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Weekly round-up: March 7-11

March 11, 2022

The top five climate risk stories this week

1) Canadian banks set financed emissions targets

Banks among Canada’s ‘Big Five’ followed the example of their US and UK peers by rolling out plans for decarbonizing their loan portfolios.

TD Bank — Canada’s biggest lender with CAD$1.73 trillion in assets — announced emissions reduction targets on Wednesday. The firm set a goal of cutting the carbon intensity of its energy portfolio by 29% and of its power generation portfolio by 58% by 2030, both against a 2019 baseline. TD says the targets align with the International Energy Agency’s Net-Zero Emissions by 2050 scenario. 

The bank also disclosed an estimate of the carbon emissions financed by its energy and power generation portfolios. For its energy portfolio, which covers fossil fuel producers, Scope 1 and 2 emissions came to 8.8 million tonnes of carbon dioxide equivalent (mt/CO2e) and Scope 3 emissions 72mt/CO2e in 2020. Canada as a whole emitted 535.8mt/CO2e in 2020.

BMO published its financed emissions targets on Monday. The bank pledges to cut emissions linked to its upstream oil and gas, power generation, motor vehicles, and residential mortgage portfolios. As with TD, the decarbonization pathways are aligned with net zero emissions scenarios. In its financed emissions disclosure, BMO revealed that the Scope 1 and 2 emissions of its upstream oil and gas portfolio came to 2.3mt/CO2e in 2019, and its Scope 3 emissions to 38.9mt/CO2e.

In contrast, RBC did not unveil decarbonization targets in its climate report, published last Wednesday. It also only disclosed Scope 1 and 2 financed emissions for select asset classes and exposure types. Oil and gas financed emissions totaled 11.4mt/CO2e in 2021. In the preamble to the report, RBC chief executive officer David McKay said the banks would set “interim financed emission reduction targets to align with our clients’ plans”, but did not say when.

2) Small US banks won’t be quizzed on climate risks yet — OCC

It will be “a number of years” before examiners at the US Office of the Comptroller of the Currency (OCC) get round to scrutinizing the climate risk management capabilities of “midsize and community banks”, the agency’s Acting Chair, Michael Hsu, has said.

In a speech before the Institute of International Bankers on Monday, Hsu laid out the steps the agency is taking to finalize climate risk management principles for large banks it released in draft form last December. These would apply solely to US banks with more than $100 billion in assets, a small subset of the more than 1,100 entities the OCC supervises.

Hsu said that the OCC plans to develop the draft principles “on an interagency basis with the Federal Reserve and FDIC [Federal Deposit Insurance Corporation].” Following a transition period, the OCC would then “begin assessing large banks’ climate risk management capabilities.”

Addressing smaller banks, Hsu said they should work on assessing their own climate risk profiles to lower the risk of a “trickle down” of climate risk management expectations over the coming years.

3) RMS builds out climate risk model offering

Catastrophe risk modeler RMS is expanding its suite of climate change models to capture flood, wildfire, and typhoon risks in the US and Japan, as well as sea level rise projections for the US.

Announced Thursday, the firm said the new models will be available from June and should assist firms when its comes to gauging both the near- and long-term physical impacts of climate change. RMS released a first wave of climate change models in 2021 covering European flood and windstorm risks, as well as North American hurricane perils. With all RMS models, users can project physical climate risk impacts across four future GHG emissions pathways from 2020 out to 2100.

“What is becoming increasingly important for businesses is the ability to look forward at the potential impacts of climate change, across portfolios, risks and liabilities,” said Julie Serakos, Senior Vice President, Model Product Management, at RMS. “There is also a growing need to capture sensitivity around the potential impacts of historical climate change, for example in perils where the consensus on this is limited. Only with detailed, consistent, and reliable information around future climate change risks are businesses and executives able to make informed long-term strategic decisions to best reflect the interests for their business, stakeholders, and regulators,” she added.

RMS predominantly serves the (re)insurance sector through its suite of over 400 risk models, which are used to estimate the financial losses linked to wildfires, hurricanes and windstorms. The firm was acquired by financial intelligence firm Moody’s last August.

4) WWF promotes science-based climate risk disclosures

The World Wide Fund for Nature (WWF) is pressing financial authorities to “rapidly and significantly improve the comparability and reliability of disclosed climate risk metrics” produced by banks and insurers.

On Wednesday, the environmental nonprofit published a series of “science-based disclosure principles” to inform regulatory disclosure requirements for forward-looking assessment approaches. These include methodologies like Implied Temperature Rise, which calculate the temperature alignment of financial portfolios.

The purpose of these principles is to help make such disclosures comparable across institutions and thereby make it easier for climate risks to be priced in the market.

Alongside the principles, the WWF also provides standardized disclosure templates that financial institutions can use to report the essential features of their forward-looking assessment approaches, as well as the implications of their findings.

The guidance is based on research by academics at ETH Zürich and the Swiss-based Council on Economic Policies, who in 2021 compared 14 different climate transition risk tools in use by financial institutions and found significant variations in their risk assessments.

5) Climate activists push institutions to reject Europe’s “unscientific” sustainable taxonomy

European financial institutions should pledge to exclude natural gas and nuclear power exposures from all products and bonds labeled “sustainable”, “green”, or “responsible” in defiance of the European Union’s sustainable taxonomy, a coalition of climate-focused nonprofit groups has said.

In an open letter published Thursday, 92 groups — including France’s Reclaim Finance, the UK’s ShareAction, and Friends of the Earth Europe — said that the European Commission’s (EC) decision to allow investments in natural gas and nuclear power to qualify for the taxonomy was “unscientific and unjust”, and had turned the framework into “a highly politicized document.” Financial institutions have to take matters into their own hands by excluding these investments from their ‘green’ product suites, the letter continued.

“Europeans must not be deceived into believing they are supporting the sustainable transition by opting for a climate-aligned taxonomy while unknowingly supporting fossil gas and nuclear development instead,” the groups wrote. 

The EU taxonomy is intended to classify which economic activities are environmentally sustainable, so as to protect investors from ‘greenwashing’ and help mobilize capital towards climate-friendly projects and industries. On February 2, the EC proposed the inclusion of natural gas and nuclear power, which sparked an uproar from certain policymakers and investment groups. Ahead of the decision, the Institutional Investors Group on Climate Change, which represents over 370 firms, wrote to EU lawmakers saying it was “strongly opposed” to the inclusion of natural gas in the framework.