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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:
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.