TCFD Releases Final Recommendations

Conceptual map of climate-related risks, opportunities, and financial impacts, from the final TCFD recommendations report

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) released their final recommendations in late June. The changes to the recommendations reflect the extensive feedback the Taskforce received from the stakeholder engagement process in the past six months. Some key changes include:

  • Simplifying the recommended disclosure related to Strategy and scenarios to focus on the resiliency of an organization’s strategy to climate risk and opportunities
  • Establishing a threshold for organizations that should consider conducting more robust scenario analysis to assess the resilience of their strategies.
  • Clarifying that the recommended disclosures related to the strategy and metrics and targets recommendations depend on an assessment of materiality, whereas disclosures on governance and risk management are relevant for all organizations.
  • Updated conceptual map of climate-related risks and opportunities and associated financial impacts.

TCFD Recommendations at G20

The recommendations were presented at the G20 summit in Hamburg, Germany, with hopes that the world leaders would formally endorse the guidelines. Climate change was high on the agenda for the summit, where all but the United States voiced a strong recommitment to the goals of the Paris Agreement, and the G20 included by reference, the TCFD recommendations in their Climate and Energy Action Plan for Growth.

CEOs Endorse the Recommendations

The TCFD final recommendations were endorsed by over 100 CEO’s from a wide range of companies, including large financial institutions like Barclays and Morgan Stanley as well as energy and manufacturing companies like Suez, DuPont, and Unilever. Reactions from a broad range of financial analysts were also positive, noting the need for improvements and wider adoption of climate risk disclosure practices.

A number of initiatives are already under way to think through and plan the implementation of the TCFD recommendations, such as the UNEP FI’s effort with major banks from around the world who have pledged to work towards adopting these recommendations, and put forth actions they see as needed for broader adoption of climate risk reporting.

Further Readings

  • The Economist Intelligence Unit’s  “The Road to Action” report finds that investors, asset managers, and banks are in urgent need of a way to identify and measure how the industry is responding to climate-related risks. It notes that their interviewees widely regard the TCFD’s recommendations as having the clearest mandate to providing possible solutions.
  • Aon’s white paper Financial Regulators Awaken: Prepare to Disclose Climate Risk notes that risk management and analytics is what differentiates the TCFD’s recommendations from many existing standards. “Risk management, including insurance and risk analytics, is given a key role in helping businesses understand and quantify climate risks. The recommendations provide a framework that can enhance risk management, empower corporate strategy, and improve resilience in a fast-changing world.”
  • The 2-Degree Investing Initiative takes a deep dive into corporate disclosures in its forthcoming report “Limited Visibility”, part of their Tragedy of the Horizon program. The report presents the current state of corporate disclosure on long-term risks and long-term forward looking data using analysis of MSCI World companies’ financial disclosures.

Four Twenty Seven helps investors, Fortune 500 companies, and government institutions understand how to quantify and monetize climate change impacts on operations and asset portfolios. Our clients rely on Four Twenty Seven’s tools and models to factor into financial and operational planning processes. Learn more about how we are helping our clients assess and adapt to climate risks.

Trump and Paris: What Impact on Climate?

President Trump’s decision to withdraw the United States from the Paris Agreement triggered a strong response from the international community, and many foreign leaders quickly denounced the decision and vowed to maintain or increase their nations’ efforts. China and the European Union have announced a new alliance to lead on climate issues. In addition, U.S. states are forming alliances with other nations, with California Governor Jerry Brown traveling to meet with Chinese President Xi Jinping and sign climate partnerships with local Chinese leaders. Governor Brown also participated in an event for the Under 2 Coalition, a group of subnational actors in 33 countries committed to reducing carbon emissions, which he led California to establish in 2015. Yet the loss of U.S. federal leadership is still daunting. Other world players are looking to fill this leadership gap, including new French President Emmanuel Macron who has invited American climate scientists to continue their work in France.

Impacts on U.S. Emissions

U.S. leaders in the private sector and in state and local government are pressing forward. As David Victor notes for the Brookings Institution, the loss of U.S. federal leadership makes the path to achieving the Paris Agreement’s goals harder to achieve, but not impossible. Rhodium Group’s modeling showing the annual emissions projections,  shows that the systematic dismantlement of climate policy by the Trump Administration makes it impossible for the US to attain its 26-28% emissions reduction target. However, uncertainty from a range of other factors, including energy markets dynamics (oil and gas prices in particular) and the health of the economy could drive large variations in emission trajectory, compounding the policy uncertainty around the fate of climate policy and programs targeted by Republicans.

Rhodium Group projections of U.S. greenhouse gas emissions

Even before the Paris Agreement announcement, the administration had worked to impede the nation’s effectiveness on climate issues. Among many other programs in the line of fire, the ability to monitor carbon emissions, with budget cuts proposed to severely limit the Environmental Protection Agency’s Greenhouse Gas Inventory, and eliminate the National Aeronautics and Space Administration (NASA)’s Global Carbon Monitoring program. The loss of these tools would critically undermine the U.S.’ ability to implement and enforce emissions regulations.

Impacts on Adaptation and Resilience Funding, Domestically and Internationally

As part of the withdrawal, Trump announced that the U.S. would end its payments to the Green Climate Fund, falsely claiming that “nobody even knows” where the funding for developing nations is ending up. Yet the fund, which aims to support equally climate mitigation and adaptation projects, fully details 43 projects currently funded from the $10+ billion pledged. By ending its payments, the U.S. cuts $2 billion in expected funding, a serious blow to the fund. It is yet to be seen if other nations will increase their pledges to fill this gap. Trump’s proposed budget will cut grants and funds for the National Oceanic and Atmospheric Administration (NOAA), Department of Housing and Urban Development (HUD), and close to 50% of the EPA’s scientific research programs budget. The proposal belies previous administration claims that their EPA plans would return environmental responsibilities to states, as the budget reduces “state grants for air and water programs by 30 percent.” Other budget cuts may target innovation and fundamental research with cuts for ARPA-E and the Department of Energy.

New U.S. Coalitions Form to Support Paris Agreement 

Though funding to climate programs are at risk, leaders of U.S. cities and states are forming alliances to voice their commitment to achieving the nations’ contributions even without federal government support. The U.S. Climate Alliance, which was formed by the state governors of Washington, New York, and California, is comprised of 13 states and territories make up the alliance representing 35.9% of the country’s population.

The We Are Still In movement, which is led by Michael Bloomberg, seeks to allow subnational entities formally to submit reports on progress to the United Nations Framework Convention on Climate Change, raising questions of whether and how the Framework should allow subnational actors to participate. More than 1200 mayors, governors, college and university leaders, businesses, and investors have pledged to continue to support climate action to meet the Paris Agreement through the We Are Still In; Four Twenty Seven is proud to join these efforts as a signatory.

The effect of these new coalitions is yet to be seen, but the signal they send to other nations and advocates around the world is critical to cushion the blow from the withdrawal of the world’s second largest emitter from the Paris Agreement. The rest of the world has sent a clear signal that they remained committed to fighting climate change, with European leaders, Indian Prime Minister Modi, and Chinese Premier Xi in particular reiterating their commitment in the days that followed the announcement by Donald Trump.

What Now?

The Trump administration has brought new levels of uncertainty to climate policy in the U.S., but efforts to tear down regulatory programs are more likely to create continued confusion and delays than to deal a final blow to efforts to reduce emissions. The greatest uncertainty, however, comes from the broader policy and political context, the ability of the administration to carry out its agenda, and the impact of its proposed policy on the economy.

Meanwhile, many cities and corporations are galvanized. Their efforts to compensate the policy shifts at the federal level will not be enough to make up for the lost budget and policy ambition, but it will ensure the U.S. does not trail too far off its international commitment and keeps an informal but critical presence on the global stage.

Climate Adaptation Planning – Challenges, Requirements, and the Need to Streamline

Climate Adaptation Planning – Challenges, Requirements and the Need to Streamline

The Challenge

Cities and counties across the United States face a variety of challenges from climate variability and change as well as non-climate stressors that changing climate conditions threaten to exacerbate. Local jurisdictions that repair infrastructure, make land use decisions, and engage communities in a way that accounts for future change, can help make their cities more resilient. However, many cities and counties lack the capacity, resources, and funding to assess climate risks, integrate climate adaptation into existing plans, and implement adaptation actions in the face of competing or more immediate needs.

Even so, a growing number of local jurisdictions are engaging in voluntary commitments to mitigate and adapt to climate change. A wide range of available resources makes this possible, and climate legislation increasingly requires it, but both can also make implementing a cohesive, streamlined adaptation strategy difficult. Several federal agencies (FEMA and NOAA), state agencies (California Adaptation Planning Guide), international institutions (GIZ), and NGOs (National Wildlife Federation) have developed climate hazard or vulnerability assessment and/or adaptation planning guidance and methods. Industry and sector-specific tools and literature are also available from a multitude of sources. No single option can meet the diverse adaptation planning needs of cities and counties across the US, but the range of sources also presents local jurisdictions with the challenges of selecting a methodology, building climate literacy, and using their assessments to inform multiple goals, plans and projects.

The Requirements

In California, legislation exists that actively seeks to promote the integration of adaptation and resilience into local planning processes. Senate Bill No. 379 Land Use: general plan: safety element (Jackson) (SB 379) calls on local governments in California to incorporate adaptation and resilience strategies into the Safety Elements of their General Plans as well as their local hazard mitigation plans starting in 2017. Assembly Bill No. 2140 General plans: safety element (Hancock) enables local jurisdictions to adopt a local hazard mitigation plan as their safety element, facilitating integration of hazard mitigation into General Plans.

To support local governments’ implementation of SB 379, the Governor’s Office of Planning and Research recently issued draft guidelines for integrating climate considerations into Safety Elements. The draft guidelines build on the State’s Adaptation Planning Guide (2012) and emphasize the need for communities to adopt a longer-term perspective in preparing for climate risks. They also highlight the importance of identifying linkages and complementarity across different elements of the General Plan and other relevant plans. Thus, there is a need to unify and streamline efforts to boost resilience and integrate adaptation comprehensively into city and county planning in a way that leverages local capacity and resources, uses the best available science and data, and meets local needs as well as relevant requirements.

It is important to note that these requirements are in addition to local commitments and planning processes that each come with their own timelines and demands. Cities that commit to voluntary agreements, such as the Global Covenant of Mayors are required both to reduce greenhouse gas emissions and address the impacts of climate change by identifying climate hazards, assessing vulnerabilities, and developing adaptation plans. Cities may have adopted several plans that integrate or overlap with climate planning, such as Climate Action Plans, Adaptation Plans, Resilience Strategies, Transit Oriented Development Strategies and more. Adaptation has a crosscutting role to play across all these forms of city planning, so comprehensive integration of risk and vulnerability assessment and adaptation action is essential.

Towards a Solution

In support of implementation of integrated climate adaptation planning, Four Twenty Seven has developed a streamlined process to support local governments in their efforts to integrate climate risks into key planning efforts, such as local hazard mitigation plans, general plans, and climate action plans. Through our work for seven cities in Alameda County, on behalf of the County waste authority, StopWaste, we designed an assessment process and report to help cities meet the requirements of SB 379. For each city, this work responds to these requirements and others by providing a climate hazard exposure analysis and proposing a set of adaptation options to help each city plan for future conditions.

The assessment and report are designed to be applicable to multiple cities and useful for multiple planning processes. The objective is to develop one hazard assessment and set of adaptation actions that can fulfill or inform multiple city demands and decision making processes. In this case, the hazard assessment focused on asset-specific exposure, however, the methodology could be expanded to include the other components of vulnerability – adaptive capacity and sensitivity – in order to meet the needs of other jurisdictions and planning processes while promoting an accessible and streamlined approach to climate hazard assessment and adaptation planning. The second blogpost in this series on local adaptation planning will discuss climate hazard assessment in greater detail, and the third blog in the series will focus on adaptation planning.


Find ideas for successful planning in Four Twenty Seven’s Process Guide on local adaptation planning and a case study on our work in Alameda County

Audio Blog: The Changing Landscape of Climate Risk Disclosures

Market expectations on corporate climate risk disclosures are fast changing as corporations, investors, and regulators are attempting to increase efficiency and strengthen economic resilience through more transparency. This panel discussion, held at the 2017 Climate Leadership Conference on March 1, 2017, provides an overview of recent developments by US and EU regulators and Bloomberg’s Task Force on Climate-related Financial Disclosures. Panelists shared how they are responding to the new regulatory context, challenges and opportunities arising from understanding climate impacts on business and markets, and expectations for further developments.

Panelists:

  • Emilie Mazzacurati, Founder & CEO, Four Twenty Seven (moderator)
  • Laline Carvalho, Director of the Financial Services Ratings Group at S&P Global
  • Tim Dunn, Founder and Chief Investment Officer, Terra Alpha Investments LLC
  • Mardi McBrien, Managing Director, Climate Disclosure Standards Board
  • Richard Saines, Partner; Head of North American Climate Change & Environmental Markets Practice, Baker McKenzie

You can listen to a recording of the panel here. Note that due to a technical issue with the recorder, the introductions from Laline Carvalho and Tim Dunn were unfortunately not captured.

For more information about the Taskforce on Climate-related Financial Disclosures, read our blog posts:

You can also watch our webinar discussing TCFD next steps, and issues to consider for implementation.

Audio Blog: Climate Data & Public Health, Mobilizing Adaptation Action

Director of Advisory Services Yoon Kim moderated a panel at the 2017 National Conference and Global Forum for Science, Policy, and the Environment. The session, titled “Climate Data and Public Health: Mobilizing Adaptation Action”, explored the role of interactive data tools in the adaptation continuum – from diagnosis to planning to solutions – through concrete case studies. Presenters brought local public health and private sector hospital perspectives from across the United States. You can listen to a full recording of the panel here, and follow along with the presentation slides.



Panelists:

  • Cyndy Comerford, Manager of Policy and Planning, San Francisco Department of Public Health
  • Michele Shimomura, Public Health Manager, Denver Department of Environmental Health
  • James Evans, Sustainability Analyst, Cleveland Clinic
  • Deborah Weinstock, Director of the National Clearinghouse for Worker Safety and Health Training, Michael D. Baker, Inc.
  • Jennifer de Mooy, Climate Adaptation Project Manager, Delaware Division of Energy and Climate

From Policy to Markets: the New Climate Agenda

The election of Donald Trump as President of the United States comes at a time where the world needs more engagement in climate policy, and threatens to derail the world’s efforts to keep global warning below 1.5oC. Financial markets’ interest in low-carbon and resilience finance can help counter-balance the expected scaling back of U.S. engagement.

Trump’s Climate Agenda

Myron Ebell, a well-known climate denier, is on Trump’s shortlist for nominees to the EPA.
Myron Ebell, a well-known climate denier, is on Trump’s shortlist for nominees to the EPA. Source: New York Times

While Donald Trump as a candidate did not expound much on his views on climate policy beyond calling climate change “a hoax” and promising to revive the coal industry in the U.S., the Republican agenda on climate change is well established. Trump’s short list of potential nominees for EPA and Dept. of Energy seems to confirm his alignment with the most conservative aisle of the Republican party on all things climate and environment. We expect the impact of the Trump administration on climate policy to be three-fold:

First, we anticipate a hard stop or slow down of U.S. efforts to reduce greenhouse gas (GHG) emissions, starting with the Clean Power Plan, mired in court since 2015, but also including other environmental regulations on air, water and land conservation. The incoming administration will likely face legal challenges since the Supreme Court mandated the EPA to regulate GHG emissions under the Clean Air Act, but these typically unfold over years and the EPA can also count on industry-led lawsuits to help bring down some existing or in progress regulations.

Second, we expect a sharp budget cut for the EPA, but also for development aid related to climate change (the U.S. is an important contributor to development finance institutions like the World Bank and the Inter-American Development Bank) and grants and subsidies to support local government. The Obama White House has been instrumental in providing concrete support and resources on adaptation and resilience, in particular with the Climate Data Initiative and the Climate Resilience Toolkit – the future of these programs is now called into question. Trump may also consider cutting funds for critical agencies like NOAA and NASA, which could impact long term climate data collection and analysis, similar to what was experienced in 2013 with the ‘sequester’.

Third, the U.S. will likely shift from being a driving force for a strong global climate agreement to becoming a negative influence, that may provide an excuse for other countries to slow down their own efforts. While the future of the Paris agreement is not called into question even if the U.S. withdraws, the effectiveness of multilateral efforts will be undermined by the absence of the second largest emitter in the world at the table. It is unclear at this point if the EU and China can and will jointly take over that leadership role, but together they could provide a stabilizing influence and governments in both regions take climate change very seriously.

Market Forces At Play

However, many analysts have noted that even without policy support going forward, the transition to the low-carbon economy is already well underway. Trump is unlikely to succeed at reviving the coal industry with low natural gas prices, and renewables and low-carbon technologies have largely reached the point where they compete effectively with fossil fuel sources. Financial markets are providing steady support for new renewable and energy efficiency projects, with over $65.5B worth of green bonds issued in 2016 YTD.

The world needs to step up adaptation finance by over 400 percent.
The world needs to step up adaptation finance by over 400 percent. Source: WRI

The private sector’s support is also going to be needed for adaptation and resilience. Disengaging from climate policy at a time where each year breaks new heat records, and 2016 is already locked into being the hottest year ever on record does not bode well for the future. Mercer estimates climate change will cause $1.5 trillion of potential impact of climate on returns for portfolios, asset classes and industry sectors, and impacts on communities and human welfare will be even more devastating.

UNEP estimates the financing needed for adaptation will be at least $100B a year, while current adaptation funding from multilateral organizations hovers around $25B a year. While there is a strong consensus over the need to bring more private capital into adaptation and resilience investments, meaningful flows are yet to materialize.

Mobilizing Private Capital for Adaptation

In this context, the discussion paper released today by the Global Adaptation and Resilience Investment (GARI) working group brings welcome insights into how investors see opportunities and barriers to adaptation investments. GARI was launched at Paris COP21, in conjunction with the UN Secretary General’s A2R Climate Resilience Initiative, to bring together private investors and other stakeholders to focus on the practical intersection of investment and climate adaptation and resilience. At COP22, GARI released Bridging the Adaptation Gap, a discussion paper that summarizes the discussions of over 150 private investors and other stakeholders in 2016.

The paper confirmed a high level of awareness among participants, with 70 percent of private investors surveyed declaring they see both risk and investment opportunity from the impact of climate change. Seventy-eight percent of respondents thought evaluating the physical risk from climate change was “very important,” and over 60 percent confirming that they were already, in fact, considering climate risk in their investment portfolio. The lack of a common approach to measuring climate risk, however, was identified as a critical barrier, with respondents calling for a transparent, practical approach to assess physical climate risk.

Where are the investment opportunities in adaptation? GARI maps the opportunities in key sectors. Source: Bridging the Adaptation Gap discussion paper.
Where are the investment opportunities in adaptation? GARI maps the opportunities in key sectors. Source: Bridging the Adaptation Gap discussion paper.

GARI also brought attention to investors’ interest in opportunities for investments in adaptation and resilience. Seventy percent of participants indicated they would consider making investments that supported adaptation to climate change or climate change resilience now. The paper catalogs various investment types, including existing infrastructure, corporate, and fixed asset investments that support adaptation and resilience to climate change. Over 60 percent of respondent investors are considering investments today in resilient infrastructure and in companies whose products address the impact of climate change on water, agriculture, healthcare, energy, and financial services.

Conclusion

The engagement shown by GARI participants, which includes some of the largest financial institutions in the world, opens the door to bringing private investors into a number of adaptation opportunities in need of funding, such as developing and deploying new and existing technologies to help deal with the effect of drought in agriculture, better flood prevention, resilient retrofits to infrastructure and cool, efficient housing.

Not all adaptation projects are suited to private sector investments however, and banks will not replace governments in investing in social capital, development projects and lifting the most vulnerable out of poverty. But leveraging and guiding financial flows towards projects that enhance economic and social resilience create a win-win opportunity and a powerful way to continue to make progress towards a low-carbon and resilient world in spite of political headwinds.

by Emilie Mazzacurati

Policy Brief: Climate Adaptation in the California Budget

California is a leader on climate resilience and adaptation efforts in the U.S. Yet translating adaptation policies into clear budget priorities can be a challenge. This Policy Brief provides a detailed analysis of the California budget for FY 2016-2017 with regard to adaptation and resilience spending, with an eye to lessons learned for other states and opportunities for improvement and clarification for future budgets.

California’s adaptation policy builds on a growing body of legislation – namely, SB246, AB1482, SB379, and Executive Order B-30-15 highlight California’s commitment to adaptation and resilience, as do numerous state and local programs. We found that these priorities are reflected in the 2016-2017 State budget, but somewhat disjointedly.

Governor Brown’s proposed budget, which the legislature passed on July 15, does not allocate specific amounts to programs labeled as adaptation- and resilience-focused. Rather, it supports programs related to drought resiliency, infrastructure upgrades, climate change, and other issues. Therefore, tracking resilience-specific finance is difficult; to overcome this challenge, we analyzed the 2016-2017 budget by looking at both specific sections of the budget and policies that relate to climate hazards. Within certain sections, we were able to compare allocations that support climate resilience to the total allocations for sector initiatives. Policies related to hazards include those designed to protect vulnerable populations and the overall strength of the state to respond to disasters.

In our view, California’s latest budget does not yet adequately address the state’s adaptation challenges, nor does it fully reflect the state’s priorities. However, with the final round of legislation passing before the close of the legislative year on August 31, 2016, the State set itself up for success by addressing gaps in allocations, prioritizing environmental justice and setting the stage to clarify cross-departmental standards for addressing climate change. It is now essential that the state move forward with the implementation of these initiatives in a clear, communicative way, in order to ensure that state funds engender climate resilience.

Download the full policy brief (PDF)

What Brexit Means for Climate

Reposted from The Huffington Post, The Blog, view it on HuffPo HERE.

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape"

BOTTOM LINE

  • In the short run, Brexit means, at the very least, delays and complications in the process towards the ratification of the Paris Accord.
  • The financial volatility caused by the referendum’s outcome could distract the worlds’ financial regulators and have a negative impact on current efforts to better regulate climate-related financial disclosures.
  • Looking ahead, the incoming Eurosceptic government in the UK is unlikely to make climate change its priority, depriving global climate negotiations from a leader and political engine towards more ambitious GHG cuts.
  • In a worst case scenario, a full-blown global economic crisis would set back investments in clean energy, cut budget for both mitigation and adaptation efforts, and fuel further discontent from the middle-class and the unemployed.
  • Over the long run, a possible “contagion” effect enabling populist victories in upcoming elections in the US, Spain, France or Germany over the next 12 months could further hamper the enactment of effective global climate policy.

ANALYSIS

Political Implications: Impact on the Paris Accord

The only certainty regarding the impact of Brexit on climate policy comes from the extensive political uncertainty and financial volatility the referendum outcome has triggered. As the political debate turns towards the process for the UK to exit from the EU and deepening internal tensions between the UK and the “pro remain” constituents within Scotland and Northern Ireland, this uncertainty will at a minimum cause a temporary slowdown of the ratification process of the Paris Accord.

The ratification process was already expected to be long and complex for the EU. Each country has to approve the ratification domestically before the EU as a whole ratifies the accord. In the context of such a lengthy process, we think it is highly unlikely the lame-duck Cameron government would stick its neck out and push for a rapid ratification of the accord in the next three months, before its scheduled October departure. It is unclear how the UK will affect the EU ratification process during the two years preceding Britain’s formal exit from the EU.

This leaves the next government in charge of a possible ratification. Leading candidate for British Prime Minister, Boris Johnson, and the UK Independence Party leader Nigel Farage, who are credited with driving the success of the Leave vote, both do not believe in or prioritize climate change, casting a shadow of uncertainty over whether the UK might actually ratify the Paris accord at all.

However, the Paris Accord requires the ratification from 55 countries representing 55 percent of global emissions to come into forces. A refusal from the UK to ratify would send a negative signal but a single country representing 2 percent of global emissions would not bring the global process to an end. While the UK has historically been a driving force in global and EU climate negotiations, we expect the new UK government will at best be a follower, at worst a laggard and opposing force in global climate policy.

Beyond Britain: The Rise of Populism

While the direct political implications of the referendum on UK climate policy are quite predictable, we cannot rule out a potential ripple effect on the willingness from other countries to ratify the Paris accord. More generally, the UK vote signals that current populist trends in the world’s largest economies – U.S., France, Germany in particular – could bring a deep reshuffling of cards for climate policy. Populists parties are typically lukewarm, if not outright opposed to climate policy and global agreements, as illustrated by the so-called Trump Trajectory in the U.S.

A rise in climate-sceptic governments could bring to a halt the progress brought about by the Paris accord and set us back toward a high carbon emission pathway. At this point in time, however, we believe most governments have a robust understanding of the seriousness of the issue of climate change, and will do their best to proceed with the accord ratification and with meeting their targets.

Financial Implications: Impact on Efforts to Regulate and Price Climate Risk

A very immediate impact from Brexit-induced financial volatility and risk of recession will be felt on efforts to better understand, regulate and price climate-related risks on financial markets. The very institutions and individuals that have been leading this effort globally – the Financial Stability Board and its Chair, Mark Carney, who is also the Chair of the Bank of England, as well as to some extent the Securities and Exchange Commission in the U.S., are going to be entirely focused on preventing a complete collapse of the British economy and a global recession. This will necessarily cause distraction away from the recent efforts to push climate change higher on the agenda of financial decision-makers.

Assuming the world’s financial leaders are successful in preventing a global recession and the volatility of financial markets continues, we expect the discussion to resume and allow the recommendations from the Task Force on Financial Climate-Related Disclosure to garner the attention needed from global financial regulatory bodies.

However, if Britain’s decision to leave the EU were to cause continued turmoil on financial markets around the world, leading to a major recession, the impacts on climate change policy could be extensive, and mostly negative. Recessions in general are bad for the environment because jobs and financial volatility typically take precedence on the political agenda over environmental regulations and climate policy, often perceived as putting added burden on the economy. A global recession could lead to budget cuts and increased contention over energy and climate budgets, and otherwise lead to a scale back of efforts to reduce emissions.

Financial instability also means a setback for investments in clean energy, with financial flows likely to flock towards safe havens (U.S. bonds, gold) and away from riskier investments.  Expectations of trade financing faltering, credit spreads narrowing, emerging markets assets under serious stress and a worse-than-expected earnings season, impacting equity valuations all point to less money for adaptation in developing countries and a further slowdown in renewables investment levels.

Conclusion

The UK’s decision to leave the EU puts both financial markets and climate policy to the test. Financial markets were still slowly recovering from the second greatest recession in the history of modern markets, and this is where the main uncertainty stands at the time of writing. Short term volatility may bring distractions but unlikely to drive a meaningful change of course away from greater climate risk disclosures. If continued economic turmoil materialized, it could slow down investments in clean energy and put climate and environmental issues on the back burner once again.

By Emilie Mazzacurati and Camille LeBlanc

Image courtesy: Free Range Stock, photographer Daniel J Schreiber “London Landscape”

 

Redefining Climate Risk

Comment Letter from Four Twenty Seven to Task Force on Climate-Related Financial Disclosures. (Download full letter here)

May 23, 2016

Dear Chairman Bloomberg,

Four Twenty Seven, Inc., a climate resilience research and advisory firm, is pleased to submit this letter of comment for your consideration and to help inform the work of the Task Force on Climate-Related Risk Disclosures (TCFD) during Phase II.

We commend you for the important work undertaken by the TCFD and your deliberate efforts to engage practitioners and stakeholders in providing input along the way. Providing guidance around climate risk disclosures is a critical step not only to help ensure financial markets will not be blindsided by predictable risks, but also to ensure that investors send the appropriate price signals to the decision-makers for the underlying assets – from corporate boards to public officials and real estate owners — thus providing an incentive to better prepare for and adapt to the physical impacts of climate change.

Our comments stem from years of working closely with Fortune 500 corporations to help them understand climate change impacts, quantify risk and monetize costs. We anticipate this type of analysis will need to become widespread for corporations to comply with the forthcoming guidance from the TCFD, and wanted to share our lessons learned from our past work.

Our comments, detailed below following the questionnaire structure, center around two key takeaways:

  1. The need to redefine climate risk to better account for direct and indirect risks related to the physical impacts of climate change. Regulatory, technology or transition risks are by no means confined to greenhouse gases, and focusing a disclosure framework only on extreme weather events and direct physical impacts would be deeply misguided. It is critical that corporations understand, address and disclosure their exposure to risks and opportunities related to transition risk due to:
  • Regulatory changes driven by climate change (e.g. changes in underground water regulation, permitting, zoning, etc.);
  • Costs and revenues associated with finding and deploying adaptive technologies to improve corporate resilience, mitigate risk exposure and promote more efficient resources use;
  • Costs associated with capital expenditure, retrofitting or moving facilities, infrastructure and other critical assets out of harm’s way.
  • Costs and revenues associated with increasing the company’s adaptive capacity, ranging from increased legal and insurance costs to investments in human capital, supply chain risk management, engagement with local governments to support climate adaptation efforts, and other public-private partnerships.
  • Macro-economic and financial risk for property owners, market risks for certain products, etc.

 

  1. The need to incorporate climate data into decision-making processes and provide vulnerability assessments at the asset-level for both corporations and investors.
  • Corporations need to utilize fully the wealth of climate data and projections that are available, and leverage sophisticated techniques and models to incorporate uncertainty into their decision processes.
  • Climate risk analysis must be performed at the asset-level, even if the final disclosures do not include all the asset-level data, and should rely on common standards, assumptions and scenarios to enable comparison across assets and across markets.
  • Risk assessments should be subject to third-party verification to ensure they are complete and cover all the material risks.

Download Four Twenty Seven’s Comment Letter (FourTwentySeven_PhaseI_CommentLetter) for our detailed analysis on climate risk reporting.

From Data to Action: Climate Adaptation in 2015

I remember 2014 as the year of climate science. The unfolding of the IPCC Fifth Assessment Report, and, in the US, the publication of the National Climate Assessment and the first Risky Business report brought to new levels our collective understanding of how devastating climate change would be for human and natural systems.

2015 saw growing recognition of the economic risk brought about by climate change – coming not just from the community of dedicated climate activists that have been raising the alarm for years, such as C2ES, Ceres’s Investor Network on Climate Risk (INCR), and the CDP, but this time coming from the world’s largest and most influential financial players.

Financial Risks of Climate Change
Mark Carney, describing the financial risks of climate change as “the tragedy of the horizon.”

A few key reports stand out: Mercer’s study on Investing in a Time of Change, Standard and Poor’s warning of climate change impacts on corporate and sovereign risk ratings, and Bank of England Governor Mark Carney’s famous speech on the “tragedy of the horizons.” All these studies, punctuated by a slew of catastrophic extreme weather events across the globe, point to the devastating systemic costs to our economies and our communities if we do not better prepare and adapt to climate change.

This alarm is starting to turn into action and concrete steps. Just in the past weeks, the Financial Stability Board, also headed by Mark Carney, announced an industry-led task force headed by Michael Bloomberg to develop voluntary, consistent climate-related disclosures in financial markets. The United Nations announced a private sector Working Group headed by private equity firm SigulerGuff to mobilize private sector investment in climate adaptation and resilience. The United Nations Global Compact and Caring for Climate launched a report providing concrete guidance and a conceptual framework on how corporations can adapt to climate change while helping reduce social and environmental vulnerability. What these initiatives speak to is the need for standardization in how we measure, quantify and disclose climate change risk.

Governments play a critical role in enabling private sector adaptation by providing data and guidance (Photo: Getty).

In the public sector, Governments have a key role to play in supporting private sector-driven initiatives to build social resilience and grow technological and financial solutions. 2015 saw governments treading new waters with regard to climate risk and resilience. In California, Governor Jerry Brown issued Executive Order B 30-15 directing state agencies to identify vulnerabilities by sector and to infrastructure and property. The City of San Francisco established the first-in-the-nation mandate to assess infrastructure risk posed by sea-level rise, promptly echoed by a similar mandate from President Obama for all federal agencies. The White House also worked to empower and challenge the private sector to develop new data-driven tools for climate adaptation through the Climate Data Initiative. And finally, the Paris agreement negotiated during COP21 includes extensive provisions to finance and implement climate adaptation measures.

The challenges ahead of us remain tremendous – deepening our understanding of how to best forecast and quantify social and economic impacts of climate change, measuring progress towards resilience, developing common metrics of success are only the very first steps towards bridging the adaptation gap. I believe 2016 will see critical new developments to help the world prepare and adapt to climate change. We’re ready for the challenge.

Emilie Mazzacurati, December 18, 2015.