TCFD Recommendations: guidance for banking industry to manage physical risks and opportunities now available

17 July 2018

Geneva, 17 July, 2018 | Sixteen leading banks convened by the UN Environment Finance Initiative (UNEP FI) and supported by climate risk advisory firm Acclimatise, have released new methodologies that aim to help the banking industry to understand and manage the physical risks and opportunities of climate change in their loan portfolios.

The methodologies are designed to enable banks to be more transparent about their exposure to climate-related risks and opportunities, in line with the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).

“Climate change risks – such as storm surges, droughts and heat waves – can affect financial markets, and more market actors are demanding better data to evaluate those risks,” said Michael Bloomberg, Chair of the Task Force on Climate-related Financial Disclosures and UN Special Envoy for Climate Action. “The UN Environment Programme’s Finance Initiative will give banks tools they can use to implement our task force recommendations and disclose more accurate information about climate risk.”

The banks leading this work and currently piloting the methodologies are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS.

Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics – Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.

The methodologies, published in the report Navigating a New Climate, were piloted across three climate-sensitive industry sectors: agriculture, energy and real estate. First piloting results demonstrate the need for a balanced approach to assessing the risks to banks’ clients and loan books from both incremental climate change (such as rising temperatures and changing precipitation patterns) and increasingly frequent and extreme weather events.

Extreme events often attract more attention as their impacts are more apparent, but incremental changes have the potential to gradually erode the financial performance of entire borrower segments. Understanding these phenomena and how they translate into financial risk and opportunity is fundamental to banks’ strategies to increase their resilience to a changing climate.

Case studies from leading banks who piloted the methodologies are provided in the report.

The methodologies demonstrate that physical risks will worsen if the global economy continues on its current greenhouse gas emissions pathway. Future negative impacts could be reduced somewhat, but not avoided completely, if strenuous and rapid efforts are made globally to cut emissions.

The guidance also aims to inform banks’ strategies to support clients in adapting to changing conditions. Clients who face physical risks may need to make investments to become more climate-resilient. What’s more, global markets are developing for providers of climate-related products and services, as companies such as engineering and technology providers are identifying opportunities to capitalise on shifting market trends. Banks may have opportunities to support these investments.

 

Find out more via webinar briefings designed for global finance industry:

Webinars featuring representatives from the banks involved in the pilot, advisory firm Acclimatise, and UNEP FI secretariat will take place on Tuesday 14 August at 09:00 and 16:00 CEST. The content of both will be broadly similar, you need only attend one of the webinars. Register for the 09:00 webinar , and for the webinar at 16:00 .

 

Download the Navigating a New Climate report here.

 

QUOTES FROM SENIOR EXECUTIVES & NOTES TO EDITORS:

 “For financial institutions and other market actors, effectively managing and responding to climate change always means two things: understanding and responding to the intensifying physical impacts of unavoidable climate change; and also mitigating the risks and seizing the opportunities from the decarbonisation of the economy. We are proud of our collaboration with these 16 leading banks and Acclimatise in the development of methods and tools that will help the global financial industry respond to climate change in a holistic manner, spanning both the physical and transition dimensions of the challenge.”

–    Eric Usher, Head of UNEP Finance Initiative

 “The physical impacts of climate change may pose a risk to banks’ loan portfolios. The innovative methodologies published today provide foundations which can be built upon, as research and data analytics improve. Once banks understand the scale of the risks, this will be a milestone that will encourage other corporates to take climate risk management seriously. Building resilience to physical climate impacts also presents banks with investment opportunities. Those that understand this best will have a competitive advantage.”

–    Dr Richenda Connell, CTO and co-founder of Acclimatise

 “While we are still in the early stages of testing this approach, we expect it will be a useful framework to inform our ongoing discussions with customers regarding their climate-related risks and opportunities. Our participation in this working group along with our peer banks aligns with our purpose of shaping a world where people and communities thrive”.

–    Kevin Corbally, Chief Risk Officer, ANZ

 “This report provides a practical way to assess the physical risks of climate change, which we have piloted on our real estate mortgage portfolio to consider how flood risks could impact Barclays’ customers now and in the future. This type of assessment helps us to manage climate change risk and opportunity, both at a transactional and portfolio level.”

–    Jon Whitehouse, Head of Government Relations & Citizenship, Barclays

 “For BBVA it has been very helpful to participate in this collective pilot exercise developing an open methodology to assess the impact of physical climate risk in real estate portfolios. It is another great step to progressively internalize climate change in our decision-making.”

–    Antoni Ballabriga, Global Head of Responsible Business, BBVA

 “The results of the Financial Industry TCFD pilot are a major advancement in the management of the financial risks related to the impacts of climate change. They have the potential to influence the practices of clients, investors and, consequently the entire economy.”

–    Denise Pavarina, Executive Director, Banco Bradesco; Vice-chair, Task Force on Climate-related Financial Disclosures (TCFD)

 “As global temperatures rise, we are seeing rising sea levels, changing weather patterns, extreme weather and more severe and frequent natural disasters. The UNEP-FI physical risk methodology provides us with a useful tool in helping the financial industry and our clients understand and prepare for the realities of climate change.”

–    Brandee McHale, Director of Corporate Citizenship, Citi, and President, Citi Foundation

“As a financial institution we are mindful to the changes that directly impact the society, the economy and the business environment. The physical risks associated with climate change must be incorporated into banking products and services in order to better understand our exposure to them, anticipate their impacts and provide responses that mitigate their effects and support the transition to a low carbon economy. The financial sector is the driver of this transformation. We are proud to have been part of this working group that has joined the efforts of 16 banks under the coordination of UNEP FI to build a tool for analyzing the impact of physical risks on the banking business. We are committed to advancing our understanding and actions related to Climate Change.”

–    Denise Hills, Head of Sustainability, Itau Unibanco

“As Australia’s largest agri-business bank, banking one in three farmers in Australia, we understand the seasonal nature of the industry, and the challenges our customers face operating in one of the driest continents in the world. Climate projections indicate these challenges will grow, so it’s vital we continue to understand the impacts and opportunities presented by the physical impacts of climate change, to proactively manage future risks and develop opportunities for adaptation and building resilience. This project is helping us to deepen our understanding of physical climate impacts across a range of sectors, so we can continue to support our customers as they manage and mitigate climate-related risks, and identify opportunities for growth. We are pleased to be part of this collaborative global project which is developing new approaches to incorporating climate risk into traditional bank scenario development and stress testing.”

–    David Gall, Chief Risk Officer, National Australia Bank

“Rabobank’s participation in the UNEP FI pilot on the implementation of the recommendation of the TCFD is in line with our mission of Growing a Better World Together. The partnership with leading international organizations like UN Environment helps us in our drive to make a serious contribution to tackling the challenges brought about by climate change. The knowledge developed within the UNEP FI TCFD working group is an important stepping stone that can help us realize our commitment to the Paris Agreement targets.”

–    Bas Rüter, Director of Sustainability, Rabobank

 “RBC believes climate change is one of the most pressing issues of our time and we have an important role to play in supporting the transition to a low carbon economy. We are committed to advancing best practices in climate-related disclosures, assessing climate-related risks and opportunities, and supporting our clients in doing the same.” 

–    Dave McKay, President & CEO, Royal Bank of Canada

“Climate change will bring wide-ranging risks and opportunities for the banks, so we must prepare proactively in a robust manner; today’s UNEP-FI TCFD report is a critical first step for us in developing the tools to analyse, respond and report on the physical risk aspect.”

–    Roselyne Renel, Global Head, Enterprise Risk Management, Standard Chartered

 “At TD Bank Group we believe that as the transition to a low-carbon economy unfolds, having a firm understanding of climate-related risks and opportunities will be important to help sustain healthy and balanced growth. An interesting area of development is the role of technology in assessing the impacts of a changing climate.  In piloting the Financial Stability Board’s climate-related recommendations we collaborated with Bloomberg MAPs to assess the ability of data visualization tools to contribute to the assessment process and will continue to explore it applications.”

    Nicole Vadori, Head of Environment, TD

“The UNEP FI TCFD pilot working group has supported the banking sector in advancing physical climate risk analysis offering an excellent platform for collaboration and knowhow exchange. We are proud to be part of that working group and continue to support joint efforts that help advancing climate risk analysis across financial and non-financial industries.”

    Liselotte Arni, Managing Director, Head Environmental and Social Risk, UBS

 

The methodologies and bank case studies are the second output of a unique collaborative process that started in mid-2017. It brought together various functions from within the banks including credit risk, stress testing, sustainability and business development with leading climate risk management experts and climate scientists.

A complementary methodology focused on the assessment of risks and opportunities from the transition to the low-carbon economy was released by the group of banks and UNEP FI in April. It was developed with the support of management consultancies Oliver Wyman and Mercer and can be found here.

Download the Navigating a New Climate report here.

 

About the UN Environment Finance Initiative

The UN Environment Finance Initiative is a global partnership between United Nations Environment and the financial sector. Over 200 institutions, including banks, insurers, and investors work with UNEP FI to bring about systemic change in finance to support a sustainable world.

http://kunsthaus-schwanheide.info/

For press inquiries, please :

Sally Wootton, Communications Lead, UN Environment Finance Initiative, Tel: +41 22 917 8591, Email: sally.wootton[at]un.org

Remco Fischer, Climate Change Lead, UN Environment Finance Initiative, Tel: +41 22 917 8685, Email: kai.fischer[at]un.org

 

About Acclimatise

Acclimatise is a UK-based climate change advisory and analytics company that specialises in climate change adaptation and resilience building. Acclimatise is a trusted advisor for organisations across a wide range of sectors including government, finance, insurance, water, energy, transport, mining, agriculture, defence, food and beverages, and international development. The company’s staff have successfully worked on more than 350 climate risk and adaptation projects in over 70 countries for 180 public, private and non-governmental organisations.

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For more information, please :

Richenda Connell, CTO & Co-founder, Acclimatise, Tel: +44 (0)7909 840731, Email: r.connell[at]acclimatise.uk.com

John Firth, CEO & Co-founder, Acclimatise, Tel: +44 (0)7769 706184 j.firth[at]acclimatise.uk.com