Category: Financial Services

Financing and de-risking nature: the next frontier for financial institutions

Financing and de-risking nature: the next frontier for financial institutions

By Laura Canevari

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 Report estimates 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.

Biodiversity-related financial risks defined

In order to swiftly incorporate nature-related risks within existing ERM (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.

Fig. 1: Classification of biodiversity-related financial risks into existing financial risk types. Source: PwC and WWF (2020) Nature is too big to fail

Steps to de-risk nature

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:

  1. Formulating a description of corporate activities and environmental impacts on the basis of financial and sustainability reports.
  2. Integrating data from life cycle databases and models extracted from a global environmental-energy-economic model.
  3. 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.

Biodiversity- 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.

Ways forward

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.

Last but not least, financial institutions should also engage with emerging initiatives such as the Natural Capital Coalition, by signing the Natural Capital Protocol for financial institutions, and with the new Task Force on Nature-related Financial Disclosure.

Cover photo by Crystal Mirallegro on Unsplash.

New consultation on global approach to sustainability reporting, including climate reporting

New consultation on global approach to sustainability reporting, including climate reporting

By Robin Hamaker-Taylor

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 include?

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 climate-related matters.

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 participants;
  • 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 be located?

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.

Cover image by Nanang Sujana/CIFOR
New report reveals current state of climate disclosure amongst ASX200 companies

New report reveals current state of climate disclosure amongst ASX200 companies

By Robin Hamaker-Taylor

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

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

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

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

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

The full ASCI report is available by clicking here.

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

Cover photo by Jordan on Unsplash.
Climate risk disclosure picks up steam: Roundup of developments in UK, US, Australia, and New Zealand

Climate risk disclosure picks up steam: Roundup of developments in UK, US, Australia, and New Zealand

By Robin Hamaker-Taylor

Late summer 2020 has seen a flurry of activity relating to climate risk disclosure requirements, frameworks and consultations, with several milestone announcements and in the last few weeks from Australia, the US, and New Zealand in particular. We bring these announcements together here, as well as highlight a UK consultation on climate risk governance and reporting in pension schemes, closing 7 October 2020.


On September 14th, a set of guidelines on physical climate risk assessment and disclosure was launched in Australia by The Climate Measurement Standards Initiative (CMSI). The CMSI is an Australian industry-led collaboration established to assist with, and support, climate-related financial disclosures. CMSI involves insurers, banks, scientists, reporting standards professionals, service providers and supporting parties.

The CMSI has recommended financial disclosure guidelines and developed scientific scenario specifications for the purpose of disclosure of scenario analyses for climate-related physical damage to buildings and infrastructure. The open-source guidelines are voluntary, and provide Australian banks, financial institutions and insurers with robust scientific and technical information on how to assess the risk of climate-related damage associated with a set of acute and chronic risks. The guidelines aim to allow Australian firms to determine their physical risks from these extreme events in a credible and consistent way, and to disclose physical risks under the TCFD recommendations. Importantly, this guidance sets out a potential framework for regulation of climate risks, should regulators decide to mandate disclosures in Australia.

Involved parties include: QBE, Suncorp, IAG, RACQ, NAB, Westpac, Commonwealth Bank, HSBC Australia, Munich Re, Swiss Re, Leadenhall CP, MinterEllison and Investor Group on Climate Change. The new CMSI guidelines can be downloaded here.

New Zealand

All eyes were on New Zealand this month as well, when the Government announced plans to make climate-related financial disclosures mandatory for certain firms, on 15 September. The Cabinet agreed to introduce a mandatory regime through an amendment to the 2013 Financial Markets Conduct Act. Disclosures would be required from around 2023, if approved by Parliament, on a ‘comply-or-explain’ basis. At present, around 200 entities in New Zealand would be required to produce climate-related financial disclosures in line with the TCFD recommendations:

  • All registered banks, credit unions, and building societies with total assets of more than $1 billion;
  • All managers of registered investment schemes with greater than $1 billion in total assets under management;
  • All licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million;
  • All equity and debt issuers listed on the NZX; and
  • Crown financial institutions with greater than $1 billion in total assets under management.

Read more about this announcement on the New Zealand Government website, which provides links to useful climate risk assessment guidance documents, such as those from the IIGCC and UNEP FI.  

United States

There is emerging evidence that key organisations in the United States are starting to understand climate risk as a financial risk. Specifically, the US Commodity Futures Trading Commission (CFTC) released a report on 9 September 2020, entitled: Managing Climate Risk in the U.S. Financial System. The report, produced by the Climate-Related Market Risk Subcommittee of the Market Risk Advisory Committee is the first of-its-kind effort from a US government entity.

The work was instigated by CFTC Commissioner Behnam, and comes after the CFTC announced in 2019 that a climate sub-committee of the Commission on climate risk would be established. Commissioner Benham recognised the global progress toward climate risk supervision, not least by the network of 60+ central banks and supervisors (known as the NGFS) who are sharing best practice on the matter. The US is not yet a member of the NGFS, and though some states, private sector actors and financial institutions have been assessing and disclosing climate risks, the federal government progress on this is sluggish.  

The report brings together a set of over 50 recommendations to mitigate the risks to financial markets posed by climate change. Though regulation of climate risk and mandated disclosure is perhaps a ways off in the US, and in many other countries, this landmark report could help pave the way for improved oversight of climate risks, in particular as the report finds that Existing statutes already provide U.S. financial regulators with wide-ranging and flexible authorities that could be used to start addressing financial climate-related risk now. The full report can be downloaded here.


In late August, the UK Department for Work and Pensions (DWP) put out a consultation which seeks views on policy proposals to require trustees to address climate risks and opportunities. In particular, this would be for trustees of larger occupational pension schemes and authorised schemes. It also invites responses on proposals to disclose these in line with the recommendations of the international industry-led Task Force on Climate-related Financial Disclosures (TCFD).

It is proposed that among the activities required would be calculating the ‘carbon footprint’ of pension schemes and assessing how the value of the schemes’ assets or liabilities would be affected by different temperature rise scenarios, including the ambitions on limiting the global average temperature rise set out in the Paris Agreement. The disclosures would be required to be made publicly available, referenced from the schemes’ Annual reports and Accounts, and pension savers informed of the availability of the information via their annual benefit statement.

The consultation closes on 7 October 2020, and more information on responding to the consultation can be found here.

Cover photo by Dan Freeman on Unsplash.

New taxonomy created to identify private sector solutions for investing in climate adaptation and resilience

New taxonomy created to identify private sector solutions for investing in climate adaptation and resilience

The Adaptation SME Accelerator Project (ASAP) and The Lightsmith Group released the Adaptation Solutions Taxonomy, identifying solutions from private companies that support climate adaptation and resilience on 10 September, 2020. This taxonomy is the first peer-reviewed set of definitions and eligibility criteria specifically focused on climate adaptation solutions being offered by private sector companies.

The ASAP Taxonomy was developed through ASAP, which is supported by the Special Climate Change Fund (SCCF) of the Global Environment Facility, Conservation International, and the Inter-American Development Bank and IDB Lab. It builds upon existing definitions and international standards around climate finance, such as the European Union’s Sustainable Finance Taxonomy, the Intergovernmental Panel on Climate Change, the Task Force on Climate-related Financial Disclosures (TCFD), and the UNFCCC Climate Technology Centre and Network (CTCN) Taxonomy, among others, in order to foster harmonization and uptake. Acclimatise is delighted to have been one of the expert reviewers of the ASAP Taxonomy.

The Taxonomy is actively being applied to identify hundreds of private companies across the globe that offer climate adaptation solutions.

“We need practical solutions to help us adapt to climate change now,” said Jay Koh, Managing Director of Lightsmith. A recent study by the University of Cambridge shows an additional $100 billion of global costs annually linked to extreme weather events – such as floods, heatwaves and droughts – can be expected by 2040. The UN Environment Program estimates the cost of adapting to climate change in developing countries alone could rise to $140 to $300 billion per year by 2030, and between $280 and $500 billion per year by 2050. Despite the fact that 75% of all national climate plans under the Paris Agreement reference climate adaptation, adaptation received less than 6% of the total $579 billion of climate finance in 2017/2018, with perilously little from the private sector, according to the Climate Policy Initiative.

“Identifying companies that can help manage drought, flood, wildfire, supply chain disruption, disease, and other climate impacts is a critical first step to building resilience to climate,” added Koh. “Most of these companies do not call what they do ‘climate change anything’ but if we can find them, we can invest in and scale up their solutions as the challenge of climate change grows.”

ASAP recognizes the important role that small and medium-size enterprises (“SMEs”) can play in supporting climate adaptation. SMEs generate at least 45% of employment and as much as 33% of GDP in developing countries. The ASAP Taxonomy offers a systematic approach to identify SMEs that produce technologies, products, and services that support adaptation to climate change (“Adaptation SMEs”) and enables investors and governments to target investment and support.

“The timing of the new ASAP taxonomy is crucial. With SMEs in developing regions and especially Latin America and the Caribbean confronting both the economic fallout of the pandemic and worsening climate impacts, we should take full advantage of this new taxonomy to support them to continue to capitalize on the business opportunities to develop solutions for climate adaptation and resilience,” said Graham Watkins, Climate Change Division Chief of the Inter-American Development Bank.

The ASAP Taxonomy specifically focuses on SMEs in developing countries but can be easily extended to apply to businesses of all sizes, operating in all geographies. The ASAP Taxonomy is comprised of (i) a definition of an “Adaptation SME”, (ii) eligibility criteria to determine what types of companies qualify as an “Adaptation SME”, (iii) classification systems for climate adaptation solutions, and (iv) a results framework to measure, monitor and report on climate adaptation- related outcomes.

The ASAP Taxonomy can be used by investors, funders, companies, and other stakeholders to:

  • Identify climate adaptation investments, thereby enabling more accurate tracking and reporting;
  • Sets out a menu of classification approaches for categorising, tracking, measuring and reporting climate adaptation solutions based on the technology, product, service provided;
  • Inform companies on how their solutions may support climate adaptation and resilience;
  • Provide initial guidance on approaches for measuring companies’ contributions to climate adaptation; and;
  • Create a framework that can be used to align climate adaptation and resilience investment strategies with international standards and definitions.

“The release of ASAP Taxonomy is an important contribution to increasing private sector investment in climate change adaptation. Through a common language, the taxonomy will help classify climate adaptation business solutions and eventually support investors and SMEs understand market opportunities and track investments. The taxonomy’s focus on Adaptation SMEs will contribute to climate resilient and inclusive global economic recovery from the COVID-19 pandemic”, said Chizuru Aoki, Lead Environmental Specialist and Manager of the Least Developed Countries Fund and the Special Climate Change Fund.

“The ASAP Taxonomy is a significant step toward building the case for climate adaptation as an investment asset class and mobilizing much needed capital flows to adaptation-focused SMEs,” said Agustin Silvani, Senior Vice President of Conservation Finance at Conservation International (CI). “Both investors and businesses will benefit from a better understanding of the scope of climate adaptation investing. CI congratulates Lightsmith and all involved in the production of this valuable resource.”

By using the ASAP taxonomy, investors, funders, companies, governments, and policymakers can enhance the supply and uptake of climate adaptation solutions globally, and especially in the places where they are needed most.

The full ASAP Adaptation Solutions Taxonomy can be downloaded here.

Read The Lightsmith Group press release here.

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

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

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

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

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

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

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

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

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

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

For media enquiries and a copy of the embargoed report, please contact Mustafa Chaudhry on

Download “Charting a New Climate” here.

Excerpts from Charting a New Climate

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


The Working Group

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




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

UN Environment Programme Finance Initiative (UNEP FI)

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

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

Acclimatise supports Macquarie to conduct climate risk heatmapping and scenario analysis exercises for TCFD disclosures and establishing materiality of physical and transition risks

Acclimatise supports Macquarie to conduct climate risk heatmapping and scenario analysis exercises for TCFD disclosures and establishing materiality of physical and transition risks

By Laura Canevari

Investors and asset managers are increasingly taking action to advance their transition to a low carbon, climate resilient economy and prepare for the financial impacts of climate change. Such is the case, for example, of Macquarie Group Limited, a multinational independent investment bank and financial services company headquartered in Sydney, Australia. As part of their continued efforts to align to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), Macquarie conducted heat-mapping and climate scenario analysis on physical and transition risks in its holdings. The bank has released a new report reflecting on its progress to date against the four pillars of the TCFD (governance, strategy, risk management, and metrics).

Acclimatise deployed its HeatMapR toolkit to help Macquarie undertake a high-level analysis of physical climate risks on its global equity and lending portfolios against two climate scenarios. The heatmapping exercise used 1.5°C and 4°C warming scenarios*, representing good practice by selecting a high and low-risk scenario. The HeatMapR tool pulled climate hazards data for three time horizons, namely 2020, 2030 and 2050. A wide range of hazards were analysed in the exercise, including chronic climate change variables (e.g. temperature, precipitation, sea level rise) and extreme weather events such as bushfires. The results of these analyses were presented as a set of summary heatmaps, and a similar exercise for transition risk was conducted alongside Acclimatise’s physical heatmapping workstream.

As noted in Macquarie’s report, the Acclimatise HeatMapR outputs provide a strategic tool to identify potential areas of their holdings where more detailed analysis is needed; heatmapping can also be used to guide further analysis and investment decision making. The findings of the heatmapping exercise for physical climate risks show that most severe impacts are expected to occur after 2050, but also that climate vulnerabilities are different across sectors and sub-sectors and in particularly are highly dependent on the country of exposure.

Thorough its climate risk heatmapping and scenario analysis, Macquarie determined that physical and transition risks present in its holdings were not considered to be material. Reasons for this include the fact that the firm  has a sufficiently diverse portfolio, and the their exposures to counterparties at risk are short term, as compared to the time scenarios examined. Finally, the exercises revelated that Macquarie has  limited lending exposure to risky sectors.

Over the course of 2020 and beyond, Macquarie will continue implementing its guidelines on climate risk governance and continue to refine and embed climate change considerations within its existing risk management frameworks. In particular, it aims to continue refining scenario analysis and to further integrate these exercises into their existing risk procedures and stress testing. In addition, it also aims to assess the resilience of its business premises to physical climate risks in the coming year.

Click here to access Macquarie’s full report.

* scenarios are warming scenarios by 2100, above and a warming by 2100, relative to pre‐industrial levels.

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

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

By Laura Canevari

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Robin Hamaker-Taylor and Georgina Wade

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

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

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

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

Access the individual chapters of the guide here:

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

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

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

Delivering a virtual training course on GCF project requirements in Belize

Delivering a virtual training course on GCF project requirements in Belize

Acclimatise’s Climate Finance team, in partnership with the Caribbean Community Climate Change Center (CCCCC), has designed and launched a five-week virtual training course on GCF project requirements as part of Belize’s Green Climate Fund (GCF) Readiness 2 Support – “Building Capacity for Direct Access to Climate Finance”. One of the objectives of this Readiness support is to strengthen the capacity of Belize’s National Designated Authority (NDA) – the Ministry of Economic Development (MED) – to effectively mobilise, manage and monitor climate finance with a view to achieving national development and climate change priorities.

This course was specifically tailored to members of Belize’s National Climate Change Committee (BNCCC) which is the committee that sits under the NDA, and designed so they can perform their GCF responsibilities, which includes appraising projects received from project developers and providing constructive feedback to national and international stakeholders.

About the course

The course was developed by Acclimatise’s Virginie Fayolle, Caroline Fouvet and Maya Dhanjal, with facilitations support from in-country expert Ann Gordon. Since commencing the course on 29th June 2020, we have had a successful first three weeks of the course which will continue until 7th August 2020. Overall, the course equips BNCCC members to:

  1. Understand GCF project requirements and what a good GCF project looks like;
  2. Grasp key GCF or general project preparation concepts, such as climate rationale, theory of change, logical framework, paradigm shift, and gender mainstreaming;
  3. Align a project with the GCF’s six investment criteria to appraise concept notes; and
  4. Provide constructive feedback on GCF concept notes received by the Belize’s NDA.

Adapting to a post-pandemic world

This training was originally designed for a face-to-face format where our instructors would travel to Belize to deliver it over a 2-week period. However, in response to travel restrictions due to coronavirus, Acclimatise adapted the format into a virtual training, following a human-centric design approach. This conversion required an understanding of the constraints faced by both parties including availability of and access to technology, using web-based products that allowed for collaboration and real-time communication, and lastly, a sense of what life is now like for BNCCC members who may be working from home, have children to home-school or dependents to take care of, and have religious observances to attend to.

Through a set of interactive plenary presentations from guest speakers, recorded videos that are accessible at participants’ own pace, as well as quizzes and live calls with featured polls to gauge participant knowledge, understanding and comfortability with the topic, the training course has been successfully re-designed for participants into a blended learning classroom where we are currently holding some “live-on-air” events as well as asynchronous activities so participants could tackle the content at their own pace. The live sessions in particular brought a range of participants together to exchange and share meaningful experiences across a broad group of stakeholders, including multiple regional government agencies and private sector organisations.

Future trainings on GCF project requirements under Readiness Support

Acclimatise has a wealth of experience designing and executing training services for clients looking to access, manage and utilise funding from the GCF. Although typically done in a face-to-face format, Acclimatise has now successfully approached adapting this training into a virtual format that maximises the potential of the participants to absorb knowledge and strengthen their success of securing funding from the GCF.

Some topics covered in the training include:

  1. Climate Change in Belize and Belize’s relevant climate-related national priorities – two presentations by Colin Mattis, Deputy Climate Change Officer at NCCO
  2. Challenges and opportunities for demonstrating the climate rationale of a GCF project and related data needs – a panel discussion with Olivia Avilez from Belize Sugar Industries, Ryan Zuniga from CCCCC and Ronald Gordon from National Meteorological Services
  3. The relevance of adaptation in Belize: the business perspective – a presentation by Olivia Avilez at Belize Sugar Industries

You can find more information about how Acclimatise can help you mobilise, catalyse, and leverage public and private capital to deliver your climate investment strategies and financing for climate-resilience solutions on our website.

If you are interested in our training offering on the topic,  contact: Ms. Virginie Fayolle

Cover photo of Belize flag from Wikimedia Commons.