Expectations for corporates and financial institutions on climate risk analysis and disclosure continue to evolve and grow

Expectations for corporates and financial institutions on climate risk analysis and disclosure continue to evolve and grow

By Robin Hamaker-Taylor


Despite the grave conditions many economies are facing due to 2020’s rolling COVID-19-induced lockdowns, expectations for corporates and financial institutions on climate risk analysis and disclosure have not slowed. In fact, climate risk and reporting mandates only appear to be increasing.

2021 will see a continued focus on climate risk analysis in the private sector, in the lead up to the 26th Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC). COP 26 will be held here in the UK and is set to have a strong focus on private sector finance. Mark Carney, special finance advisor to the UK Prime Minister has made clear that the objective for the private finance work for COP 26, is to “ensure that every financial decision takes climate change into account”. Finance is also one of five campaigns of the UK COP 26 presidency.

As 2020 comes to a close, this article summarises major developments expectations for corporates and financial institutions on climate risk analysis and disclosure in the last quarter of this year. Other reviews of progress in this space – and there has been a lot – are available here and here.

US Federal Reserve, Treasury Department, and the Securities and Exchange Commission have all indicated in various ways that they are on-board with their counterparts in other countries, who have long since been making progress toward mandating climate risk analysis and disclosure. (e.g., the dozen or more central banks and supervisors around the world who are undertaking climate-related stress testing.). This is no doubt in part due to President-Elect Joe Biden, who has made climate one of four priority areas in his Administration. The US is also set to re-join the Paris Agreement, and the expectation is that the US Federal Reserve will soon join the Network (of Central Banks and Supervisors) on Greening the Financial System (NGFS) (more information is available here and here.)

Importantly, there is ample evidence that President Biden and his Administration may not need congressional approval for any further climate-related laws or regulations, which would not be likely, given the Republican stronghold on the US Senate. There is, however, a growing call by some Republicans to take climate action, which represents an important shift.

There are now 75 central banks covering 60% of global emissions who are members of the NGFS. Members are already taking action, with central banks now requiring climate stress testing, e.g., Bank of England.

To celebrate its three year anniversary in December 2020, the NGFS published two reports on 15th December:

  • A progress report on sustainable and responsible investment practices by central banks; and
  • The findings of a survey on monetary policy operations and climate change.

Both are available here

The guide explains how the ECB expects banks to prudently manage and transparently disclose such risks under current prudential rules. The ECB will now follow up with banks in two concrete steps. In early 2021 it will ask banks to conduct a self-assessment in light of the supervisory expectations outlined in the guide and to draw up action plans on that basis. The ECB will then benchmark the banks’ self-assessments and plans, and challenge them in the supervisory dialogue. In 2022 it will conduct a full supervisory review of banks’ practices and take concrete follow-up measures where needed.

A new alliance between 30 international asset managers with $9tn in assets under management (AUM) has formed, setting net-zero emissions targets. The group of asset managers pledges to support investing aligned with net-zero emissions target by 2050 or sooner. More asset managers are due to join in the coming months. More information is available here.

This new initiative complements the Net-Zero Asset Owner Alliance, an international group of 33 institutional investors delivering on a bold commitment to transition investment portfolios to net-zero GHG emissions by 2050. More information is available here.

  • The International Financial Reporting Standards (IFRS) Foundation released a Consultation Paper on global sustainability standards, including climate risk reporting, open for public comment until 31 December 2020. More information is available here.
  • The TCFD is holding a public consultation on decision-useful, forward-looking metrics to be disclosed by financial institutions. The Task Force’s 90-day public consultation solicits input on forward-looking climate-related metrics for the financial sector. The consultation asks questions about the usefulness and challenges of such metrics and what may be necessary to enhance their comparability, transparency, and rigour. The consultation is open for public comment until 27 January 2021. More information is available here.
  • The UK’s Financial Conduct Authority (FCA) announced that it is going to be consulting on rules in early 2021, which would introduce TCFD obligations for asset managers, life insurers and pension providers by 2022. These extended rules would build the FCA’s new requirement that by 1 January 2021, premium listed companies will be required to disclose how climate change affects their business, consistent with TCFD, or explain why not.
  • The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation on the use of climate change risk scenarios in the Own Risk and Solvency Assessment (ORSA) in the form of a draft supervisory Opinion. EIOPA invites stakeholders to provide their views on the consultation paper by filling in the survey by 5 January 2021. More information is available here.

Many banks, asset managers, asset owners, insurers, and at very least listed companies are already getting out ahead of the curve of emerging climate risk reporting. Acclimatise has now been acquired by WillisTowersWatson, where we offer joined up services on both physical and transition risk-related analysis. Please contact Robin Hamaker-Taylor (r.hamaker-taylor at acclimatise.uk.com).

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