With the 2020 United Nations Climate Change Conference (COP26) approaching, financial institutions are being urged to revise their reporting, risk management practices, and business strategies to mitigate the profound effects of climate change on the economy and financial markets.
This alert follows the launch of the ‘COP26 Private Finance Agenda,’ presented by Mark Carney, Governor of the Bank of England, at the Guildhall in London. The Agenda emphasizes that achieving net-zero emissions will require companies, banks, insurers, and investors to revamp their operations to align with a low-carbon future. It calls for the establishment of robust frameworks for reporting, risk assessment, and financial returns.
Carney asserts that financial markets are uniquely positioned to facilitate this essential transition by amplifying the shifts in societal attitudes, consumer preferences, and climate policies. He states, “In light of the significant climate challenges and the increasing demands from our citizens, 2020 must be a pivotal year for climate action, engaging all parties, including leading financial centers globally.” He further stresses the need for comprehensive climate risk disclosures, transformative climate risk management, and mainstream investments geared toward a net-zero future.
Recent evaluations of the 12 largest banks and 14 largest insurers in the Eurozone reveal that while most disclose data related to their business travel and energy consumption, many fail to adequately report their exposure to climate-related risks stemming from financial activities. Among the 26 institutions assessed, only five partially disclose the impacts of their financial assets, and none provide comprehensive information.
In her address at the agenda’s launch, ECB President Christine Lagarde indicated that the Eurosystem is currently reviewing how well the market understands and prices climate-related risks. She highlighted the focus on how credit rating agencies integrate these risks into their creditworthiness assessments. “We will continue to analyze how these factors influence our risk management, particularly concerning our collateral framework,” she noted, adding that ECB Banking Supervision is examining banks’ approaches to climate risks and developing relevant supervisory expectations.
Preparatory efforts are underway for a macroprudential stress test to evaluate the implications of climate-related risks, with initial results anticipated by year-end. This framework aims to assess how such risks affect both the real economy and financial systems.
Additionally, the Basel Committee on Banking Supervision has recently established a Task Force on Climate-related Financial Risks. Its work will include:
– Producing analytical reports on climate-related financial risks, encompassing literature reviews and analyses of how such risks disseminate through the banking system, as well as methodologies for measuring them.
– Formulating effective supervisory strategies to manage climate-related financial risks.
A summary of current initiatives from committee members will be published in March.
Finally, Finextra Research and ResponsibleRisk will delve into sustainable finance in investment and asset management during the upcoming SustainableFinance.Live Co-Creation Workshop in March 2020.
Interested participants are encouraged to register for this event, providing an opportunity to discuss the increasing demand for sustainability, the challenges facing sustainable investments, and potential pathways for financial services and technology firms to meet the UN’s Sustainable Development Goals by 2030.