Dramatic changes are still needed to pivot the world economy away from carbon-intensive sectors and to reach the climate change goals of the Paris Agreement.
To guide different industries in taking action, the Task Force on Climate-Related Financial Disclosure (TCFD) raised the need for decision-relevant, consistent and comparable climate information. There is considerable work ahead for the insurance industry to make headway on the TCFD’s recommendations.
In response, The Geneva Association has mobilised a task force of leading experts from the world’s largest insurers, representing the companies of our CEO members. The initiative is working to develop methodologies and tools for climate risk assessment – and build engagement with regulators, rating agencies and the scientific community – to identify the most viable ways forward.
This first report of the task force finds that:
For both P&C and life re/insurers, climate change presents different levels of physical and transition risk to both sides of the balance sheet (liabilities and assets).
Developing climate risk assessment methodologies and tools for insurers is a work in progress, requiring qualitative and quantitative approaches over different time horizons.
Uncertainties associated with transitioning, related to public policies, regulations, technological advancement and markets, will increasingly affect levels of climate change risk and the future risk landscape.
Robust dialogue across insurance companies and with all stakeholders is increasing climate risk awareness, strengthening collaboration and ensuring effective actions are taken.
The task force will continue its work, analysing the insurance regulatory landscape related to climate risk, and conduct a technical ‘deep dive’ to develop methodologies and tools for scenario analysis for the insurance industry.
Real estate has led the way as an early adopter of TCFD requirements. In this whitepaper Willis Towers Watson outlines key lessons learnt throughout the sector.
Task Force on Climate-related Financial Disclosures (TCFD) is being increasingly adopted by the real estate sector, with the past two years seeing significant momentum in adherence to the guidance1. Indeed TCFD disclosures made by Real Estate Investment Trusts (REITs) and Real Estate Management and Development organisations have increased. Total disclosures made in 2020 more than doubled the total number reported for 2019, and the number of disclosures for 2020 exceeded the total combined disclosures made over the previous three years from 2017 to 20192. This is in spite of the macro-economic decline and uncertainty, which has hit some landlords especially hard.
Total TCFD disclosures made in 2020 were more than double than the total number reported from 2017 to 2019
With disclosure mandatory (on a ‘comply or explain’ basis) from 2022 for premium listed companies3, this whitepaper outlines the key themes and lessons learned from real estate experience in addressing TCFD guidance.
The Investment Consultants Sustainability Working Group (ICSWG) has launched a guide to support trustees to assess their investment consultants on their climate competency. The ICSWG is a collaboration between 17 firms formed in 2020 taking action to support and accelerate sustainable investment initiatives in the UK.
Developed through collaboration between all 17 member firms
with input from ShareAction, The Pensions Regulator and the PRI, the guide is a
practical response to the 2020 Pensions Climate Risk Industry Group (PCRIG)
consultation, which recommended that pension scheme trustees require their
investment consultants and asset managers to demonstrate climate
The guide sets out five themes against which trustees should expect their
investment consultants to demonstrate their climate competency. These are:
Firmwide climate expertise and commitment
Individual consultant climate expertise
Tools and software (to support climate-related risk assessment and monitoring)
Thought leadership and policy advocacy
Assessment of investment managers and engagement with them
Examples of ‘positive’ and ‘best practice’ indicators are
proposed for each theme to help trustees assess their consultants in each area,
underscoring the commitment of the ICSWG to ongoing improvement of climate
“The indicators are deliberately stretching with the aim of
raising investment consultants’ standards and it should be acknowledged that
some of these indicators will be aspirational.” Said Luba Nikulina, of Willis
Towers Watson and co-Chair of the ICSWG. “However, this is an important step
towards developing good practice and practical guidance for schemes, in
particular those seeking to align with the recommendations of the Taskforce on
Climate-Related Financial Disclosures (TCFD).”
Download the “Guide for assessing climate competency of Investment Consultants” 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.
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:
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.
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.
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
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.
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.
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.
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 homogenousbetween 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
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.
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.
 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.
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:
specific risks to financial firms,
financial system-wide 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.
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.
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;
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;
house world” scenarios [i.e. the current
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,
Step3, 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
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.
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.
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
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.
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.
MinterEllison, a commercial law firm in the Asia-Pacific, has published new analysis which indicates that companies have not been prioritising their surveillance of their climate change risk disclosures. In their analysis of annual reports for the 2019 financial year, MinterEllison found that only 21 (7%) of ASX300 companies had ‘meaningful’ climate change risk disclosures, compared with 137 (45.5%) of reports containing little or none.
not bode well for many listed companies in light of the Australian Securities
& Investments Commission’s (ASIC) recent announcement that it will
prioritise this in the 2020 financial year. So how do boards assure themselves
that they are having meaningful climate change risk disclosures? To answer this
question, MinterEllison has set out their top 5 climate change-related
governance issues for directors to consider this reporting season.
Narrative disclosures – TCFD and stress-testing move from gold standard to base expectation
An increasing proportion of mainstream institutional investors now expect investee companies to apply the governance, strategy, risk metrics and disclosure framework set out in the 2017 Recommendations of the Bloomberg Taskforce on Climate-related Financial Disclosures (TCFD). One of the key TCFD Recommendations relates to stress-testing and scenario planning of business strategies against a plausible range of climate futures, emphasising the inclusion of information on the impact of climate change on financial performance, position and prospects.
Consider how your business has
made credible inroads on the journey towards compliance with the
Recommendations of the TCFD in FY20.
‘Net zero’ emissions transition
Mainstream investors and large
proxy advisors are increasingly voting in favour of activist shareholder
resolutions that seek corporate disclosure of net zero emission strategies –
often against the recommendation of management.
Consider how you envision your
business will continue to thrive in a ‘net zero’ economy, and your strategy for
transitioning your business.
…and a roadmap for achieving Paris Agreement goals
Bare pledges of ‘support for
Paris Agreement goals’ are not enough. In FY20, investors are looking for a roadmap
of short- and medium-term targets against which to assess a corporation’s net
zero transition commitment, and evidence of credible progress on that journey.
Consider your business plans
and their progression towards achieving emissions reduction commitments and
your strategy for achieving these goals.
Valuation and impairment – relevance of climate change-related assumptions to financial reporting and audit
Standard setters made clear that
they expect climate change-related assumptions to be clearly stated,
highlighting the potential to be a material accounting estimation variable,
impacting on asset useful lives, fair valuation, impairments and provision for
bad and doubtful debts.
What consideration has been
given to the climate-related variables that may materially impact on your
accounting estimates (financial position) and prospects?
Governance, executive remuneration and their relationship with climate change strategy.
Companies should benchmark their
governance of climate change strategy and risk management against the
recommendations of the TCFD and ensure that a portion of the discretionary
remuneration of relevant senior officers is linked to progress against the
business’ climate targets.
Consider your company’s
governance structures and if they are benchmarked against the TCFD.
The UK government has today put forward new reforms that would force large pensions schemes to show exactly how they are managing the risks of climate change. The Department for Work and Pensions tabled an amendment to the Pension Schemes Bill today to mandate for disclosure against the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure.
The decision will add more impetus to the efforts of the financial services sector to understand and manage its climate risk exposure. “Financial institutions must take responsibility for their impact on the planet and the money they manage on our behalf, so we’re delighted that the UK government is taking steps to implement TCFD on a mandatory basis.” said Fergus Moffatt, head of UK policy at ShareAction a UK charity that campaigns for responsible investing. “The level of disclosure required under these laws will make it plain to see which pension schemes are really walking the talk on tackling the climate crisis and the risks it poses to our savings. As the UK hosts COP26 this year, all eyes will be on the current government to ensure this ambition reaches all areas of finance.”
The UK’s largest 25 pension schemes have over £560 billion invested. In 2018 the Environmental Audit Committee published responses it received from the UK’s 25 largest pension funds detailing the funds’ approach to climate change risk and whether it is – or is not – incorporated into their investment decision-making. 12 of the 25 schemes were listed as “more engaged” meaning that they are taking steps to assess and minimise their exposure to the physical and transition risks posed by climate change. Pension funds in this group support TCFD and most have committed to – or are considering – reporting in line with recommendations on climate-related financial disclosures.
However, 12 schemes also said that they had “no plans” to report against the TCFD recommendations. Today’s announcement will mean that all funds will have to engage with climate risk and work to understand their exposure. Acclimatise has been working closely with banks and other corporates in the financial services sector to develop tools and methodologies to assess physical climate risk to investments and loan portfolios.
The announcement will have implications for the entire financial services sector, showing a willingness from the government to take action if engagement on climate change is perceived to be lagging. It also sends a clear signal to corporates in other sectors, that investors will be expecting them to be able to report to them on their climate risk exposure, with loans and credit ratings likely to become contingent on taking action to manage climate risks.
Acclimatise have partnered with IIGCC and Chronos Sustainability to develop guidance for institutional investors on how they integrate the risks and opportunities presented by the physical risks of climate change in their investment research and decision-making processes. The guidance, titled ‘Understanding Physical Risks,’ will be launched in mid-March 2020. Acclimatise will lead a webinar to launch the guidance, stay tuned for more details.
A recent survey conducted by the Institute of International Finance (IIF) and the European Banking Federation (EBF) finds that the demand for climate services and sustainable products is on the rise, but the need to improve risk management processes and streamlining disclosure frameworks remains.
70 member firms representing nearly $40trillion in assets responded to the survey. 29% claim that they are already aligned with the TCFD Recommendations and another 30% believe that they are aligning, but only partially. Firms that have not aligned but plan to (30%), or that have not started to consider it (10%), highlighted a number of challenges including a lack of data available, a lack of regulatory guidance and the lack of streamlined and standardised processes to report climate related financial data. Whilst over 45% of participants acknowledge that their risk management process includes procedures to identify and assess climate related risks and opportunities, only 17% believe they have fully integrated these procedures into the overall risk management framework.
In terms of sustainability instruments and products, 90% of respondents believe that client demand will increase and that demand will be more pronounced in Europe, followed by other mature markets. Over 65% believe that current regulatory initiatives, in particular the EU Action Plan for Financing Sustainable Growth (followed by the TCFD and NGFS workstreams), are having a material impact on the market environment for sustainable finance. More than half of the financial firms surveyed are issuing their own sustainable instruments, in particular green bonds (75%) and green loans (65%). Yet, nearly 70% of the respondents believe there is currently a relative lack of sustainable products.
Landscape fragmentation is a source of concern for respondents. In fact, many raised their apprehension over the increasing number of initiatives with similar or overlapping goals or disclosure processes, as well as the limited usage of metrics and targets to assess climate risks and opportunities, and the lack of standardised practices for the development of sustainable finance products.
The results, therefore, highlight a rising need for collaboration among stakeholders. 70% of the organisations surveyed said that they would be interested in collaborating through the IIF Sustainable Finance Working Group, particularly on the development of an open-source framework for assessing climate finance risks at the client level. It’s too early to know what this framework might look like. But having a shared understanding of disclosure information requirements and standardised procedures to mainstream climate risk management will certainly help secure greater buy-in from firms that currently remain hesitant and doubtful about what steps to take, and will help to promote transparency and collective action for sustainable finance.