed companies, while there are particular challenges in assessing physical risks for SMEs due to a lack of data on those companies. Scenarios are not granular enough and not all the hazards are integrated. Overall, there is still a lot of room for improvement in the information area. Key areas of improvement we would wish to see from physical risk analytical tools include greater flexibility, accuracy and easy management of massive volumes of information (e.g. retail mortgages).
  • Previous correlation studies show that storm surges, wildfires, sea level rise, inland flooding, drought, and other hazards are already impacting financial portfolios. This is because globally significant climate models such as El Niño and the Pacific Decadal Oscillation drive extreme weather, physical risks, and related socio-economic impacts. By discovering opposing associations (such as floods in one region coinciding with droughts in another) it may eventually be possible for portfolio managers to hedge against such physical risks.
  • Physical climate change impacts are often considered as a risk management challenge. What is missing is a recognition of the banking sector’s critical role in the implementation of the Paris Agreement by mobilizing financial flows to deliver adaptation and resilience. It is essential that banks assess and explore the opportunities to provide finance within their markets and to their counterparties. The opportunities framework has been designed to enable banks to explore how they can align their strategic and operational activities with the Paris Agreement and play a major role in the mobilization of private sector finance towards adaptation. This chapter explores several key drivers which will influence the demand for finance from counterparties as they respond the impacts of a changing climate.
  • Physical risk correlation analysis of FI portfolios – was developed as banks recognized the value of having a deeper understanding of observed relationships between loan performance metrics and climate-related events. Some banks have reported that borrowers are already being affected by climate and weather events, and these effects provide early signals of a changing climate, and empirical evidence which may help to calibrate forward-looking physical climate risk assessments. The module provided a step-by-step process for banks to undertake correlation analysis with a worked example using actual property values for an anonymized coastal city and its neighborhoods in the US. The results revealed neighborhoods and types of house experiencing ‘climate gentrification’ – a term used to describe increases in real estate values in neighborhoods that are more resilient to climate-related threats. The module also summarized recent developments in scientific research on correlation analysis and more sophisticated statistical techniques, based on a review of more than 50 studies investigating flood, drought and wildfire risks within the real estate and agriculture sectors.

Quotes

The Working Group

The Working Group includes the following thirty-nine banks: ABN-AMRO, ABSA, Access Bank, Bank of Ireland, Barclays, BMO, Bradesco, Caixa Bank, CIBC, CIMB, Citibanamex, Credit Suisse, Danske Bank, Deutsche Bank, DNB, EBRD, FirstRand, ING, Intesa Sanpaolo, Itau, KBC, Lloyds, Mizuho, MUFG, NAB, Nat West, Nedbank, NIB, Nomura, Nordea, Rabobank, Santander, Scotia Bank, Shinhan, Standard Bank, Standard Chartered, TD Bank, TSKB and UBS to develop a blueprint for assessing the climate-related physical risks and opportunities for banks’ corporate credit portfolios.

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About

Acclimatise

Acclimatise is a specialist advisory and analytics company providing world-class expertise in climate change adaptation and risk management. Founded in 2004, their mission is to help clients understand and adapt to climate risk and take advantage of the emerging opportunities that climate change will bring. With offices in the UK, US, India and mainland Europe, Acclimatise has worked in over 60 countries worldwide. Working with financial institutions, national and local governments, multilateral organisations, and major corporations, Acclimatise has been at the forefront of climate change adaptation for over a decade.

UN Environment Programme Finance Initiative (UNEP FI)

UNEP FI is a partnership between UNEP and the global financial sector to mobilize private sector finance for sustainable development. UNEP FI works with more than 300 members – banks, insurers, and investors – and over 100 supporting institutions – to help create a financial sector that serves people and planet while delivering positive impacts. UNEP FI aims to inspire, inform and enable financial institutions to improve people’s quality of life without compromising that of future generations. By leveraging the UN’s role, UNEP FI accelerates sustainable finance.


[1] While there are many portals providing data on projected future incremental changes in temperature and precipitation, the Phase I pilot identified a lack of data on future changes in extreme events.

NGFS publish their guidance on scenario analysis for central banks and supervisors

NGFS publish their guidance on scenario analysis for central banks and supervisors

By Laura Canevari

The Network for Greening the Financial System (NGFS) has released a set of high level and harmonised Reference Scenarios in June, 2020. Central banks and supervisors have the responsibility to prepare for the potential impacts from climate change. Yet, there are great uncertainties regarding what climate change impacts may look like in the future, as the way that climate risks will take shape is dependent on the carbon-intensity development pathways that countries decide to take. The use and application of foresight tools such as scenario analysis allows organisations to test the robustness of their strategies against a number of plausible and coherent future storylines.

The use of scenario analysis as a tool for robust decision-making is already being promoted in the private sector through the efforts of the Task force on Climate-related Financial Disclosures (TCFD). Organisations can face many challenges when trying to develop and apply scenario analysis for financial planning. In particular, it is difficult for non-experts to penetrate the technical parameters and assumptions behind climate change models, ultimately to decide which climate and emissions scenarios to use in order to explore a good range of plausible futures. Set out in the publication, ‘NGFS climate scenarios for central banks and supervisors’, the Reference Scenarios are therefore well-placed to help organisations (central banks, supervisors, other financial institutions and corporates) explore the impacts of transition and physical climate risks to the economy and the financial system in a consistent and transparent way.

Apart from setting out Reference Scenarios, the new NGFS climate scenarios guide offers a four-step process for scenario analysis, which are briefly described in Figure 1. (Source: NGFS, 2020)

In Step 1, central banks and supervisors should first consider how the exercise will relate to their objectives and define whether the scenarios are going to be used to:

  • Assess specific risks to financial firms,
  • Assess financial system-wide risks
  • Assess macroeconomic impacts
  • Assess risks to a central bank’s own balance sheet

As part of this first step, central banks and supervisors need to define what are the most material risks to the institution’s objectives, which can help in the identification of physical and transition risks that are likely to have the greatest impact. At this stage, it is also important that central banks and supervisors consider how different stakeholders (e.g. financial institutions, financial standard setters, governments) will be involved in the scenario analysis.

In Step 2, central banks and regulators are suggested to make a number of informed choices on the climate scenarios assumptions they will use for scenario design (e.g. Greenhouse Gas (GHG) concentration and socio-economic pathways as well as policy, technology and market trends). At this stage, central banks and supervisors should consider the types of climate risks that they want to explore and the NGFS strongly encourages the use of multiple scenarios in order to explore a range of futures in order to unveil the broad spectrum of transition and physical risks that could emerge under different economic development pathways.  As noted in the guidance report, “The number of scenarios that central banks and supervisors choose to analyse will depend on the objective of the exercise, the materiality of the macro-financial risks, and resources available.” (p. 14). This also applies to the choice of scenario granularity and choice of time horizons.

For the NGFS Reference scenarios, multiple models were used to capture a range of uncertainty in the results, although they were all build against the assumptions of the same socio-economic pathways (namely the SSP2 “middle of the road” pathway). But each varies according to how policy and technology are assumed to evolve.  A number of scenarios are thus developed according to these assumptions, namely:

  • Three orderly transition scenarios: One which is representative and assume immediate action is taken to reduce emissions in alignment with the Paris Agreement and that all CDR technologies needed to reach net zero carbon are available; and two additional ones which are even more ambitious;
  • Three disorderly transition scenarios, which assume delayed policy action and limited access to CDR technologies but differ in the extent of dependence on Carbon Dioxide Removal (CDR )technologies;
  • Two “Hot house world” scenarios [i.e. the current trajectory]:
    • One scenario which assumes only current policies are implemented and the goals of the Paris Agreement are not met, leading to substantial physical risks over time and another that accounts for all; and
    • One scenario which incorporates all pledges from Paris  (even if not yet implemented) and leads to substantial, yet less, physical impacts.

In Step 3, central banks and supervisors will use the scenarios to assess economic and financial impacts. There are many challenges for doing this. For example:

  • It is difficult to anticipate and model the extent of macro-financial impacts caused by physical impacts due to tipping points in the Earth system that we are just starting to understand (e.g. loss of ice sheet, permafrost and forest loss).
  • Current economic models are ill-suited to study climate risks so central banks may need to deploy a combination of approach to tackle limitations of existing models.
  • The channels through which economic impacts translate to financial impacts are complex
  • Additional variables may be needed due to the limited number of macro-financial outputs available from climate models underpinning the scenarios.
  • There is limited data and research to support scenario analysis

To refine the scenarios, the NGFS also encourages central banks and regulators to revise scenario assumptions, address more comprehensively systemic risks, further elaborate on transmission channels, and perform a second round of the exercise. This recommendation is already being taken forward, for example, by the Bank of England (BoE) in its 2021 Biennial Exploratory Scenario (BES) exercise.

Step 4, the final step set out in the guidance, helps central banks and supervisors define their communication strategy of scenario analysis results. It includes guidance on the type of information that should be disclosed, the intended audiences and methods to communicate the results.

As noted by Frank Elderson (Chair of NGFS) and Sarah Breeden (BoE and Chair of Macrofinancial workstream) in the Foreword of the report, “Challenges and shortcomings remain. Indeed, we are close to the start of this intellectual journey not at its end.” The effort to harmonise scenario approaches and provide relevant guidance to central banks and regulators achieved in this document, however, is commendable and offers a good foundation for future developments in climate scenario analysis. Not only are the Reference Scenarios and guidance relevant for central banks and regulators, they can in fact be instrumental for financial firms and corporates that want to explore their exposure to these emerging risks.  


Cover photo by Annie Spratt on Unsplash.
Climate Financial Risk Forum releases ground-breaking guide for financial firms

Climate Financial Risk Forum releases ground-breaking guide for financial firms

By Robin Hamaker-Taylor and Georgina Wade

On 29 June 2020, the UK’s Climate Financial Risk Forum (CFRF), co-chaired by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), published their guide to climate-related financial risk management. The guide draws on good practice examples from industry as well as guidelines set by relevant and respected industry bodies, including the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD).

The new CFRF guide aims to help financial firms understand the risks and opportunities that arise from climate change and provides support for how to integrate them into their risk, strategy and decision-making processes. As part of this, the guide considers how firms can plan for the impact of climate policies over different time horizons and assess their exposure to climate-related financial risks so that they can adapt their businesses in response.

Written by industry, for industry, this guide is based on CFRF discussions that have been convened and facilitated by the PRA and the FCA. The forum, similar to the Task force on Climate-related Financial Disclosures (TCFD), has brought together expertise from both financial firms and corporates to develop this guidance. Over the course of 2019 and 2020, the forum’s four working groups (Disclosures, Innovation, Scenario Analysis and Risk Management) have shared good practice and analysis to advance thinking on how firms can better manage the risks posed by climate change and support the transition to a net-zero carbon economy.

Each of the four working groups wrote a chapter of the final guide, and a summary document was co-produced by the FCA and PRA. The PRA and FCA have convened and facilitated CFRF discussions but the views expressed in this guide do not necessarily represent the view of the regulators and does not constitute regulatory guidance.

Access the individual chapters of the guide here:

Acclimatise is proud to be featured in the Risk Management Annex: list of data and tools providers. We are a specialist advisory and analytics company, providing world-class expertise in climate change adaptation and resilience. With experience in more than 90 countries, our work plays an important role in shaping the international adaptation agenda. We work closely with corporates and financial institutions on their physical climate risk analysis, by interpreting climate science and information in the context of their own strategies, processes, capacities.

Click here for more information on Acclimatise’s TCFD-aligned disclosure services.

Click here to learn more about Acclimatise’s corporate climate risk and adaptation services.


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.
UK Government to make climate disclosure mandatory for pension schemes

UK Government to make climate disclosure mandatory for pension schemes

By Will Bugler

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

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

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

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

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

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


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

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

By Laura Canevari

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

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

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

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

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


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

Training workshop: Integrating climate risk considerations into decision-making processes

Training workshop: Integrating climate risk considerations into decision-making processes

A three-day training workshop hosted by the Banking Association of South Africa (BASA) in collaboration with GIZ’s Climate Support Programme (CSP) in South Africa, will provide eight South African banks with the knowledge and tools required to take demonstrable action to embed climate risk into their existing risk management frameworks. The training will take place from November 27th to 29th at the Standard Bank Global Leadership Centre in Johannesburg.

            Through a set of interactive plenary presentations, practical exercises and contributions from guest speakers, the workshop is designed to provide training participants with an incremental understanding about the relevance of climate risk management and disclosure and its integration in existing decision-making processes, in line with the recommendations of the Task Force on Climate-Related financial Disclosure (TCFD). The training will aim to foster peer-to-peer learning between international and national banks that are at different stages of their journey in integrating climate-related risks into their governance structures, risk management processes and disclosure, as well as undertaking climate scenario analysis. Perspectives from South African companies that have been considering climate risks into their supply chains, business assets and operations, customers and other stakeholders will be also sharing their experience with the participating South African banks on the market needs and opportunities they foresee in their sectors towards a low carbon and climate resilient economy.

            Over the course of the three days, Acclimatise’s own Virginie Fayolle will introduce participating banks to relevant climate change-related risks in South Africa, as well as help them navigate the suite of climate scenario-based tools available to them for evaluating climate risks based on their existing needs and capabilities.

Key events include:

27th November 2019

10:45-11:15 Climate change-related risks in South Africa / Virginie Fayolle

11:45-12:25 Key International regulatory and market related development on climate risk management, including the recommendations of the Task Force on Climate-Related financial Disclosure (TCFD) / Chiara Trabacchi

28th November 2019

9:15-09:45 Integrating climate risk considerations into decision-making processes in line with TCFD’s recommendations / Chiara Trabacchi

14:45-16:00 Mainstreaming climate scenario analysis in existing risk management frameworks / Virginie Fayolle

29th November 2019

9:15-9:45 Overview of climate scenario-based tools / Virginie Fayolle

9:45-11:00 Perspective from a provider and a user of climate scenario-based tools / Florence Palandri, George Harris, Jaco G. Swart, Lizette Perold, Simon Connell


Cover photo by Mark Jelley (CC BY-SA 2.5)
Training workshop in Mexico City helps strengthen banks’ capacities to govern and manage social, environmental and climate risks

Training workshop in Mexico City helps strengthen banks’ capacities to govern and manage social, environmental and climate risks

By Laura Canevari

Introduction

In late October, 2019, Acclimatise led a training workshop which aimed to strengthen the governance and risk management structures of Mexican banks, in relation to social, environmental and climate risks.  The training workshop was funded by the Inter-American Development Bank and the GIZ (the German Corporation for International Cooperation), with the support of the Asociación de Bancos de México (ABM) and was held in Mexico City. Facilitated by Laura Canevari of Acclimatise, and Dr Chiara Trabacchi, an independent consultant, the training was well attended by more than 40 representatives from over 20 banks. This included: Banco Azteca, Bancomext, Bancoppel, Banobras, Banorte Banregio, CIBanco, Fira, Nafin Santander and Scotiabank, among others. The Mexican banking regulator – Banxico – was also in attendance during the event which served as a reminder to participants that aligning to best governance and risk management practices and to the TCFD recommendations will help ensure their sustained viability and competitiveness and that of Mexico.

This article reviews the rich array of findings from this training workshop, including lessons drawn for important sectors of the Mexican economy, including tourism, real estate and agriculture. While these findings focus on the Mexican context, other banks may find them useful as they begin their own journeys with climate risk governance and management.

Getting started: understanding environmental, social and climate (ES&C) risks and current management systems

During the first day, drivers of environmental, social and climate (ES&C) risks were discussed and key factors that differentiate climate from other types of risks introduced (such as their far-reaching nature, irreversibility, dependence on short term actions and foreseeable nature). In addition, the training reviewed the various channels through which physical and transition climate risks transfer to the economy and to the financial system. Finally, market and regulatory trends in climate risk governance and risk management were reviewed.

Banks were provided with the opportunity, during the first day, to use a new self-assessment tool from IDB and Acclimatise, which allows banks to identify gaps in their governance and management systems for ES&C risks. The tool enables users to assess their existing systems against an international benchmark on best practices, in order to develop a roadmap on priorities and steps they need to take to improve their practices.

This first application of the self-assessment tool, and reflections stemming from the work with five pilot banks who completed their assessment in the previous weeks, showed that Mexican banks are at different levels of maturity in their development of ES&C governance and risk management structures. Most are still in the very early stages of this process. Few banks have consolidated ES&C governance and risk management best practices or have started to incorporate climate risks into their existing processes and procedures. Most participants lack direct oversight from the Board on ES&C risks, and have not yet assigned clear roles and responsibilities for the identification, evaluation and management of these risks and their integration at higher levels of strategy and financial planning. Several factors were found to have influenced the current status, in particular: lack of awareness on the financial implications of physical and transition risks on portfolio performance across different departments; lack of awareness around the potential benefits of incorporating ES&C risk management into existing processes; lack of resources and data to establish a baseline on portfolio risk exposure; short termism; and a lack of an established culture among Mexican banks to plan strategically and manage social and environmental risks.

Appraising financial climate risks: a sectoral approach

Activities on the second and third days of the workshop raised awareness among participating banks to help overcome these barriers. Bank participants reflected on the implications of climate change to important sectors of the Mexican economy, and on financial portfolios. With facilitation from Acclimatise, working groups performed an initial analysis of climate risk exposure in the tourism, real estate, energy and agriculture sectors in order to identify and reflect on the types of credit, market and operational risks that could become material for each. The working groups also explored how climate scenario analysis can be used to better understand and plan for these risks. From these exercises, the following lessons were drawn for each sector:     

Tourism

Key climate hazards generating physical risks to tourism operations in Mexico include hurricanes and floods, as well as global warming, ocean acidification and an increased incidence of drought and forest fires. Transition risks facing Mexican banks, on the other hand, include the potential effects of new legislation on energy prices and changes in consumer behavior. These hazards can affect a bank’s clients through increased operational costs, reduced tourism volumes and earnings, increase of insurance premiums and losses in assets value. Reduced tourism rates and changes in consumer preferences could also reduce opportunities for new businesses and, in the worst scenarios, could lead to business interruption.

Real estate

Key climate hazards affecting Mexican real estate include; coastal erosion (caused by sea level rise and storms), drought and forest fires; increased residential cooling costs (due to increases in temperature and the incidence or urban heat islands); damage from hurricanes, tropical cyclones and flooding; and potential human migration. On the transition risk side, changes in regulation for water and solid waste management as well as new urban planning standards and the development of carbon markets were noted as key risks. Combined, these risks can increase the costs of construction and insurance, increase reputational risks, induce reductions in property prices and affect business continuity. For financial institutions, these risks can expose banks to credit risks through their effect on loan-to-value ratios and affect the mortgages market.

Energy

Physical climate impacts were found to affect the entire energy value chain in Mexico, from generation and transmission to storage. In particular, changes in rainfall patterns and associated floods and droughts were identified as a threat to energy generation and infrastructure. On the transition risk side, changes to the price of carbon and government reforms (particularly in relation to the CELs market (i.e. market for clean energy certifications) and the Energy Transition Law and the General Law on Climate Change) could affect the price of energy and the demand for oil and gas. Potential impacts to the sector could also diminish the ability of PEMEX, a Mexican oil company,  to repay the Mexican government and lead to default.

Agriculture

In terms of physical risks, participants identified key climate hazards affecting agriculture including: the potential reduction of yield productivity (due to changes in temperature and rainfall patterns); increased production costs associated to water shortages; the salinisation of productive soils due to both sea level rise and over extraction of groundwater resources; and increased damage in transport routes, storage facilities and equipment due to flooding. Transition risks also include: changes in regulation and the transition to low carbon technologies, which could lead to the potential increase in fuel prices (affecting the production cost of herbicides and fertilisers), as well as the increased cost of other key inputs, such as energy and water.

These risks can result in a reduction in revenue and EBITDA, due to reductions in the quality and volume of the produce, and increases in CAPEX and costs to adjust practices to new technologies and increased premium of parametric insurance. These impacts can result in greater price volatility of agricultural commodities and changes in the probability of default of a bank’s clients.

Formulating actions to overcome the challenges posed by physical and transition risks and to take advantage of emerging opportunities

During the sectoral working groups, several priority areas were identified as necessary to strengthen banks’ abilities to face emerging climate risks. The development of internal technical capabilities was found to be key: bank officials, starting with those handling client relations, must be able to identify and evaluate climate risks at the transaction level. Exclusion lists and contractual clauses can be updated to better account for ES&C risks and to support climate-proofing of future lending transactions. Banks also recognised the importance of developing cross-departmental working groups and bringing together the expertise and knowledge of different units (e.g. operational risk, credit risk, sustainability and new products) for the appraisal of climate risks and opportunities. They reflected on the opportunities that can originate from an adequate appraisal of client risks and how the banking sector can act as catalyzer of change through the development of financial products that respond to client’s need to adapt to a changing climate and to transit to a low carbon economy.

By exploring the saliency and utility of different tools available, the banks were able to compare different approaches to scenario analysis (for both physical and transition risks) and to debate how outputs from scenario analysis could inform financial planning. Several challenges that need to be tackled in order to mainstream scenario analysis into risk management processes were identified, including limited available data, resources and metrics. Banks agreed that greater foresight and understanding on the evolution of transition and physical risks and on the climate impacts to their clients can be important for the development of new products in the banking sector. Furthermore, banks agreed that client engagement can help determine the extent to which investments are already climate proofed. Several banks seemed reluctant to incorporate new ES&C risk management requirements and expressed a fear of losing clients if they were to reinforce their risk management practices. Their concern was that clients may perceive such requirements to be heavy handed in an environment where ES&C risk management is not being mandated or enforced by the regulator. Banxico, however, noted that it is in the best interest of banks to strengthen ES&C risk management practices and to work with their clients. Banxico also encouraged banks to extend their time horizons to match the long-term horizons of client investment needs.

Learning from others in the sector

Across all three days of the workshop training, participating banks had myriad opportunities to learn from the experiences of their peers and to reflect on the steps required to help Mexican financial institutions strengthen their governance and risk management processes, in alignment with the TCFD recommendations. On the first day, representatives from several banks reflected on their experience using assessment tools to appraise and manage social and environmental risks. On the second day, another panel reflected on the business case of integrating ES&C risks into financial planning and the importance of having the support from high level officials. The panel suggested the Board of directors need to promote the integration of climate considerations into governance and risk management structures. On the second and third days, banks also benefitted from presentations by 2 Degrees investing initiative (2Dii) and from South American regional bank who is a known leader on the governance and risk management of climate-related financial risks. 2Dii provided a useful overview of the PACTA tool they developed in partnership with the Principles for Responsible Investing (PRI), which can be used to analyse different energy transition scenarios.

Conclusion

This training workshop has helped raise awareness on the relevance of climate risks to the financial sector in Mexico and strengthened the institutional capacity of banks around governance and risk management systems. The training has left participating banks with an increased ability to align with the TCFD Recommendations and implement them. These are crucial steps to help Mexican financial institutions be on par with international best practices. Acclimatise will continue to work with these institutions with the aim of strengthening their institutional capacities and improving their response to emerging realities of a changing climate.


Cover photo by Alejandro Islas on Flickr.
Acclimatise contributes to Risk Magazine on the pressures facing energy firms, driven by physical climate change

Acclimatise contributes to Risk Magazine on the pressures facing energy firms, driven by physical climate change

By Anna Haworth

Acclimatise’s Anna Haworth recently contributed to an article for Risk Magazine focused on the increasing pressure energy firms are facing to assess physical climate risks. In the article, Anna shares a number of insights, developed through our long-standing experience of helping corporate clients, particularly in the oil, gas and extractives sector, position themselves to effectively manage physical climate risks.

In the article, Anna highlights that climate change doesn’t necessarily create new risks, but instead acts to change existing risk profiles – by altering their frequency, severity and spatial distribution. She reflects that the energy sector, and others with large, fixed assets and complex supply chains (e.g. mining and metals), are very experienced and well-equipped to identify and manage risks. Future climate-related risks have been on companies’ radars for a long-time, particularly from an operational, business continuity and supply chain management perspective. “What they are struggling with a bit more is bringing in the longer-term dimension and understanding how those risks might change over time, driven by changes in the climate and evolving stakeholder expectations” reflects Anna.

Anna describes the step-changes in the last few years in the positions of many key stakeholder groups around the imperative to understand and manage physical climate risks, with associated calls for disclosure. Arguably the most significant recent development is the publication of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations, in 2017. The TCFD set out a framework for the voluntary disclosure of climate-related risk and opportunities (governance, strategy, risk management, metrics and targets). The TCFD identifies physical risk as one of two categories of climate-related risk, alongside transition risk to a lower-carbon economy.

Anna reflects that corporates are encouragingly viewing the TCFD’s recommendations as being more than just disclosure: meeting the recommendations is also changing corporate behaviour and driving action. “The TCFD’s recommendations have really created an impetus for companies to progress their climate risk and opportunity assessment and management,” says Anna. “Oil and gas companies are increasingly aligning their climate change activities with these recommendations,” such as improving governance, strategic planning, risk management and reporting on targets, including progress in meeting these. We are also witnesses a flow-through of this information into companies Integrated Annual Reports or the development of stand-alone TCFD-style climate reports.

Anna, and others in the Acclimatise team, are at the forefront of developing methodologies and metrics that help corporates to identify, quantify, and disclose physical climate risks and opportunities. Anna has been instrumental in the development of our bespoke TCFD benchmarking and audit toolkit, which we have successfully deployed for several of our FTSE100 and major corporate clients. If you would like to discuss your needs, Anna Haworth would be delighted to hear from you.

The full Risk Magazine article published on 10 October 2019 is available here


Photo by Raghu Nayyar on Unsplash