climate risk and chimneys

Leading institutions still provide low visibility on how climate change may affect their performance, according to Moody’s.

As world leaders gather in Glasgow this month for COP26, in an attempt to reach an agreement to tackle global warming, the efforts of banks to improve climate risk disclosure is under the microscope.

While reporting at some large banks has improved over the past 18 months, according to a recent study by Moody’s, overall assessment of how climate change might affect financial performance remains weak.

The Moody’s study analysed 28 US, European and Asian lenders with combined assets of $56tn, comparing the banks’ publicly available climate risk disclosures with those available at the beginning of 2020.

“Most banks focus on disclosing governance structures, policies and processes to manage environmental risk, rather than providing a clear assessment of how climate change might affect their lending and investment portfolios,” says Olivier Panis, an analyst at Moody’s.

Banks have reached a sort of glass ceiling in the disclosures they can provide

Olivier Panis, Moody’s

The Task Force on Climate-related Financial Disclosures (TCFD) was created by the Financial Stability Board in 2015 in a bid to establish reliable climate-related financial information so that markets can accurately price climate risks and opportunities.

Of the 28 banks in Moody’s sample, 89% have signed up to the TCFD’s recommendations or to alternative frameworks, such as the Sustainability Accounting Standards Board and the Global Reporting Initiative guidance.

Around half the banks provide disclosure under each of the four TCFD pillars — governance, strategy, risk management, and metrics/targets — up from a third last year. All banks in the study considered climate change when making strategic decisions and 61% state clear climate risk objectives, up from 46% last year. Around 93% of the banks report their own greenhouse gas emissions.

But while many of the banks have integrated climate-risk criteria within their credit approval processes, few have implemented the methodologies and tools needed to gauge the vulnerability of their portfolios to climate change, according to the Moody’s report.

Just 21% report the carbon emissions funded by their lending and investment activities and, as a result, few banks disclose how climate change might affect their profits, with the exception of the revenues they expect from developing green products.

“Banks have reached a sort of glass ceiling in the disclosures they can provide,” Mr Panis says. “They have made improvements on the disclosure of the carbon emissions from their own operations, but the development of methodologies for reporting standards and regulatory rules are still in their infancy.”

Leaders and laggards

According to the report, only a handful of banks “fully describe” how their boards and committees monitor climate-related issues, or how they incorporate these issues into decisions affecting strategy, risk appetite and budgets.

Société Générale is one of the few; in 2019, the French bank established a responsible commitments committee for the whole group, which manages strategic decisions of environmental and social importance.

The committee has led to significant improvements at the bank about how it divides responsibility for climate strategy between its board, its executive management and the managers of its business units, Mr Panis says. “The bank provides examples of relevant climate-related decisions that different divisions of the bank have taken,” he says.

Likewise, Dutch bank ABN Amro started revealing in March this year how its efforts to align with the 2015 Paris Climate Agreement, which aims to keep global warming below two degrees Celsius, are affecting its business operations, including its lending and investment activities. “The bank is doing a good job in explaining how its targets are evolving,” says Mr Panis.

ABN Amro’s objectives include increasing sustainable client loans and investments from around 20% of the total in 2020 to around one-third by 2024.

Among the institutions in Moody’s 28-bank sample lagging in terms climate risk disclosure are State Bank of India, Russia’s Sberbank, and the Chinese megabanks – China Construction Bank and the Industrial and Commercial Bank of China. “They provide very limited information on the carbon emissions from their portfolios, the targets and the adoption of climate risk management tools,” Mr Panis says.

Enforced corporate disclosure

In order to achieve substantial improvements across the global banking industry, more enforced disclosure of all financial and non-financial borrowers is required, along with more harmonisation of reporting rules globally, according to Moody’s report.

“How can banks report on the risk associated with lending or investing in corporates if their clients’ disclosures don’t evolve at the same pace?” Mr Panis adds.

On a national and supranational basis, various recent developments should significantly improve corporates’ disclosure. In July, for example, the Japanese Financial Services Agency and the Tokyo Stock Exchange revised Japan’s Corporate Governance Code to require prime listed companies to disclose TCFD-based information.

Similarly, the UK government recently consulted on proposals to make disclosure of climate-related financial information mandatory for all listed companies, and all private companies with more than 500 employees and turnover of more than £500m.

At the same time, the International Financial Reporting Standards Foundation aims to establish global sustainability standards based on the TCFD recommendations. The International Organization of Securities Commissions — which supervises securities markets in around 130 jurisdictions — is expected to assess initial proposals by the end of the year and publish a first set of draft standards in 2022.

The EU Sustainable Finance Disclosure Regulation, which took effect in March 2021, is another milestone in the harmonisation of financial institutions’ climate risk assessment, the report states.

“More demanding disclosure rules should, over time, drive more comprehensive reporting of the climate risks associated with banks’ portfolios, and it is this that will help them reduce their carbon exposure and improve their resilience to climate stress,” Mr Panis adds.


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