It’s that time of year again! The beginning
of a new year marks a great time for dedicating oneself to resolutions, whilst
also giving us an opportunity to reflect on the past year and the moments that
shaped us. With that spirit of reflection in mind, we sifted through our
network’s article archive and selected some of our favourites from the past
year. We’ve sorted our favourite articles by topic, to make up a short, three-part
series throughout the month of January. To kick
things off, we bring you six articles related to climate adaptation for the
financial services sector.
While 2020 was a
big year in terms of newsworthy moments across the globe, there were also many
significant developments within the financial services sector. In September,
the United Nation’s Environment Programme Finance Initiative (UNEP FI) released
a report on Phase II of its Task Force for Climate-related Financial
Disclosures (TCFD) Banking Program with Acclimatise. The new report, “Charting
a New Climate”, provides financial institutions with a state-of-the-art
blueprint for evaluating physical risks and opportunities. A new learning paper
was also launched, one which provides insights on the lessons
learnt from implementing Green Climate Fund (GCF) Readiness projects in the
Caribbean and aims to inform future Readiness efforts in the region or
Despite the grave conditions many economies are facing due to
2020’s 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).
Acclimatise has now been acquired by Willis Towers Watson, where
we offer joined up services on both physical and transition related-risk
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
By Acclimatise News
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.
Why climate resilience bonds can
make a significant contribution to financing climate change adaptation
By Maya Dhanjal
There is a rising cost associated with economic damages related to
climate change with 2019 being the most expensive year to-date and expected to
only get worse. Governments who are mainly responsible for providing this
funding are strapped in their ability to mobilise and manage emergency funds.
Resilience bonds provide a unique opportunity to hybridise principles in debt securities
and insurance policies and ultimately divert available funds into
climate-resilient projects that will enhance adaptive capacity, particularly
for long-lived infrastructure assets that have to face the test of time and a
GCF readiness efforts in the Caribbean: Learning from Practice
By Acclimatise News
A new learning paper by Acclimatise provides an insight on the
lessons learnt from implementing Green Climate Fund (GCF) Readiness projects in
the Caribbean and aims to inform future Readiness efforts in the region or
New report: Protecting low-income communities through climate
By Will Bugler
Since 2015, the InsuResilience Investment Fund (IIF)
has worked to build the climate resilience of poor and climate-vulnerable
households as well as micro, small and medium enterprises, by increasing
climate insurance coverage. A new report “Protecting low-income communities through climate
insurance”, takes stock
of its experience and achievements to date.
de-risking nature: The next frontier for financial institutions
Nature and biodiversity have gained the spotlight this year,
becoming the next frontier for financial services. Earlier this year, the Task Force on Nature-related
Financial Disclosure (TFND) was launched under
the leadership of the Global Canopy, UNDP, UNEP and WWF, aiming to redirect
financial flows towards nature-based solutions and nature-adding activities.
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
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.
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
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).
Over the course of 2020, leading
international think tank of the insurance industry, The Geneva Association, released
a set of country-based reviews of flood risk management. Covering five
countries, reports are available for the United States, Germany, England,
Australia and Canada.
“Floods are the costliest weather-related event globally, and climate change is likely to increase their frequency and severity. The impacts of weather-related events such as floods are a special threat alongside COVID-19, with government resources for emergency management and socio-economic recovery already stretched. We hope our findings effectively guide the public and private sectors in protecting society from this growing risk”, said Geneva Association Managing Director Jad Ariss.
Flooding is a persistent and expensive challenge to businesses and communities, and will continue to be so if preventative measures are not put in place, and ex-ante risk assessments are not made. At the time of writing, businesses, citizens, investors and insurers are set to see losses from flooding in the next few days in Australia, as heavy rainfall and storms in New South Wales have once again sparked evacuation warnings for many towns in the state. Meanwhile, the total out-of-pocket costs of flooding in Canada were recently estimated at almost CAD 600 million annually. (Swiss Re 2016 in Geneva Association, 2020).
A June 2020 summary report (covering findings from the US, Germany, and Australia) finds that stakeholders are in general reactive to floods. A more forward-looking, ‘all-of-society’ approach is needed. Governments, insurers, businesses and homeowners all have a role to play, and better public and private-sector cooperation is urgently needed to manage flood risk.
Practically speaking, governments, businesses, and individuals need to move toward a ‘risk-informed, anticipatory and system-wide approach to managing disaster risks, as suggested by Geneva Association Director of Climate Change , Maryam Golnaraghi.
These ex-ante efforts should certainly include
investors and lenders, as flood risk can accumulate across portfolios, and
compound with other risks, including shocks from a range of other hazards
(e.g., biological hazards, driving pandemics, or geohazards driving earthquakes
and tsunamis). Put simply, forward looking flood risk analysis is needed, under
a range of plausible climate futures. Investors and lenders should screen for flood
risk (in relevant sectors and geographies), and should aim to consider a
systemic approach, where the combination of flood and other hazards are
considered. This could be at the point of transactions, and in the management
of portfolios and lending books.
The Geneva Association
flood risk management reports aim to encourage better exchange between
investors, businesses, insurers and businesses around flood risk. In
particular, the reports look at the governance element of flood risk management
in detail in the country, reviewing institutional frameworks and the interplay
of different components of flood risk management. Investors and banks could use
these guides to better understand the flood risk situation during security
selection, or during engagement activities.
The main set of recommendations from the June 2020 summary
report (of US, England, and Germany) are as follows (named stakeholders in bold):
Recommendation 1: Governments should
develop a clear national strategy for FRM, with an anticipatory, cohesive and
systems-based approach to building flood
Recommendation 2: The insurance industry
should further step up their proactive engagement with governments and their
customers, as risk advisers, risk management experts, risk underwriters and
investors, to support the implementation of FRM systems to strengthen
resilience to floods.
Recommendation 3: Businesses and households
should proactively seek flood-risk information; understand and take
responsibility for managing their flood risk; and make risk-informed decisions.
Recommendation 4: International
organisations, academic institutions, professional and executive education
programmes could utilise this study in their awareness-raising campaigns
and educational programmes targeted at government officials, policy makers,
businesses and the general public, promoting the need for a risk-based,
anticipatory, cohesive and systems-based approach, which takes climate change
into consideration for building flood resilience.
Recommendation 5: Government officials, the
insurance industry and other stakeholders responsible for FRM in these
countries [U.S., England and Germany in particular, but also in Australia and
Canada] should come together in their respective countries, review and discuss
the gaps, challenges and weaknesses identified in our review and find effective
ways to work together to enhance their FRM system towards a more cohesive,
systems-based and forward-looking approach.
reports are available here:
Canada (published in
partnership with Intact Financial)
By Will Bugler (Acclimatise) & Andrew Eil (Climate Finance Advisors)
Since 2015, the InsuResilience Investment Fund (IIF) has worked to build the climate resilience of poor and climate-vulnerable households as well as micro, small and medium enterprises, by increasing climate insurance coverage. Today, at a side event of the InsuResilience Global Partnership’s 4th Annual Forum, it has launched a new report “Protecting low-income communities through climate insurance”, which takes stock of its experience and achievements to date. As the first fund of its kind to raise private capital to invest in climate insurance markets in developing countries, IIF’s report shares valuable lessons relevant tor impact investors, insurers, policy makers and other relevant entities involved in building resilience using insurance and disaster risk finance.
Authored by Acclimatise and Climate Finance Advisors, the report is based on an analysis of reporting data, interviews and survey responses from IIF’s investee companies. It shows how IIF has developed a unique model that allows it to invest in companies across the entire insurance market value chain, helping to build new networks that support climate insurance market growth in developing countries. In its first six years, the IIF has extended climate insurance cover to 25 million poor or climate vulnerable people in developing countries.
to climate resilience
The report begins by placing the IIF’s work in the context of the wider challenges of closing the climate finance gap and increasing insurance market penetration in developing countries. Climate-driven extreme events have doubled from an average of under 300 events per year in the 1980s to over 600 per year since 2010. This has continued to drive economic losses, affecting practically all sectors. According to Swiss Re, the last decade has been the costliest on record with economic damages from natural disasters totalling over USD 2 trillion. However, as the report notes, current investments worldwide are insufficient to prepare for such impacts. In fact, according one UN estimate, climate adaptation finance totalled an average of $30 billion in 2017-2018, well below the $210-300 billion needed per year between 2010 and 2030.
As noted in the 2015 Paris Agreement, insurance can play an important role in building resilience to climate change and it impacts, allowing people to withstand the financial impacts of disasters and invest in adaptation measures. However, the majority of economic losses generated by climate-related extreme events are not covered by insurance, resulting in a substantial protection gap of $280 billion in 2017 and 2018. Whilst this gap has narrowed in recent years in upper-middle and high-income countries, there has been little progress in lower to middle-income countries, where the protection gap persistently exceeds 95 percent (see map below).
To close the
adaptation finance gap and increase access to climate insurance products in
developing countries, private sector investment is crucial. The IIF uses a
blended finance approach, raising public capital with high risk tolerance
complemented by grant resources, and leveraging it to attract private
investors. So far, the IIF has raised $166 million (approximately $100 million
of which in private capital) and invested $133 million in 21 companies around
barriers to climate insurance penetration
by BlueOrchard, was initiated by KfW, the German Development Bank, on behalf of
the German Federal Ministry for Economic Cooperation and Development (BMZ). It
has a mandate to improve access to and the use of insurance in developing
countries and, in so doing, reduce the vulnerability of MSMEs and low-income
households to extreme weather events. To achieve this, IIF’s investee companies
must overcome several important barriers such as high transaction costs of
delivering climate insurance, difficulties distributing products to large
numbers of poor and climate-vulnerable clients, low levels of awareness of and
trust in insurance, and regulatory challenges associated with earl-stage
climate insurance markets.
these challenges, IIF’s innovative blended finance approach combines aspects of
a conventional investment fund with traditional donor grantmaking and technical
assistance programmes. It has established a unique model that promotes a
whole-value-chain approach to investing, careful selection of investee
companies, and a high level of technical support provided by the Fund itself. It
does this by operating two sub-funds: A Debt Sub-Fund and an Equity Sub-Fund.
The Debt Sub-Fund invests in companies that distribute climate insurance
products, such as micro finance institutions, whilst the Equity Sub-Fund
invests in climate data and service providers, insurers and reinsurers.
whole-value-chain approach to investing recognises that a thriving ecosystem of climate insurance entities
is essential for long-term climate insurance market development. Service
providers cannot exist without insurers and aggregators to buy their products,
insurers in developing countries require a healthy pool of distributors to
extend insurance to low-income communities, and new technologies from data and
service providers underpin the market and are essential to take climate
insurance products to scale. Climate insurance entities also interact with
financial institutions such as retail banks and reinsurers in critical ways;
these interactions are reflected in the business models of many of IIF’s
investees and contribute to the development of the climate insurance ecosystem.
Other elements of IIF’s support for its investees to launch and
grow climate insurance products are the Technical Assistance Facility (TAF) and
Premium Support Facility (PSF). Through the TAF, IIF has undertaken 25
technical assistance projects supporting companies with activities ranging from
business planning, and corporate structure, to product development and
marketing. To help climate insurance products gain a foothold in the market,
the IIF also provides temporary subsidies for insurance premiums through its
PSF, making its investees products more affordable.
and surveys with IIF’s investee companies have shown that the Fund has
delivered significant benefits to their companies. Investees reported that
IIF’s involvement has helped them to: develop new and improve existing climate insurance
products, tailoring them for specific clients; scale their operations, allowing
them to expand into new markets and reach more clients; reduce transaction
costs by making capital investment in new technology and strategic planning; and
improve business governance and reputation which has enabled them to access new
Many of IIF’s
investees are yet to launch or have only recently launched their climate insurance
products. This status, coupled with the challenges they face when scaling
products in developing countries, serves to explain why reaching large numbers
of IIF’s target beneficiaries takes considerable time. Despite the long runway
to large-scale impact, IIF has already demonstrated that its investments
increase access to climate insurance for poor and climate-vulnerable people. At
the end of its first year of operation in 2015, the IIF had approximately 1,700
beneficiaries, a number which had grown to 25 million by September 2020.
model now well established, the Fund expects to make a further 12 to 15
investments in companies in the coming years. Through these new investments and
the further growth of its existing investees’ climate insurance offerings in
maturing markets, the IIF expects to reach between 90 and 145 million
beneficiaries by 2025.
The report also features evidence that the climate insurance products released by IIF’s investees have had a positive impact on the lives of its beneficiaries. Eight IIF investees reported paying out a total value of $4.75 million to clients, from over 18,000 claims, since 2015. The report found that access to climate insurance allowed beneficiaries to recover more quickly from climate related shocks and gave other benefits including improved access to credit in order to invest in their businesses. Interviews conducted by impact measurement company 60 Decibels, with 120 beneficiaries of one of IIF’s investees – Kashf Foundation – found that claimants were over twice as likely to have recovered to their pre-shock levels of welfare compared with those who did not make a claim.
Overall, the report finds that IIF has successfully
established a model that can raise both public and private capital, provide
investor returns, and achieve real benefits for poor and climate vulnerable
communities. Ultimately, IIF’s successes are founded on the quality of its
relationship building with its investees and with other institutions in its
target countries. Whilst this approach is not quickly
scalable, it does provide a real and lasting impact in
building resilience through climate insurance.
The insurance sector has been at the forefront of managing the impact of climate-related risks for many decades. Insurers are well placed to seize the structural opportunities ahead and become stewards of an orderly, whole economy transition to a net zero and climate resilient future. But doing so will require a pro-active and creative approach – a 7-step framework for a strategic climate response. Fortune will favour the risk-adjusted.
In a relatively short time, climate change has moved from an underwriting focused concern of property re/insurers, or matters of corporate social responsibility, to a mainstream set of issues relating to prudential safety and soundness and financial stability across the financial system.
While increasing attention to ESG (environmental, social and governance) factors, reputation concerns and changing consumer sentiment have undoubtably played their part, the system-wide and structural integration of climate-related risks into financial regulation is now the primary driver and moving in only one direction.
The insurance sector has already played a key role in shaping the global regulatory landscape that has now emerged on climate, including leading a revolution in climate data and analytics, responding to Solvency II and supporting the development of a formative framework for climate-related financial risks.
There is a strategic opportunity for insurers to continue to lead. But doing so will require the industry to up its game even more and embed a strategic approach; one that not only integrates climate-related risks into day-to-day risk management but also seeks to steward a whole economy transition to a low carbon and resilient future.
Before diving into how insurers can embrace a stewardship role, let’s start with a reminder of three key inflexion points in the rising tide of climate-related financial regulation. And the leading role the insurance sector has already played in the fundamental reshaping of finance now underway.
The 1990s: An industry in crisis – and a revolution in climate data, analytics and regulation
As many may remember, a series of events in the late 1980s and early 1990s, culminating with Hurricane Andrew in 1992, presented an existential threat to the insurance industry. With losses of over $15bn, Andrew was responsible for the failure of at least 16 insurers between 1992 and 1993. But with crisis comes opportunity. Under pressure from their investors, the insurance industry responded with an analytical revolution in models, methods and metrics to better integrate what has become known as physical climate risks into the heart of pricing and decision making. The catastrophe risk models the industry has pioneered, marrying engineering metrics and actuarial science with human and physical geography, are providing a key analytical building block of the climate-related risk gear box now being employed across the financial system.
As discussed further in Matt Foote’s and Adhiraj Maitra’s article: Insurers can draw on their Solvency II experience to integrate climate risk and resilience, the insurance sector has also been at the centre of one of the first inflexion points in climate-related financial regulation. The introduction of requirements for modelling 1-in-200 year natural hazard scenarios via Solvency II and other regimes around the world, reinforced by insurance credit rating agency requirements, was an early front-runner to the climate stress tests that are now being introduced across the financial system.
It is therefore no surprise that a second pivotal inflexion point had its roots in a prudential climate review of the UK insurance sector, setting the foundation for a financial sector wide approach.
2015: Physical, transition and liability risks and enhanced climate disclosure
In response to a request under the UK Climate Change Act, the Prudential Regulation Authority’s (PRA) 2015 review of the impact of climate change on the UK insurance sector set out the formative framework for climate-related financial risk. The review identified three primary channels; physical, transition and liability as shown in the boxes below. Published alongside a seminal ‘Breaking the Tragedy of the Horizon’ speech by former Bank of England Governor, Mark Carney, at Lloyd’s of London in September 2015, the PRA’s review has helped to catalyse the mainstreaming of climate-related risks as a core financial and investment issue. With an ever more powerful chorus reinforcing the same message, including, for example, BlackRock’s Larry Fink in his annual letter to CEOs, it’s a transformation that is here to stay.
Physical, transition and liability risks from climate change
The introduction of transition risk has been particularly noteworthy, broadening the financial risks from climate change from primarily an insurance sector issue to a market-wide concern. The notion of transition risk has also played an important role in establishing the global, private sector Task Force on Climate-related Financial Disclosures (TCFD). By improving transparency in financial markets, enhanced climate disclosure is helping to address financial stability concerns of a future ‘climate Minsky moment’ – a sudden and abrupt re-pricing of assets from a disorderly transition.
TCFD is also transforming the private sector’s response to the financial risks and opportunities that climate change presents. We explore this further in a related article: TCFD: coming, ready or not, including emerging insights of a recent survey of TCFD readiness among UK premium listed companies as the UK moves towards mandatory climate disclosure. As the article discusses, there is now clearly a co-ordinated, cross-sector approach to embedding climate-related risks across the UK financial system and globally; one that will only accelerate ahead of the next major climate change conference, COP26, towards the end of next year.
A new horizon: Climate stress tests to 2050, supervisory expectations and ‘Dear CEO’ letter
The last two years have witnessed a further acceleration in the climate-related financial regulation landscape. This includes the mainstream recognition that climate change not only presents financial risks, but that these risks have distinctive elements (see below), present unique challenges and require a strategic approach.
It is with these challenges in mind that financial regulators are once again raising the bar. For example, developing climate stress tests to determine the viability of banks and insurer’s business models out to 2050 and beyond and requiring firms to assign individual senior manager accountability for managing the financial risks from climate change.
The PRA’s ‘Dear CEO’ Letter published in July this year could well be remembered as a defining moment; one that requires all UK banks and insurers to ‘fully embed their approaches to managing climate-related financial risks by the end of 2021’.
And while the UK is clearly at the vanguard, it is certainly not alone. The mainstream integration of climate-related risk has become a global endeavour for insurers and across the entire financial sector. For example, since the beginning of September this year:
The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation on the use of long-term climate scenarios within firm’s Own Risk and Solvency Assessment (ORSA) as part of Solvency II;
The International Association of Insurance Supervisors (IAIS) has published its draft Application Paper to support supervisors around the world in their efforts to integrate climate-related risks into supervisory frameworks, including those relating to supervisory review and reporting, corporate governance, risk management, investments and disclosures;
In a similar vein to the PRA’s letter, the New York Department of Financial Services has written to insurers requesting firms to integrate climate-related risks into governance frameworks, risk management processes and business strategies.
And, more broadly, the Central Bank and Supervisors Network for Greening the Financial System (NGFS) continues to go from strength to strength, expanding from eight founding institutions in late 2017 to now over 80 participants across five continents.
When considered together, these latest developments define a third inflexion point – the mainstream implementation of strategic, Board level responses to the financial risks from climate change. Importantly, this third phase will require firms to not only demonstrate they are pro-actively managing near-term climate-related risks but are also taking action to pre-emptively reduce future financial risks, including those that may not fully crystallise until the second half of the century.
This third phase represents an important shift; responding to climate-related risks can no longer be considered as a spectator sport. It requires a much more participative, strategic and creative approach, one that seeks to steward a whole economy transition to a low carbon and resilient future.
Stewarding a whole economy transition
While there’s clearly overlap between embedding the near-term physical and transition risks into every day financial risk management with those required to manage future financial risks today, there’s also some important nuances. For example, insurers can manage their near-term risks by reducing their individual exposures, such as divesting carbon intensive assets to reduce transition risks. Pre-emptively reducing future financial risks requires a wider lens and a more strategic approach. As highlighted in a speech by Sarah Breeden, Executive sponsor of the Bank’s climate work, published alongside the PRA’s Dear CEO letter: ‘given the scale of change required, we will simply not be able to divest our way to net zero’.
While recognising climate as a financial issue and embedding, and disclosing, near-term climate-related risks and opportunities (steps 1, 2, 6 and 7 shown by dotted blue line) is clearly important, a strategic approach requires a deeper shift (steps 1 through to 7 shown in purple).
This includes assessing the impact of long-term climate scenarios, out to 2050 and beyond, and considering the unique system-wide challenges that climate change presents (step 3). Adjusting time horizons to the long-term provides an opportunity for Directors to reflect on the Board’s responsibilities to manage future financial risks today and to set a strategic ‘climate intent’, such as agreeing to align a firm’s strategy with the goals of the Paris Agreement, or committing to a Net Zero target (step 4). This, in turn, can inform a more strategic, pro-active and creative approach; one that embraces the need for stewardship of a whole economy transition to a low carbon and resilient future (step 5).
While the PRA’s letter, and our own recent TCFD readiness survey, clearly flag multiple areas where additional progress and capabilities are required, many financial firms are already starting to embrace a more strategic, pro-active approach. The PRA/FCA convened Climate Financial Risk Forum also evidences the strong appetite for cross-sector collaboration to advance thinking and practice. With this in mind, we are delighted to be supporting the Forum’s scenario analysis working group and helping to facilitate cross-sector dialogue more broadly. For example, through recent events bringing together financial regulators with senior industry leaders and our international work chairing the Coalition on Climate Resilient Investment.
Clearly solving a collective action problem requires a collective and collaborative approach. While the insurance sector alone will not drive the transition to a low carbon and climate resilient future, with trillions of dollars under management and billions of dollars in transaction volumes, it can certainly influence the outcome, and it is in its own enlightened self-interest to do so.
Fortune favours the risk adjusted
The good news is that a more comprehensive, strategic response has many benefits. It can provide assurance to all stakeholders, including investors, that climate-related risks, and opportunities, are fully understood and are being managed appropriately. It can also help attract and retain talent, particularly among younger colleagues who are increasingly seeking purposeful careers aligned with their values. Indeed, the integration of climate-related factors into talent and reward strategies is increasingly being viewed as an important source of differentiation and advantage.
Perhaps most importantly a strategic approach can also support insurers in orientating towards the transformative and structural opportunities presented by the low carbon, climate resilient transition. Having helped shape the landscape that is now emerging, there is no industry better placed to seize the opportunities that lie ahead.
There is still much to do to manage climate-related risks, and many questions that still need to be answered as methods, models and metrics continue to evolve. Developing a pro-active, strategic and creative approach now will be sure to pay dividends; fortune will favour the brave, well-prepared and risk adjusted.
Acclimatise has been acquired by leading global advisory, broking and solutions company, Willis Towers Watson. The move sees the Acclimatise team combine with Willis Towers Watson’s Climate and Resilience Hub (CRH), creating a market-leading centre of climate adaptation expertise with over fifty technical staff. The combination significantly expands the capacity of the CRH to meet growing demands for climate resilience services.
CRH is the focal point for WTW’s work on climate risk and resilience, helping its
clients to address the challenges associated with climate change across
physical, transition and legal liability risks. Acclimatise and the CRH have complementary
capabilities in financial services, climate risk and vulnerability assessment,
resilience planning and climate data analysis and risk modelling.
“Climate change risk is fast becoming a central
part of government, corporate and financial decision making and planning.
Meeting growing client demand will require increasingly sophisticated
approaches to climate risk assessment and management.” Said Acclimatise CEO,
John Firth. “This is why I’m hugely excited by the potential that Willis Towers
Watsons’ acquisition of Acclimatise brings. I am very proud of Acclimatise’s
achievements and our staff over its sixteen-year history – from kitchen table
to a market leader – and am confident that combining with the Climate and Resilience
Hub is the right move to ensure we can amplify the impact of our work.”
Welcoming the deal, Rowan Douglas, Head of the CRH, said, “By combining Acclimatise’s market-leading climate modelling and adaptation capabilities with Willis Towers Watsons’s deep experience in natural catastrophe modelling, risk management, re/insurance and investment markets we have a unique range of expertise to help clients manage climate exposures, seize adaptation opportunities and build more resilient societies and economies.”
The two companies have collaborated in the past and have enjoyed a strong working relationship. “We have long admired Acclimatise and what John Firth and Dr Richenda Connell have built as visionary leaders since 2004.” Said Douglas, “Our earlier collaboration via the Willis Research Network illustrated a shared market ambition, culture and complementary experience and relationships. This feels like a very natural step for both teams. We are all excited about meeting the resilience challenges for corporates, Governments and financial institutions in the years ahead.”
The deal comes at a time where there is significant momentum behind climate risk services for corporates, Governments and the financial services sector. In recent years, WTW has increasingly mainstreamed climate risk across its business segments. John Haley, CEO Willis Towers Watson, said that the acquisition “is very much in line with our ambition to help clients navigate an increasingly complex world and to achieve climate resilience through the provision of market-leading solutions. Acclimatise’s capabilities and proven success in the area of climate risk, provide significant opportunities for us going forward. I am excited about what this means for Willis Towers Watson.”
Australia’s largest super fund, Rest, has agreed to test its
investment strategies against various climate change scenarios and commit to
net-zero emissions for its investments by 2050, after a legal case brought by a
25-year-old man from Brisbane. Mark McVeigh sued Rest in 2018 for failing to
provide details on how it will minimise the risk of climate change. The
landmark case represents the first time a superannuation fund has been sued for
failing to consider climate change.
Mr McVeigh alleged Rest had breached Australia’s
Superannuation Industry Act and the Corporations Act, after it failed to
provide him with information on how it was managing the risks of climate
change. These risks include physical climate risks that threaten Rest’s
investments, and also transition risks which arise from the decarbonisation of
the global economy.
Climate change is a ‘material, direct and current
Australian law requires trustees of super funds to act with
“care, sill and diligence to act in the best interest of members – including
managing material risks to its investment portfolio”. In its settlement Rest
agreed that its trustees have a duty to manage the financial risks of climate
In Rest’s statement about the settlement it said: “The
superannuation industry is a cornerstone of the Australian economy — an economy
that is exposed to the financial, physical and transition impacts associated
with climate change.” and went on to emphasise that “climate change
is a material, direct and current financial risk to the superannuation
Rest also agreed to take immediate action by testing its
investment strategies against various climate change scenarios, publicly
disclose all its holdings, and advocate for companies it invests in to comply
with the goals of the Paris Agreement.
The latest cases in Australia are part of a global movement towards stricter regulation governing the financial risks posed by climate change (see Acclimatise’s timeline charting the rise of climate law). In 2015, for example, France introduced laws mandating climate disclosure for institutional investors and asset managers and in 2017 the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure published recommendations for corporate climate disclosures. In 2019, National Instrument 51-102 Continuous Disclosure Obligations set out new requirements for firms reporting in Canada to disclose material risks in their Annual Information Form.
The implication of landmark cases such as the Rest settlement, is that super funds, pension funds, banks and other investors will increasingly require companies to understand and manage their climate risks. Earlier this year, Acclimatise worked Working with Asia-Pacific’s largest law firm, MinterEllison to produce a primer on physical climate risk aimed at Non-Executive Directors. The primer was published by Chapter Zero a global voluntary programme that connects and supports Non-Executive Directors to improve oversight and action on the issue of climate change.
Nature and biodiversity have gained the spotlight this year, becoming the next frontier for financial services. Earlier this year, the Task Force on Nature-related Financial Disclosure(TFND) was launched under the leadership of the Global Canopy, UNDP, UNEP and WWF, aiming to redirect financial flows towards nature-based solutions and nature-adding activities.
The TNFD is informed by a number of recent publications that help to increase our understanding of nature-based risks and record widely the scale of loss that economies globally would experience if we don’t steer towards a future that nurtures nature. In this article, we review the recent findings of these initiatives and their recommendations for financial institutions on how to implement adequate strategies to work with nature.
The economic impacts of global environmental change
The rate of loss of biodiversity and ecosystems degradation is staggering. As noted by IPBES in their Global Assessment Report on Biodiversity and Ecosystem Services, seventy-five percent of the global land surface is significantly altered, 66 percent of the ocean area is experiencing increasing cumulative impacts, and over 85 percent of wetlands (area) has been lost. The average abundance of native species in most major terrestrial biomes has fallen by at least 20 percent. Land use change, climate change, pollution and the increasing material demands exerted by the human population are among the main drivers of nature’s degradation and loss. Yet, without ecosystems services and the biodiversity that sustains it, economic prosperity as a whole is at risk. In fact, according to the World Bank (2020) over half of the world’s GDP is generated in industries that are directly dependent on nature and its services.
The Global Futures Reportestimates that the costs to the economy from the loss of nature in a “business-as-usual scenario” could reach US$10Tn by 2050, compared to a potential net gain of +US$490bn under a future scenario guided by the preservation of nature. This is a net drop of 0.67% of GDP per year by 2050. While significatively indicative, these results only reflect the effects that a business-as-usual vs a “global conservation” scenario would have on six major ecosystem services modelled, namely: Pollination; Coastal protection; Water yield; Timber production; Fish production; and Carbon sequestration. Hence, we must recognise that the true impacts of nature loss (and gains secured from protecting it) could in fact be much higher (and in some cases, irreversible).
It therefore should come as no surprise that over the past 5 years the World Economic Forum’s annual Global Risks Report (GRR) ranks biodiversity loss and ecosystem collapse as one of the top five risks in terms of likelihood and impact in the coming 10 years. What’s more, the 5 top risks according to the latest WEF survey are all environmental.
financial risks defined
In order to swiftly incorporate nature-related risks within existingERM (enterprise risk management) and ESG (environmental, social and governance) processes and within investment decision-making, and financial and non-financial reporting, several publications recommend aligning nature-related risks with existing risk categories. In particular, WEF’s “New Nature Economy” Report and the Global Canopy and Vivid Economics report “The Case for a Task Force on Nature-related Financial Disclosures” recommend to align nature risk categories to the the Task-Force for Climate Related Disclosures (TCFD) framework. Accordingly, the classification of biodiversity-related financial risks into financial risk types is best laid out in PwC and WWF´s “Nature is too big to fail[” and is reproduced below in Figure 1.
Steps to de-risk
Financial institutions (FIs) must start to consider the risks and opportunities stemming from the ecological limits of nature. However, and as noted in the WWF and AXA “Into the wild” 2019 report, integrating nature into investment strategies can vary according to the type of strategies followed by financial institutions and the asset classes taken into account. Sustainability indexes (such as Dow Jones Sustainability Index) can prove a useful tool to monitor nature-related issues and for acquiring information on corporate sustainability. However, the market today does not provide a comprehensive list of sustainability trackers to enable a diversified sustainable passive strategy. Some investors following a more active qualitative approach (generally within niche dedicated impact funds) are already integrating environmental considerations, but remain unable to internally calculate their exposure to nature risks.
According to WWF and
AXA, the most effective way to integrate nature-related issues into investment
decisions would be to quantify them in order to derive natural capital costs from
corporate information. This can be done through a three-step approach consisting of:
Formulating a description of corporate activities and environmental impacts on the basis of financial and sustainability reports.
Integrating data from life cycle databases and models extracted from a global environmental-energy-economic model.
Computing natural capital costs in monetary terms based on valuation factors, which determine the monetary costs per environmental impact (i.e. societal costs, solution costs, and potentially avoided costs).
Complementing this information on costs with the likelihood of their occurrence provides then a perspective in terms of risks.
related target-setting by the finance sector.
Either directly or indirectly, businesses rely on nature and ecosystem services. Yet, dependency on nature can vary considerably between different industries and sectors. Equally, the negative impact of companies on the natural environment differs significantly from sector to sector. The Beyond Business as Usual report, published by UN Environment Programme, UNEP Finance Initiative and Global Canopy earlier this year identified a series of priority sectors that financial sector needs to consider in terms of industries with highest dependencies on the environment and those causing the largest negative impacts, here summarised in Table 1 below.
Table 1. Priority sectors for biodiversity target-setting by financial institutions
The industries in Table 1 all have either potentially high material
dependencies and/or potentially high intensity impacts on biodiversity and
ecosystem services. This makes them more likely to be material from a financial
perspective to institutions, including banks, investors, and insurers, and means
that activities—loans, investments, or insurance—expose financial institutions
to biodiversity-related risk.
One way for financial institutions to start integrating nature risks in their decision-making is to use the list of priority sectors presented in the previous section to guide the systematic assessment of biodiversity risks and opportunities in their own activities. Moreover, they can start to explore existing tools to assist the evaluation of nature-risks such as ENCORE, the Natural Capital Toolkit, as well as explore metrics from the Global Footprint Network and Trase Finance.
Moreover, financial institutions need to become more familiar with innovative biodiversity financing tools with high potential to attract capital, such as corporate sustainable timber bonds, corporate green commodity debt funds and ecosystem-based carbon offset bonds. For a full list of innovative investment instruments to finance nature, see the World Bank’s “Mobilizing private finance for nature” recently released report here.
A new Consultation Paper has been released by the IFRS Foundation
in late September 2020 and is open for public comment until 31 December 2020.
The International Financial Reporting Standards (IFRS) Foundation is the
organisation behind the set of globally accepted accounting standards, known as
the ‘IFRS Standards’, which are the financial reporting standards required for
use by more than 140 jurisdictions.
The Trustees of the IFRS Foundation are aiming to assess demand for global sustainability standards, as there is increased focus on environmental, social and governance (ESG) and ongoing developments in sustainability reporting. Alongside these developments, there has also been an increased call for standardisation of sustainability reporting. Investor groups have also been calling for the IFRS Foundation to expand its mission to include sustainability reporting.
Trustees are now seeking stakeholder input on the need for global sustainability
standards and gauging support for the Foundation to play a role in the
development of such standards. The Consultation Paper will feed into the
Foundation’s current assessment of its future strategy, as the Trustees are
required to consult on every five years.
Erkki Liikanen, Chair of the IFRS Foundation Trustees, said:
“Calls for standardisation and comparability of reporting on sustainability and climate-change issues continue to grow as these matters become increasingly important to capital markets. We therefore seek to assess whether there is demand for global sustainability standards and whether the IFRS Foundation should play a role in developing such standards.”
What does the Consultation Paper
The Consultation Paper sets out possible ways the Foundation might
contribute to the development of global sustainability standards by broadening
its current remit beyond the development of financial reporting standards and
using its experience in international standard-setting, its well-established
and supported standard-setting processes and its governance structure.
One possible option outlined in the paper is for the Foundation to
establish a new sustainability standards board (SSB). The new SSB could operate
alongside the International Accounting Standards Board under the same
three-tier governance structure, build on existing developments and collaborate
with other bodies and initiatives in sustainability, focusing initially on
The Consultation Paper also shares critical success factors for
the creation of a new board. These include:
Achieving sufficient support from public authorities and market
Working with regional initiatives to achieve global consistency
and reduce complexity in the reporting landscape; and
Achieving the appropriate level of funding; and ensuring the
current mission of the IFRS Foundation is not compromised.
Where can the Consultation Paper
The Consultation Paper was released on 30 September and is open for comment until 31 December 2020 and it can be accessed here. The IFRS Foundation will hold webinars discussing the Consultation Paper throughout the consultation period. More information can be found here.
This article was adapted from the original, available on the IFRS website, available here.
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
* 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.