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.
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.
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.
UNEP
© UNEP
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