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UN, 16 banks produce guidance on climate-related risks, opportunities

Sixteen leading banks from four continents, convened by the UN Environment Finance Initiative (UNEP FI), on Thursday, April 26, 2018 published a jointly developed methodology to increase banks’ understanding of how climate change and climate action could impact their business.

Christian Thimann

Christian Thimann, UNEP FI Co-Chair

The understanding is said to be fundamental to enable banks to be more transparent about their exposure to climate-related risks and opportunities in line with the TCFD. It will also inform banks’ strategies to contribute to and benefit from the low-carbon economic transition and help them engage and support their customers to that effect. This, the proponents say, is key because the climate-related risks and opportunities that banks face arise primarily from their services to clients.

The methodology and supporting materials are the first output of a unique and collaborative process over the past 10 months. It has brought together various functions from within the banks including credit risk, stress testing, sustainability and business development with leading scientists and risk and investment management experts.

The banks that are leading this work and that are currently piloting the methodology are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS. They were guided by the consultancies Oliver Wyman, Mercer, Acclimatise and supported by scientists from the International Institute for Applied Systems Analysis (IIASA) and the Potsdam Institute for Climate Impact Research (PIK).

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“Many of the environmental challenges that the world faces today, especially climate change, can be traced back to one fundamental root cause: short-termism. Financial markets can become a catalyst for action on sustainability, but for that they need to become more long-term oriented,” said Erik Solheim, Head of UN Environment. “The beauty of the TCFD framework is that it encourages organisations to consider and disclose long-term impacts. This change in perspective is what we need to achieve sustainable development. That’s why as UN Environment we are excited to be working with such committed leaders in the finance industry.”

The methodology provides the first publicly available guidance designed specifically for banks to carry out forward-looking, climate-related risk and opportunity assessments as envisioned by the TCFD. More specifically, the methodology helps banks to apply the state-of-the-art global climate change scenarios that are available today – such as those developed and offered by PIK, IIASA, and the International Energy Agency (IEA) – to evaluate the risks and opportunities that the low-carbon economic transition may present to their lending portfolios.

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“When we published our recommendations less than a year ago, we were deliberate in viewing banks and other financial institutions not only as consumers of climate-related disclosures, but also as preparers and issuers of such disclosures. We did so to emphasise the key role that financial institutions will have to play both in safeguarding financial stability and financing economic decarbonisation,” said Christian Thimann, UNEP FI Co-Chair, TCFD Vice-Chair, and Senior Executive at AXA. “That is easy to understand. The hard part is finding effective yet practical ways for financial institutions to take such action, to carry out the required assessments, and to meaningfully disclose. I am thankful for the contribution that this group is today making to that effect.”

The methodology is designed to:

  • Build upon existing risk assessment expertise, procedures, and models already used by banks;
  • Enable informed assessments of how risk exposures – and new potential opportunities – might develop in the future, under various climate mitigation scenarios;
  • Allow institutions to examine risk and opportunities across a range of geographies and sectors, and
  • Provide longer-term insights that go far beyond the usual stress-testing horizon of 2-3 years.
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The progress made through the publication of this framework is foundational. “Through this highly collaborative effort of scientists, risk practitioners and sustainability experts, we have set forth an innovative methodology that will serve to underpin enhanced climate-risk aware decision making and resource allocation,” said John Colas, Oliver Wyman Partner and Vice Chairman, Financial Services Americas. “We expect that this methodology will be further strengthened, as practices evolve and new and more granular data emerges from industry practitioners, corporates, policy makers, and climate scientists.”

Additional work is still needed across sectors and areas of expertise to develop best practices. Most publicly available scenarios are not intended for financial risk assessment. Together the scientific community and financial institutions could improve the granularity of the models and advance the financial risk variables generated. There will also be value in banks and borrowers engaging so that enhanced borrower-level information becomes available. Like the development of macroeconomic stress testing at financial institutions, forward-looking climate assessments and disclosures will continue to improve over time.

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