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Weekly Round-Up: September 12 – 16

September 16, 2022

The top five climate risk stories this week

US regulator hires chief climate risk officer

US bank watchdog the Office of the Comptroller of the Currency (OCC) appointed its first chief climate risk officer, who will be responsible for addressing the threat of global warming to the federal banking system.

On Monday, the agency announced the new role would be filled by Dr Yue Chen, who previously worked at the New York State Department of Financial Services as its first executive deputy superintendent of the climate division. In this role, she oversaw the integration of climate-related financial risks into the supervision of the state’s banks and insurers. 

As chief climate risk officer Chen will lead the OCC’s new Office of Climate Risk, overseeing its  work on climate-related bank supervision and policy. She will report to Acting Comptroller Michael Hsu, who has set the agency’s sights on tackling climate risks to the financial system. 

Last December, the OCC issued draft principles on managing climate-related risks for large banks. At the time, the OCC said: “Weaknesses in how banks identify, measure, monitor, and control potential climate-related financial risks” could undermine their safety and soundness, and threaten financial stability.

Net zero banks urged to adopt tougher fossil fuel standards

A coalition of 16 climate-focused nonprofits have told leaders of the Net-Zero Banking Alliance (NZBA) to tighten the fossil fuel policies that apply to its members.

In a Wednesday letter sent to the head of the United Nations Environment Programme Finance Initiative (UNEP FI), who serves as a NZBA steering committee member, the nonprofits demanded the alliance update its guidelines to align with new UN-backed Race to Zero (RtZ) campaign criteria. These criteria require all RtZ-affiliated groups — including the NZBA — to “phase down and out all unabated fossil fuels” by restricting the “development, financing, and facilitation of new fossil fuel assets in line with appropriate scenarios.” The NZBA includes 115 members representing around 40% of global banking assets and is part of the broader Glasgow Financial Alliance for Net Zero (GFANZ), which is also accredited by the RtZ.

The nonprofits said they were “extremely concerned” about comments made in a recent Capital Monitor article by a UNEP FI official, who said it’s unlikely that the NZBA and other GFANZ member alliances would need to revise their core commitments to meet the new RtZ criteria. “To us this assertion questions the whole structure of GFANZ and its requirement for Race to Zero compliance, so we hope that the journalist has incorrectly reported UNEP–FI’s position and we would welcome clarification from you on this,” the letter said.

The nonprofits have asked UNEP FI to respond by October 11 explaining how the NZBA will update its guidelines to meet the RtZ criteria and ensure members’ compliance.

Financial institutions ramp up climate risk hires

Banks and other financial firms are on a hiring spree to better understand their climate risks, a new survey shows.

Over the past two years, 67% of firms reported “significant increases” in climate risk-focused employees, and around 40% expect to hire more staff over the next two years. Most firms have between one and five full-time climate risk staff, though a few have over 50.

That’s according to the Global Association of Risk Professionals’ (GARP) latest survey of financial risk management, which covered 62 institutions from around the world, including banks, asset managers, insurers, and financial utilities.

The survey explores how institutions are approaching climate risk management, their climate governance processes, and use of metrics and targets. GARP found that board-level climate engagement is the norm at almost every institution surveyed. Furthermore, C-suite managers are accountable for climate risk assessments and management initiatives at 98% of firms. Only a few companies delegate this responsibility further down their internal hierarchy.

On climate strategy, 19 out of 20 respondents said they have identified climate-related risks and opportunities. Sixty percent expect climate risks to significantly impact their strategies over the next five to 15 years, while over 70% said the same about climate opportunities. A smaller percentage said climate risks and opportunities would affect their strategies over the next one to five years.

GARP’s survey also shows that more financial institutions are using a broad array of climate metrics and targets to monitor climate risks and keep their decarbonization plans on track. Only 10% of respondents said they are not measuring their climate risks at all, down from 26% in last year’s survey. More than half of all firms use metrics to manage climate-related balance sheet risks, measure the alignment of their portfolios with net-zero goals, check that their climate risk exposure is within their risk appetite, and to gauge their activities’ impact on the climate.

When asked what barriers exist to building effective climate risk management over the next five years, 82% of firms cited climate data availability, 72% access to reliable models, and 45% regulatory uncertainty.

€51trn investor group floats climate resilience framework

Asset owners and managers should take action to harden their portfolios against physical climate risks and support climate resilience, a coalition of investors says.

On Thursday, the Institutional Investors Group on Climate Change (IIGCC) published the outline of a Climate Resilience Investment Framework (CRIF). Once completed, this framework could help firms align their portfolios with efforts to prepare the world for more frequent and severe physical climate risks.

“Given the latest climate science and our knowledge of transmission of physical risks to financial risks, investors will need to pursue climate resilience,” the IIGCC says. “An understanding of the adaptive capacity of assets within a portfolio will be imperative, as well as an increasing consideration for addressing risk to the systems in which they operate.”

The proposed CRIF is structured around five pillars: governance and strategy; targets and objectives; strategic asset allocation; asset class alignment; and policy advocacy and market engagement. It recommends using a range of indicators — such as the number of assets with resilience strategies and portfolio share allocated to climate resilience solutions — to highlight investors’ actions to support physical climate risk management efforts.

The IIGCC’s goal is to develop the CRIF into a blueprint that all investors can use alongside its Net Zero Investment Framework, which sets out actions, metrics, and methodologies to align portfolios with global decarbonization objectives. Interested parties can comment on the proposal until October 15.

Over 90% of big firms at risk from climate hazards

Physical climate risks like extreme weather and prolonged heat waves are projected to harm the assets of almost all major companies by the 2050s, data from S&P Global’s sustainability unit shows.

If global emissions aren’t reduced, S&P Global Sustainable1’s new dataset estimates that 92% of the world’s biggest firms have at least one asset that will be highly exposed to physical climate risks by midcentury. This will climb to 98% by the 2090s. Over one-third of top companies have an asset that could fall in value by 20% or more by the 2050s because of physical risks. This subset includes more than 70% of leading utilities, energy, and materials businesses in the S&P Global 1200 index.

The S&P dataset projects the climate-related exposures of over 20,000 companies and 870,000 asset locations under four popular climate change scenarios. It includes exposure scores that rank how at risk each asset and company is to eight climate hazards — including extreme heat and coastal flooding. It also contains financial impact measures that show the potential future costs the exposed assets could incur. The dataset is intended to help investors, companies, and governments get to grips with their physical climate risks.

“In 2022, many countries have experienced unprecedented weather conditions, including heat waves in the UK; wildfires in the US and record temperatures in China,” said Steve Bullock, global head of ESG Innovation and Solutions at S&P Global Sustainable1. “Against this backdrop, this new dataset uses the best available climate models and integrates a new climate change hazard, drought, to ensure market participants have access to high quality data and evidence-based insights as they seek to understand and adapt to their exposure to the physical risks of climate change.”