This seminal guidance is a market-first practical toolkit for financial institutions to pivot their activities towards financing a sustainable blue economy.
Designed for banks, insurers and investors, the guidance outlines how to avoid and mitigate environmental and social risks and impacts, as well as highlighting opportunities, when providing capital to companies or projects within the blue economy.
Five key ocean sectors are explored, chosen for their established connection with private finance: seafood, shipping, ports, coastal and marine tourism and marine renewable energy, notably offshore wind.
Accompanying the guidance is a set of easy-to-follow recommendations on how to approach financial activity in ocean sectors, allowing financial decision-makers to take immediate action.
Combined, the guidance and recommendations provide a road map with a detailed breakdown of which client activities to seek out as best practice, which activities to challenge, and which activities to avoid completely due to their damaging nature.
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.
How can the finance sector pave the way towards a more resilient world? This is one of the questions raised by the Global Commission on Adaptation (GCA), launched by the United Nations (UN) in October 2018 to accelerate adaptation action and support in the world. In the run-up to September’s UN Climate Summit in New York City, during which it will present its recommendations, the GCA has organised its work around six action tracks. Each of them have targets aimed to address current adaptation challenges, and include: food security and rural livelihoods, cities, infrastructure, nature-based solutions, empowering locally-led action and finance.
Although the finance sector has heightened its focus on climate risk disclosure and climate change broadly ever since the publication of the Task-force on Climate-related Financial Disclosures (TCFD) recommendations, few actionable plans have set out the ways in which the financial services industry can contribute to fostering global climate resilience. As part of the GCA’s finance action track, the United Nations Environment Programme Finance Initiative (UNEPFI) has been commissioned to work on a background report focusing on adaption finance, entitled “Driving Finance Today for the Climate Resilient Society of Tomorrow”, which was published last week.
The report, prepared by US firm Climate Finance Advisors and reviewed by an expert group including Acclimatise’s co-founders John Firth and Dr. Richenda Connell, acknowledges that aligning global adaptation needs with the 2015 Paris Agreement’s commitments constitutes “the biggest investment opportunity of this generation”. Reaching such goals, however, entails unlocking the necessary private and public capital both that can support investment in adaptation and resilience. With this objective, the report reviews barriers and opportunities for financing resilience and adaptation by all actors across the financial system, although it predominantly targets financial system constituents, including policymakers and financial actors, while highlighting actions required from each.
barriers are found to be in the way of embedding climate risk and resilience
into the financial system:
Inadequate support for action on adaptation/resilient investment: the report states that on the one hand, there are currently no sufficient
incentives for private finance investments in adaptation, while on the other
hand, public finance, that can catalyse private investments, has been
historically insufficient and needs to be scaled up.
Weak policies and conventions in the financial industry: there is currently a gap in enabling adaptation policy and practice
in the financial industry. Guidelines surrounding climate risk and resilience
in the financial sector have been weakly established and have achieved limited
adoption into practice.
Market barriers: there is an overall
market perception that investments in resilience address public problems, such
as water management or coastal flooding, and as a result lack profitability.
Nascent application of climate risk management practices: although there is a growing general awareness of climate risks from
corporates and financing institutions, there is still a need to actually
integrate physical climate change into operational risk management practices.
This is currently hampered by a lack of access tobetter decision-relevant tools from an early stage on.
Low capacity in policy and finance for climate risk management: both financial system governance bodies and financial actors have a
low capacity to understand climate risks at a level that enables financial
As a result of
its analysis, the GCA report sets out six recommendations targeting financial
system governance bodies and financial actors to overcome the aforementioned
barriers and facilitate and accelerate financing for adaptation and resilience:
Accelerate and promote
climate-relevant financial policies;
Develop, adopt, and employ
climate risk management practices;
Develop and adopt adaptation
metrics and standards;
Build capacity among all
Highlight and promote
investment opportunities; and
Use public institutions to
accelerate adaptation investment.
The authors conclude that policymakers and financial institutions need to address the resilience issue hand-in-hand. They also state that behind climate risks also lie opportunities for the financial sector. Last but not least, the finance sector needs to go beyond disclosures, as the ultimate objective of such process is to undertake effective risk management.