Newsletter: Central Banks Lead the Way on Climate Risk Disclosures

Four Twenty Seven's monthly newsletter highlights recent developments on climate risk and resilience. This month we explore the second year of Art. 173  reports, highlight regulators'  action on climate risk and share new findings on financial climate risk in Asia.

In Focus: Lessons Learned from Art. 173 Reporting - An Update

Physical Risk Analysis is Stronger in Art. 173's Second Year

The second year of reporting under Article 173 in France saw increased analysis of physical climate risk, but there is still substantial room for improvement. We reviewed disclosures from 49 asset owners in France, finding that almost half of the respondents conducted more substantial physical risk analysis compared to last year. Insurance companies AXA and Generali provided the most detailed analysis for property portfolios, adding to their previous methodology. FRR and Comgest provided the most thorough assessment of physical climate risk in their investment portfolios and BPCE Group was the only bank with a complete analysis of physical risk.

Many firms still cite lack of data and tools as a barrier to adopting thorough analysis of physical risks. Those firms that are on the forefront of climate risk reporting disclose asset-level risk exposure and are beginning to explore how to assess value at risk and scenario analysis for physical climate risks, which are emerging as key research topics.
Read the Analysis

TCFD Moving the Market

While French firms are refining their climate risk disclosures, other companies across Europe are beginning to report on climate risk. 30 out of the top 80 companies in Europe made statements in support of TCFD and/or released disclosures, according to the Climate Disclosures Standard Board's review, First steps on climate-related financial disclosures in Europe. Only seven of these firms addressed physical risks.

ClimINVEST reviews developments in physical climate risk assessment in the financial sectors of France, the Netherlands and Norway, finding that common needs across these countries include in-house capacity building, improved risk assessment tools, increased understanding of the impacts of extreme events & guidance on corporate engagement. The report also reviews the landscape of physical risk data providers, including Four Twenty Seven.

How do these developments in TCFD reporting affect the greater landscape of financial risk disclosure and management? In its winter issue the Climate Change Business Journal interviewed Founder & CEO, Emilie Mazzacurati, about the history of the TCFD, it’s uptake to-date and how the recommendations influence other developments on risk disclosure. Emilie says, “The market is in exploratory mode: this is an emerging issue, and the collective understanding of impacts on corporations and financial markets is fast evolving. What is clear, however, is that this is a very material issue, and that is here to stay.”
Central Banks and Regulators Take Action

A Call for Action: Climate Change as a Source of Financial Risk

In its first comprehensive report, the Network for Greening the Financial System (NGFS) makes the case for climate change as a material financial and economic risk and outlines six recommended actions. The first four are directed at central banks and supervisors: integrate climate risks in financial stability monitoring, set an
example by assessing risks in central bank portfolios, promote the growth of publicly available data and encourage continued research and knowledge sharing on climate risks. The report makes two final recommendations for policy-makers: encourage continued uptake of climate risk disclosures, in line with the TCFD and develop a taxonomy of activities that support the transition to a resilient low-carbon economy and those that are highly exposed to climate and environmental risks. 

Integrating Physical Climate Risks into Insurance Stress Tests

In April the Bank of England Prudential Regulation Authority (PRA) released a policy statement responding to feedback it received on its consultation paper "Enhancing banks' and insurers' approaches to managing the financial risks from climate change," and including the final Supervisory Statement on the topic. PRA also released a request for technical input to life and general insurers on draft scenario guidelines for the 2019 insurance stress test.
The draft outlines three scenarios, including a sudden disorderly transition, a long-term orderly transition and a "hot house" scenario without transition and lists metrics of physical risk hazards and transition risk for each scenario. Feedback from industry participants is requested by May 31. 

Survey of French Banks and Insurers on Climate Risk

The French banking supervisor, ACPR surveyed French banks and insurers on their management of climate-related risks. The analysis found that governance of risks is improving significantly, slowly shifting from a corporate responsibility perspective to an integrated element in risk management strategies. However, this is not yet consistent and has yet to lead to operational adaptation for businesses.
While banks and insurers have made significant progress on assessing transitition risk, progress in undertanding physical and liability risks is much slower. In response to these findings ACPR will establish two working groups with the financial sector, one on governance of climate-change related risks and another on risk metrics and scenario analysis. 

Climate Change: Awareness to Action

The Australian Prudential Regulation Authority (APRA) surveyed 38 regulated entities including authorized deposit-taking institutions, superannuation firms and insurers on their risk perceptions, governance, strategy, risk management, metrics and targets and disclosures. Firms identified several opportunities associate with climate risk response: positioning themselves as
industry leaders, developing new products and promoting community resilience. Over 50% of respondents are conducting financial analysis of key risks. Many cite data limitations, resource constraints, regulatory uncertainty and lack of defined terms and methods as barriers to conducting scenario analysis. 

Climate Change and the Federal Reserve

"In short, climate change is becoming relevant for a range of macroeconomic issues, including potential output growth, capital formation, productivity, and the long-run level of the real interest rate," writes Glenn D. Rudebusch of the Federal Reserve Bank of San Francisco. His economic research letter highlights the ways that climate risks are pertinent for monetary policy, encouraging continued research on the financial impacts of climate change hazards. 
Asian Investors Exposed to Water-Related Climate Risk

Are Asia's Pension Funds ready for Climate Change?

Asia's financial sector faces unique climate risks due to the population's concentration in large urban areas highly exposed to climate risk and their economies' reliance on water, a threatened resource. China Water Risk, Manulife Asset Management and the Asia Investor Group on Climate Change, released a new report exploring the drivers of climate risk exposure for asset managers in Asia and recommending strategies to build resilience.

They found that public pension funds, sovereign wealth funds and central banks tend to have portfolios concentrated in their domestic markets, which are also highly exposed to climate risks. The export economies of India and China are particularly vulnerable to water stress, and businesses must prepare for the shift in economic policy towards more resilient industries. In light of high exposure to climate impacts that are already locked in, financial actors should promote adaptation finance, assess their portfolios' physical risk exposure and engage with companies and industry initiatives.
Yale 2019 Symposium on Sustainable Finance Call For Papers
The Yale Initiative on Sustainable Finance is seeking papers for its 2019 Symposium on "The State of Play in ESG Investing.” They will consider empirical research papers, literature reviews or position papers from scholars, practitioners and industry experts. Selected authors will be asked to present at the symposium in November. Specific focal topics within the broad theme of ESG investing include: environmental and social impact metrics; portfolio-level ESG assessment and metrics; ESG in financial disclosures; future reporting frameworks for ESG information; private equity and ESG; and social- and green-impact bonds. Abstracts are due by May 17
Upcoming Events

Join the Four Twenty Seven team at these events:

  • April 30 - May 1  – Ceres Conference 2019, San Francisco, CA: Meet with Founder & CEO, Emilie Mazzacurati on Wednesday.
  • April 30 – NAREIM Sustainability & Investment Management, Chicago, IL: Chief Operating Officer, Colin Shaw, will present on climate risk data for real estate at this gathering of the National Association of Real Estate Investment Managers. 
  • May 1 – Addenda Capital Investor Day, Toronto, Canada: Colin Shaw will present on physical climate risk. 
  • May 9 – Addenda Capital Investor Day, Montreal, Canada: Emilie Mazzacurati will present on physical climate risk. 
  • May 9 –  PRI Reporting Consultation Workshop, San Francisco, CA: Editor, Natalie Ambrosio, will participate. 
  • May 14 – Northern European Partnership for Sustainable Finance Conference, Stockholm, Sweden: Director, Europe, Nathalie Borgeaud, will attend.
  • May 16 - 17 – EPRI Energy and Climate Research Seminar, Washington, DC: Yoon Kim will present on climate risks in the power system. 
  • June 4 - 7 – Innovate4Climate, Singapore: Yoon Kim will present on climate risk and resilient infrastructure. 
  • June 10 - 12 – US SIF Annual Conference, Minneapolis, MN: Senior Analyst, Lindsay Ross will attend.
  • June 11 - 12 – RI Europe, London, UK: Hear Emilie Mazzacurati present on scenario analysis for physical climate risk and meet with Director, Europe, Nathalie Borgeaud, at Four Twenty Seven's booth.
  • June 19  – Columbia University and PRI Private Round Table, New York, NY: Emilie Mazzacurati will discuss stress testing for physical climate risks at this workshop.
  • June 19 - 21 – Columbia University - At What Point Managed Retreat? New York, NY: Lindsay Ross will attend.  
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