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 Programme 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 programme 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 programme including analytics providers and leading climate scientists.
Extreme events such as floods, droughts and tropical storms cause damage to fixed assets, lead to changes in output and asset values, and disrupt supply chains. They can affect banks’ borrowers and have the potential to create risks for banks’ loan portfolios. As the climate is changing, extreme events in some parts of the world are becoming more frequent and severe. Their significance varies across geographies and time horizons, between different industry sectors and individual borrowers. To effectively analyze physical risks to their portfolios, banks need to integrate data on future changes in extreme events (along with data on projected future incremental changes in variables such as temperature and precipitation) into their risk assessment processes.
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 Excel-based methodologies.
- 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.
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.
Action on climate change is needed now more than ever from the finance sector. The carbon budget remaining to hit Paris climate goals continues to diminish rapidly. The planet is already over 1º C warmer than pre-industrial times and the effects of this change are being felt globally. From devastating fires in Australia to unprecedented storm development in the North Atlantic, the climate emergency is here. Financial institutions have a social responsibility and a business imperative to actively reduce risks in their portfolios and to finance adaptation measures.
“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.
Download the report here.
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.
“The Phase II TCFD banking pilot reflects a remarkably diverse global cohort of financial institutions. Through the programme, these institutions were able to collaborate with outside experts and with each other to assess physical risks and opportunities, both in their home regions and around the world. Charting a New Climate offers a primer for the wider industry to follow the lead of this trailblazing group.” – Eric Usher, Head of UNEP FI
“We believe that the work done during Phase II of the TCFD banking pilot has empowered the participating banks to become industry leaders in assessing climate risk and opportunities. We are excited to see their knowledge and experiences reflected in their TCFD reports.” – Dr Richenda Connell, Co-founder and CTO of Acclimatise
David Carlin, TCFD Programme Lead, UNEP FI – firstname.lastname@example.org
Mustafa Chaudhry, Communications, UNEP FI – email@example.com
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.