Category: TCFD

Acclimatise becomes a signatory to the Principles for Responsible Investment

Acclimatise becomes a signatory to the Principles for Responsible Investment

Acclimatise has signed up to the internationally-recognised Principles for Responsible Investment (PRI). Becoming a signatory to the PRI demonstrates the company’s commitment to supporting responsible investment practices. Acclimatise will also report annually its environmental, social, and governance (ESG) metrics to the PRI.

PRI currently has over 2,300 signatories, including asset owners, investment managers, and service providers that collectively manage over $83 trillion in assets. Last year, 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. This change in their reporting framework will greatly increase the amount of climate-related reporting within in its framework by signatories.

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.

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

Learn more about the PRI here.

Cover photo by Mike Kononov on Unsplash.
Acclimatise participates in Geneva Association 2019 Climate Change Forum

Acclimatise participates in Geneva Association 2019 Climate Change Forum

By Robin Hamaker-Taylor

The Geneva Association, the global association of insurance companies, held its 2019 Climate Change Forum on July 11 and 12 in London. Titled, ‘Advancements in Modelling and Integration of Physical and Transition Climate Risk’ the Forum aimed to build a roadmap for advancing both physical and transition risk modelling for insurance, investment and asset management decisions.

Acclimatise’s Chief Technology Officer and Co-founder Dr Richenda Connell participated in the Forum, presenting the broad range of ways that both chronic climate change and extreme events can affect the performance of investments. In her presentation, she challenged the perception that physical climate-related risk to investment performance is just about property damage from extreme events. She emphasised that physical climate-related risks need to be evaluated along the full investment chain, including at the macro-economic level, and throughout a company’s value chain. Though the insurance sector already has a well-established set of risk analysis tools and models for extreme events damage, the Forum suggested these could be improved by better integrating insights from other sectors and experts such as this.

Maryam Golnaraghi, Director of Climate Change and Emerging Environmental Topics at the Geneva Association commented: “Mainstreaming climate risk is becoming a high priority for Boards and C-level suite executives with implications for accountability, corporate strategy, risk management, operations, investments as well as disclosure and reporting. There is a unique opportunity to enhance climate risk modelling and stress testing by leveraging the latest climate science. This Forum was an important step toward achieving consensus among leaders from 10 sectors on aligning priorities on a research and development agenda for the future.”

Several other lessons emerged from the 2019 Forum pertaining to the further development of the next generation of risk models, as highlighted by the Geneva Association. Cross-sectoral collaboration is necessary for this to happen, for example, and there is a need for common definitions to enable collaboration. Terms such as resilience, scenarios, and stress-testing may have different meanings for different stakeholders, so a mutually agreed definition should be reached. It emerged that the need to bridge the gap between science and technological development and financial and business decisions remains as pressing as ever. Finally, discussions at the Forum suggested that surveying existing climate risk modelling initiatives and identifying potential areas of cooperation are important next steps.

Cover photo by Robert Bye on Unsplash.
Latest publication on finance sector contribution to a climate-resilient world now available

Latest publication on finance sector contribution to a climate-resilient world now available

By Caroline Fouvet

How can the finance sector pave the way towards a more resilient world? This is one of the questions raised by the Global Commission on Adaptation (GCA), launched by the United Nations (UN) in October 2018 to accelerate adaptation action and support in the world. In the run-up to September’s UN Climate Summit in New York City, during which it will present its recommendations, the GCA has organised its work around six action tracks. Each of them have targets aimed to address current adaptation challenges, and include: food security and rural livelihoods, cities, infrastructure, nature-based solutions, empowering locally-led action and finance.

Although the finance sector has heightened its focus on climate risk disclosure and climate change broadly ever since the publication of the Task-force on Climate-related Financial Disclosures (TCFD) recommendations, few actionable plans have set out the ways in which the financial services industry can contribute to fostering global climate resilience. As part of the GCA’s finance action track, the United Nations Environment Programme Finance Initiative (UNEPFI) has been commissioned to work on a background report focusing on adaption finance, entitled “Driving Finance Today for the Climate Resilient Society of Tomorrow”, which was published last week.

The report, prepared by US firm Climate Finance Advisors and reviewed by an expert group including Acclimatise’s co-founders John Firth and Dr. Richenda Connell, acknowledges that aligning global adaptation needs with the 2015 Paris Agreement’s commitments constitutes “the biggest investment opportunity of this generation”. Reaching such goals, however, entails unlocking the necessary private and public capital both that can support investment in adaptation and resilience. With this objective, the report reviews barriers and opportunities for financing resilience and adaptation by all actors across the financial system, although it predominantly targets financial system constituents, including policymakers and financial actors, while highlighting actions required from each.

The following barriers are found to be in the way of embedding climate risk and resilience into the financial system:

  • Inadequate support for action on adaptation/resilient investment: the report states that on the one hand, there are currently no sufficient incentives for private finance investments in adaptation, while on the other hand, public finance, that can catalyse private investments, has been historically insufficient and needs to be scaled up.
  • Weak policies and conventions in the financial industry: there is currently a gap in enabling adaptation policy and practice in the financial industry. Guidelines surrounding climate risk and resilience in the financial sector have been weakly established and have achieved limited adoption into practice.
  • Market barriers: there is an overall market perception that investments in resilience address public problems, such as water management or coastal flooding, and as a result lack profitability.
  • Nascent application of climate risk management practices: although there is a growing general awareness of climate risks from corporates and financing institutions, there is still a need to actually integrate physical climate change into operational risk management practices. This is currently hampered by a lack of access tobetter decision-relevant tools from an early stage on.
  • Low capacity in policy and finance for climate risk management: both financial system governance bodies and financial actors have a low capacity to understand climate risks at a level that enables financial decision-making.

As a result of its analysis, the GCA report sets out six recommendations targeting financial system governance bodies and financial actors to overcome the aforementioned barriers and facilitate and accelerate financing for adaptation and resilience:

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

The authors conclude that policymakers and financial institutions need to address the resilience issue hand-in-hand. They also state that behind climate risks also lie opportunities for the financial sector. Last but not least, the finance sector needs to go beyond disclosures, as the ultimate objective of such process is to undertake effective risk management.

Cover photo by Verne Ho on Unsplash.
UK releases Green Finance Strategy signalling potential for mandated climate disclosures among other Government actions

UK releases Green Finance Strategy signalling potential for mandated climate disclosures among other Government actions

By Robin Hamaker-Taylor

The UK government released its Green Finance Strategy in early July, coinciding with London Climate Action Week. The strategy is a reflection of the UK Green Finance Taskforce recommendations and sets out a plan to mobilise finance for clean and resilient growth in the UK. The release of this strategy marks the continued support of the UK Government for an orderly and just transition away from fossil fuels and toward a climate resilient economy.

The strategy has two objectives:

(1) To align private sector financial flows with clean, environmentally sustainable and resilient growth, supported by Government action; and

(2) To strengthen the competitiveness of the UK financial sector. The first two chapters of the strategy sets out information relating to between ‘greening finance’ and ‘financing green’ and the final chapter includes expectations relating to capturing the opportunity arising from the ‘greening of finance’ and the ‘financing of green’.

Greening Finance and potential disclosure requirements

This section of the strategy aims to ‘ensure current and future financial risks and opportunities from climate and environmental factors are integrated into mainstream financial decision making, and that markets for green financial products are robust in nature.’

Actions the UK Government are taking to ensure climate and environmental factors are recognised and acted upon, as a matter of strategic and financial imperative, are set out in this part of the strategy. Perhaps one the of most relevant actions for corporates and financial institutions is the Government setting out its expectation for all listed companies and large asset owners to disclose, in line with the TCFD recommendations, by 2022.

Apart from this, the Government is carrying out the following actions which will work to green the finance sector:

  • Establishing a joint taskforce with UK regulators, chaired by Government, which will examine the most effective way to approach disclosure, including exploring the appropriateness of mandatory reporting;
  • Supporting quality disclosures through data and guidance, such as those being prepared for occupational pensions schemes by a new Government and regulator sponsored working group;
  • Clarifying responsibilities for the Prudential Regulation Authority (PRA), the Financial Conduct Authority (FCA) and the Financial Policy Committee to have in regard to the Paris Agreement when carrying out their duties, and include climate-related financial issues in the UK Government’s allocation letter to The Pensions Regulator;
  • Working with industry and the British Standards Institution to develop a set of Sustainable Finance Standards, and chairing a new International Organisation for Standardisation (ISO) Technical Committee on Sustainable Finance;
  • Working with the FCA and Bank of England, including through the Fair and Effective Markets Review, to consider steps that can be taken to understand the potential or actual barriers to the growth and effectiveness of green finance markets; and
  • Working with international partners to catalyse market-led action on enhancing nature-related financial disclosures. This will complement the recently announced global review of the economics of biodiversity by Professor Sir Partha Dasgupta.

Financing Green

This section of the strategy aims to ‘accelerate finance to support the delivery of the UK’s carbon targets and clean growth, resilience and environmental ambitions, as well as international objectives.’ This part of the strategy sets out specific actions to mobilise and accelerate flows of private finance into key clean growth and environmental sectors in the UK and abroad. The Government has mobilised green investments abroad for a number of years. Within the UK, the Government is taking the following actions:

  • Announcing a package of measures to mobilise green finance for home energy efficiency;
  • Using the forthcoming Environment Bill to place the 25 Year Environment Plan on a statutory footing;
  • Determining the steps necessary for landlords and businesses to understand and potentially disclose operational energy use;
  • Strengthening engagement with local actors to accelerate green finance across the country; •Working with the GFI to address market barriers to greater and more rapid deployment of green capital into priority sectors; and
  • The National Infrastructure Commission examining the resilience of the UK’s infrastructure to consider what action Government should take to ensure it is resilient to future changes, such as climate change.

Capturing the opportunity

This part of the strategy aims to ‘ensure the UK financial services capture the domestic and international commercial opportunities arising from the ‘greening of finance’, such as climate related data and analytics, and from ‘financing green’, such as new green financial products and services.’ To this end, the Government is aim is taking the following actions:

  • Launching the GFI to strengthen public and private sector collaboration and cement the UK’s position as a global hub for green finance;
  • Enhancing climate-related and environmental data and analytics and promoting dialogue with regulators and industry to support innovation
  • Promoting the adoption and mainstreaming of green finance products and services, including through the launch of a Green Home Finance Fund making £5 million of funding available to the private sector to pilot products such as green mortgages; and
  • Engaging with professional bodies to drive green finance competencies – notably through the launch of a Green Finance Education Charter – upskilling the UK’s diplomatic networks and building capacity on green finance across the public sector.

Public and private collaboration needed to solve the climate crisis

In the week which saw the London Stock Exchange re-classify a group of oil and gas producers as ‘non-renewable’ energy, and over 200 climate-related events, the UK Government has demonstrated its commitment to harnessing the power of the private sector to help solve the climate crisis. Highlighted time and again in the strategy was the need for collaborative efforts across the public and private sector – this challenge is insurmountable without the private sector. While it is safe to say many in the finance sector are stepping into this new role, it remains to be seen how well the wider UK finance sector will respond, and if it will be quick enough.

Cover photo by Ilya Gavin on Unsplash.
Advancing climate-related financial risk disclosures in the Financial Sector

Advancing climate-related financial risk disclosures in the Financial Sector

By Laura Canevari

Transitioning to a low carbon and climate-resilient future is a challenge of unprecedented scale. The financial sector has a fundamental role to play in this transition. However, to enable the sector to play this role, there is a need for a systemic shift in the way the financial system operates and in the way investment decisions are made.

Critical to a smooth transition is the effective management of climate risks and opportunities. The underestimation of climate risk poses a threat to the stability of the financial system, in particular, when capital is allocated without a full understanding of the potential climate implications on adjusted risk returns. Similarly, responding to climate change and transitioning to a low carbon economy offers huge investment opportunities, many of which remain largely untapped.

The role of the Task-Force on Climate-related Financial Disclosures (TCFD) Recommendations

Through the release of the TCFD Recommendations in 2017, financial institutions (FIs), along with corporates, have been given a robust compass with which to navigate climate disclosures. The TCFD recommendations  encourage FIs and companies to incorporate climate-related considerations in their governance, strategy, risk management, metrics and targets, and to provide climate-related disclosures in their public financial fillings. The recommendations effectively require organisations to assess where they stand in their ability to understand and manage climate related risks. The TCFD knowledge hub has been established, which is an interactive portal that collates resources for organisations to aid their disclosure activities. Many FIs and corporates are still coming to grips with how best to analyse and disclose climate risks, though the direction of travel is clear – the TCFD recommendations has been a game changer in putting climate risks on their radar.

Investors clearly understand the value of this information and the demand for useful, climate related financial information continues to grow, according to the second TCFD status report, released in June 2019. Climate risk disclosures not only help investors to make more informed decisions, they also help reduce litigation risks.

Many organisations have started to disclose in alignment to the TCFD Recommendations (see the TCFD Knowledge Hub). Similarly, voluntary disclosure frameworks such as CDP, GRI and SASB have started to align their disclosure frameworks to the Recommendations of the TCFD. Others, such as PRI are making it mandatory for members to disclose certain types of climate related information.

Managing climate risks has become imperative for regulators, investors and the market

In early 2019, the Central Banks and Supervisors Network for Greening the Financial System (NGFS), 36 members in total, have joined forces to promote collective action to manage climate-related financial risks. Frank Elderson, Chair of the NGFS and board member of De Nederlandsche Bank, notes that climate-related risks are a source of financial risk. Elderson points out that climate-related risks are therefore within the mandates of central banks and supervisors, and it is up to them to ensure the financial system is resilient to these risks. In their most recent report, the NGFS published a set of recommendations around the distinctive elements of climate change-related financial risks and the need to ensure resilience in finance. These recommendations send a powerful signal to others within the finance sector that financial regulators are increasingly interested in robust climate disclosures.

Regulators have also independently started to tackle climate risks. In the UK, for example, The Prudential Regulatory Authority (PRA), has released a new supervisory statement setting out its expectations for banks and insurers on managing climate-related financial risks  and established, together with the Financial Conduct Authority (FCA), a Climate Financial Risk Forum. In France, Article 173 made it mandatory for institutional investors to disclose climate-related information.

Rating agencies such as Moody’s and S&P Global have started to incorporate climate change considerations in their rating systems as well. Their assessments now illustrate how much climate factors can impact (negatively and positively) on the risk rating of companies and municipal bonds.

Similarly, investors have started to integrate climate change considerations as part of their due diligence processes and as part of their risk management and investment strategies. Early findings provided by BlackRock suggest that investor portfolios integrating climate change are already outperforming those that do not. Yet, BlackRock also suggests that most portfolios are still failing to fully account for climate related risks.

Growing action among banks and investors

The number of FIs that have started to align with the TCFD recommendations has steadily grown since the release of the final recommendations in 2017. Over 200 entities dedicated to banking, asset management or banking and insurance have become official supporters of the TCFD recommendations, and some have started to release their first climate-related risk disclosures.

Their activity is supported by a number of global initiatives with the mandate to help FIs understand and address climate related risks. For example, the TCFD pilot project established by the UNEP-FI with 16 commercial banks (with the support of Acclimatise, Oliver Wyman and Mercer) has led to the publication of a set of novel methodologies to help banks appraise and manage physical and transition credit risks.

Similar initiatives are proliferating across the world. In Mexico and South Africa, for example, the Cambridge Institute for Sustainable Leadership (CISL) and GIZ have established an initiative to help financial institutions incorporate environmental scenario analysis into routine financial-decision making. Similarly, in Mexico, the Inter-American Development Bank (IDB) and the Mexican Banking Association (ABM) have established a Climate Risk Capacity Building Program aimed at strengthening the institutional and operational capacity of Mexican banks to identify and manage climate, environmental and social risks. Within this program, a new stage started with the objective to analyse the gaps in governance systems and in the management of climate, environmental and social risks in Mexican banks in relation to the TCFD recommendations.

On the investor side, The Institutional Investors Group on Climate Change (IIGCC) has launched a new project to develop guidance for investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes. This physical risk and opportunity guidance will be available in Summer 2019. This guidance will build on other guidance reports issued by the IIGCC, such as the 2018 practical guide on how to apply the principles of scenario analysis.

A proactive approach will likely pay off 

It is clear that the way to do business is changing as the climate risk governance landscape is changing. The role of FIs is shifting in light of these broader changes. Similarly, the conversation around risk is also clearly shifting, from being centred on individual companies or investments, to a broader recognition of the environmental and societal risks that climate change is posing.

The financial sector has a privileged role to play in the coming years in steering economic development towards a more resilient future. Those who begin the journey early will help set the benchmark on best practice and start reaping the benefits that stem from making climate conscious decisions. Those that do not may be left behind.

Cover photo by Jannes Glas on Unsplash.
Second TCFD status report suggests there is room for improvement, despite growth in climate disclosures

Second TCFD status report suggests there is room for improvement, despite growth in climate disclosures

By Robin Hamaker-Taylor

The Task Force on Climate-related Financial Disclosures (TCFD), has issued a new status report, available here. The report provides an overview of current disclosure practices as they relate to the Task Force’s recommendations, highlights key challenges associated with implementing the recommendations, and outlines the efforts the Task Force will undertake in coming months to help address some of the implementation challenges.

Using artificial intelligence technology to screen reports for over 1,100 large companies from 142 countries in multiple sectors over a three-year period, the analysis was augmented by a survey to assess companies’ efforts to implement the TCFD recommendations as well as users’ views on the usefulness of disclosures. Unsurprisingly, the demand for decision-useful, climate-related financial information by financial institutions, especially investors, has continued to grow. Among the potential drivers for this demand are regulators’ sustained and growing interest in climate disclosures. Growing interest from central banks, regulators and supervisors are reflected in the recommendations provided in the newly released Network for Greening the Financial System (NGFS), which calls for the development of robust and internationally consistent climate and environment-related disclosures and which “encourages all companies issuing public debt or equity as well as financial sector institutions to disclose in line with the TCFD recommendations.”

The results of the review are encouraging and survey results suggest that progress is underway; but much work still remains. Companies and financial institutions have started to report climate-related information in their annual reports and sustainability reports and recognize the materiality of climate related financial risks. However, many organisations have highlighted the challenges of implementing the recommendations, in particular the lack of standardized industry metrics and concerns about confidentiality of information. There are also still several key ways through which companies could still improve in their disclosures. First, the Task Force found that not enough companies are disclosing decision-useful climate-related financial information. The review also indicates that more clarity is needed on the potential financial impact of climate-related issues on companies and that disclosures relating to resilience is often left out of climate-related risk strategies.

The status report indicates that further support in the implementation of the recommendations is needed. To that end, the Task Force plans to prepare another status report for the Financial Stability Board in September 2020, following a continued period of support and monitoring recommendation uptake. In addition, the Task Force is considering additional work in the following areas:

  • Clarifying elements of the Task Force’s supplemental guidance contained in the annex to its 2017 report (Implementing the Recommendations of the TCFD),
  • Developing process guidance around how to introduce and conduct climate-related scenario analysis, and
  • Identifying business-relevant and accessible climate-related scenarios.

Cover photo by Brendan Church on Unsplash.
Acclimatise kick-starts new project with Mexican banks by discussing how financial institutions can align their governance and risk management structures to the TCFD Recommendations

Acclimatise kick-starts new project with Mexican banks by discussing how financial institutions can align their governance and risk management structures to the TCFD Recommendations

By Laura Canevari

The Inter-American Development Bank and the Mexican Banking Association (ABM) have established a Climate Risk Capacity Building Program aimed at strengthening the institutional and operational capacity of Mexican banks to identify and manage climate, environmental and social risks. Within this program a new stage started with the objective to analyse the gaps in governance systems and in the management of climate, environmental and social risks in Mexican banks in relation to the TCFD recommendations.

The specific objectives of the project are to:

  1. Provide knowledge about the main international trends and practical examples of banks that are aligning with these regulatory and/or voluntary trends.
  2. Identify, through an international benchmarking exercise, best practices in governance  within banks in Latin America and the Caribbean that are sustainable finance leaders in their context of operation and/or “early adopters” of the TCFD’s recommendations.
  3. Develop a tool for the identification and analysis of EC&S governance structures and practices for the management of climate, environmental and social risks within banks in Mexico. The tool will allow the self-evaluation by banks of their performance regarding the implementation of TCFD’s recommendations for governance and climate risk management, as well as comparison with peers. Easy to use and accessible to all interested banks, the results of its application will allow the analysis of existing gaps, the identification of short and medium-term objectives and the visualisation of progress made in the implementation of TCFD’s recommendations.
  4. Use the tool to evaluate the performance of a sample of 3-5 Mexican banks in terms of governance and practices for the management of climate, environmental and social risks.
  5. Facilitate a training workshop with member banks of ABM and other interested banks where the tool and its possible applications will be presented, along with anonymous results of its application to those involved. A series of group exercises will be organised to analyse the main gaps and discuss possible barriers and enablers for climate risk management in Mexican banks. The workshop will also enable the elaboration of “road maps” for TCFD implementation through the identification of objectives, activities and timelines with respect to each criterion.

As part of this initiative, Acclimatise representative, Laura Canevari, was invited to present at a workshop organized during the XIV Symposium on Risk Management, held at the Hilton Reforma in Mexico City on the 29th of May. Here, she introduced the recent outputs from the UNEP-FI First pilot project with the banking sector on TCFD Implementation, and reflected on climate risks and opportunities best disclosure practices from around the world.

During the workshop, representatives from different financial institutions within the country engaged in dialogue to explore examples of governance and risk management systems for socio-environmental and climatic risks, and to learn about practical cases, tools and international reference frameworks that can help them pave the way to TCFD aligned disclosures.

Opening remarks from Rafael del Villar Alrich, Governance advisor of the Bank of Mexico (one of 36 financial institutions in the Network for Greening the Financial System Initiative) were complemented by presentations from ABM, Banobras, Bancolombia Banamext as well as CEBDS Brasil and GIZ.  As noted by Alan Gómez Hernández, Sustainability committee Coordinator from ABM, , climate change needs to be regarded as a fundamental issue impacting the private sector: A business topic with potentially significant positive and negative repercussions.

As noted by Virna Gutierrez (Banobras), these issues need to be recognised and tackled at high levels of governance within banks, with the support of risk management systems that can support the identification and evaluation of policies to mitigate potential risks and pursue potential opportunities. Steps are being taken to make this possible. In South America, for example, Bancolombia has recognised the role it has to play in financing the transition to a low carbon economy, with a well-established climate policy to inform their strategy. They are also active players in government conversations and have a very cohesive internal group within the bank that works to advance sustainability and climate risk management issues and engages directly with potential clients to foster the development of their green bonds and credit lines. These activities are all reported to the board of directors, which has established a target of US$10bn in climate investments by 2030.

The Mexican banks are also taking steps forward. Banamext SARAS (Sistema de Gestión de Riesgos Ambientales y Sociales) system, for example, establishes a comprehensive management framework that includes policies, procedures, tools and internal dissemination actions as well as training needs in order to identify, supervise and manage the exposure that the bank may have against potential environmental and social impacts within the credit allocation process. Similarly, they have also developed a self-assessment tool (MEDIRSE): A methodology to determine the impact of risks relating to social aspects of energy investments, in accordance with Bancomex’s due diligence process and SARAS system.

In addition, innovative collaborations are fostering the development of instruments that help Mexican banks better incorporate social, environmental and climate risks in their governance structures and that facilitate the alignment with the TCFD Recommendations. Such is the case of an initiative established by the Deutsche Gesellschaft für Internationale Zusammenarbeit’s (GIZ’s) Emerging Markets Dialogue on Finance (EMDF) Initiative, with the support of the University of Cambridge Institute for Sustainability Leadership’s (CISL’s) Centre for Sustainable Finance, the Instituto Tecnológico Autónomo de México (ITAM) and Banco de México. The project aims to empower financial institutions across the banking, insurance and asset management sectors and to promote the integration of environmental scenario analysis into practice in financial decision making.

Whilst Mexican banks acknowledged the challenges of incorporating social, environmental and climate risks and opportunities within their governance and risk management systems, it remained clear that banks should embark on this process now (if they have not already). The process and outputs generated through the newly established Inter-American Development Bank project working with the Mexican Banking Association are designed to provide the required support.

Cover photo by Asociación de Bancos de México ABM
Voluntary climate disclosures can reduce litigation risk

Voluntary climate disclosures can reduce litigation risk

By Robin Hamaker-Taylor, Richard Bater, Nadine Coudel

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

Does voluntary disclosure reduce or increase litigation risk? 

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

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

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

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

Disclosing climate change-related risks may reduce litigation risks

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

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

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

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

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

Future legal developments

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

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

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

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

Acclimatise – experts in physical risk for responding to TCFD recommendations

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

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

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

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

Investor initiative to produce new guidance on understanding physical climate risks

By Robin Hamaker-Taylor

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

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

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

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

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

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

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

Cover photo by Stephen Dawson on Unsplash.
Acclimatise 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.