Geneva, 24 April, 2018 | Sixteen leading banks from four continents, convened by the UN Environment Finance Initiative (UNEP FI), today published a jointly developed methodology to increase banks’ understanding of how climate change and climate action could impact their business.
This understanding is fundamental to enable banks to be more transparent about their exposure to climate-related risks and opportunities in line with the TCFD. It will also inform banks’ strategies to contribute to and benefit from the low-carbon economic transition and help them engage and support their customers to that effect. This is key because the climate-related risks and opportunities that banks face arise primarily from their services to clients.
The methodology and supporting materials are the first output of a unique and collaborative process over the past 10 months. It has brought together various functions from within the banks including credit risk, stress testing, sustainability and business development with leading scientists and risk and investment management experts.
The banks that are leading this work and that are currently piloting the methodology 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. They were guided by the consultancies Oliver Wyman, Mercer, Acclimatise and supported by scientists from the International Institute for Applied Systems Analysis (IIASA) and the Potsdam Institute for Climate Impact Research (PIK).
“Many of the environmental challenges that the world faces today, especially climate change, can be traced back to one fundamental root cause: short-termism. Financial markets can become a catalyst for action on sustainability, but for that they need to become more long-term oriented,” said Erik Solheim, Head of UN Environment. “The beauty of the TCFD framework is that it encourages organizations to consider and disclose long-term impacts. This change in perspective is what we need to achieve sustainable development. That’s why as UN Environment we are excited to be working with such committed leaders in the finance industry.”
The methodology provides the first publicly available guidance designed specifically for banks to carry out forward-looking, climate-related risk and opportunity assessments as envisioned by the TCFD. More specifically, the methodology helps banks to apply the state-of-the-art global climate change scenarios that are available today – such as those developed and offered by PIK, IIASA, and the International Energy Agency (IEA) – to evaluate the risks and opportunities that the low-carbon economic transition may present to their lending portfolios.
“When we published our recommendations less than a year ago, we were deliberate in viewing banks and other financial institutions not only as consumers of climate-related disclosures, but also as preparers and issuers of such disclosures. We did so to emphasize the key role that financial institutions will have to play both in safeguarding financial stability and financing economic decarbonisation,” said Christian Thimann, UNEP FI Co-Chair, TCFD Vice-Chair, and Senior Executive at AXA. “That is easy to understand. The hard part is finding effective yet practical ways for financial institutions to take such action, to carry out the required assessments, and to meaningfully disclose. I am thankful for the contribution that this group is today making to that effect.”
The methodology is designed to:
- Build upon existing risk assessment expertise, procedures, and models already used by banks;
- Enable informed assessments of how risk exposures – and new potential opportunities – might develop in the future, under various climate mitigation scenarios;
- Allow institutions to examine risk and opportunities across a range of geographies and sectors, and
- Provide longer-term insights that go far beyond the usual stress-testing horizon of 2-3 years.
The progress made through the publication of this framework is foundational.
“Through this highly collaborative effort of scientists, risk practitioners and sustainability experts, we have set forth an innovative methodology that will serve to underpin enhanced climate-risk aware decision making and resource allocation” said John Colas, Oliver Wyman Partner and Vice Chairman, Financial Services Americas. “We expect that this methodology will be further strengthened, as practices evolve and new and more granular data emerges from industry practitioners, corporates, policy makers, and climate scientists.”
Additional work is still needed across sectors and areas of expertise to develop best practices. Most publicly available scenarios are not intended for financial risk assessment. Together the scientific community and financial institutions could improve the granularity of the models and advance the financial risk variables generated. There will also be value in banks and borrowers engaging so that enhanced borrower-level information becomes available. Like the development of macroeconomic stress testing at financial institutions, forward-looking climate assessments and disclosures will continue to improve over time. A second report covering physical risk assessment methodologies will be released in June.
The methodology is available here: staging.unepfi.org/tcfd-for-banks
The press release is also available in Japanese.
Hear more from the team involved
Webinars were on 15th May for those interested in hearing more about the new methodology. Speakers included risk and investment management experts from Oliver Wyman, climate scientists from the Potsdam Institute for Climate Impact Research (PIK) and the International Institute for Applied Systems Analysis (IIASA), and representatives from the participating banks. To listen to recordings of the webinars, please click here.
NOTES TO EDITORS
Quotes from bank executives and climate scientists:
Kevin Corbally, Chief Risk Officer, ANZ
“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”.
Jon Whitehouse, Head of Government Relations & Citizenship, Barclays:
“Anticipating how the transition to a lower-carbon economy could impact our portfolio, will help us better advise our customers to manage the related risks and opportunities. Working within the UNEP FI TCFD Pilot Working Group, Barclays is able to tackle the challenges associated with understanding the financial impacts of climate change. This is the start of a longer-term process for the industry to explore approaches to climate stress testing and we look forward to continuing to work with UNEP FI and its members to find possible solutions.”
Antoni Ballabriga, Global Head of Responsible Business, BBVA:
“This is a key milestone to better understand how climate change impacts banking activity. We are very proud to be part of a collective endeavour promoted by UNEP FI to set the fundamentals of an open methodology that will be used by the whole industry worldwide. The great challenges that we experience today require more than ever the greatest collaborations”.
Denise Pavarina, Executive Director of Bradesco, TCFD Vice-Chair:
“The impacts of climate change tend to be increasingly relevant to financial institutions. The TCFD recommendations bring insights into how to consider and disclose these impacts. The pilot project with UNEP FI takes an important step and brings proposals on how the sector can assess their exposure to climate-related risks and opportunities.”
Brandee McHale, Director of Corporate Citizenship, Citi, and President, Citi Foundation:
“Integrating climate analyses into financial institutions’ work is a positive development that will allow for smarter long-term planning and more transparent reporting to stakeholders. The public methodology is an important step toward this goal and Citi’s commitment to contributing to a strong, sustainable global economy. We are proud of the hard work that Citi and our industry colleagues have put toward these efforts thus far and look forward to continue working with them.”
Ida Lerner, Group Executive Vice President, DNB Risk Management
“If banks understand and integrate climate risk, we will improve overall credit risk and responsible decision-making. The UNEP FI pilot has been essential to realize the hard work ahead required from us as banks to truly understand the risks and opportunities associated with climate change. DNB will continue to integrate the methodologies developed into our daily activities as the financial sector is part of the solution.”
Alexsandro Broedel Lopes, Chief Financial Officer, Itau Unibanco:
“We value the importance of the discussions of the UNEP FI working group on the TCFD and are committed to finding the best ways to incorporate the recommendations of each pillar in our disclosures and reports. In addition to this, the aim is to intensify our evaluation of the risks and opportunities involving the scenarios of climate change, guaranteeing safety and transparency for our clients and investors. The results of this working group demonstrate our pioneering spirit towards the development of a low carbon economy, combining the sophistication of complex models with the flexibility of adjustments in various stages of the tool.”
David Gall, Chief Risk Officer, National Australia Bank:
“Joining the UNEP FI TCFD Pilot Working Group has provided a valuable opportunity to collaborate with leading global banks and other experts as we start on the journey of climate change stress testing. The ultimate goal is to combine scientific scenarios and climate risk information with financial risk management techniques to better understand the risks and opportunities to NAB’s loan portfolio. This encompasses defining risk appetite, forming strategies that support low carbon transition, and improving disclosures to regulators, shareholders and other stakeholders. NAB also sees real benefits for our customers, our regulators and community stakeholders who are considering their strategies and response to climate change.”
Bas Rüter, Director Sustainability, Rabobank:
“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. By partnering with leading international organizations like UN Environment we aim to make a serious contribution to tackling the challenges brought about by climate change. Assisting in the realization of the Paris Agreement is part of our operational compass. Adequately managing the associated transitional risks is part and parcel of this commitment.”
David McKay, President & Chief Executive Officer, Royal Bank of Canada:
“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.”
Federico Gómez, Head of Sustainability, Santander:
“Climate change is a priority for Banco Santander. Participating in the UN Environment pilot project helps us better understand how climate change can affect our business. The increased information this initiative brings to light on how banks asses the risks and opportunities derived from climate change is an important contribution to the transition to a low carbon economy.”
Michala Marcussen, Group Chief Economist, Societe Generale:
“As a bank, we are a major actor in the transformation of the economy towards a carbon free world. Given the importance of considering risks related to climate change, Societe Generale participates in the UNEP FI workgroup with an open and inclusive approach. This initiative allows us to further develop quality methodologies to evaluate these risks for a better integration of climate related challenges in the steering and management of the banking industry.”
Vasuki Shastry, Global Head, Public Affairs and Sustainability, Standard Chartered:
“Meeting the challenge of climate change requires ambition, commitment and collaboration. With the aid of UN Environment and our expert partners, and working with our peer banks on this pilot project, we have made strong progress in understanding the issues and potential approaches for banks in their assessment of transition risks, and in delivering the TCFD recommendations. There is still much to do and we look forward to working with our partners on this critical initiative.”
Liselotte Arni, Managing Director, Head Environmental and Social Risk, UBS:
“The collaborative effort to pilot some of the recommendations by the Task Force on Climate-related Financial Disclosures is invaluable for advancing best practice in climate risk analysis. I am convinced that we can close data- and know-how gaps over time by working jointly across financial and non-financial industries as well as in research.”
Andrea Barrack, Vice President, Global Corporate Citizenship, TD Bank Group
TD Bank Group understands that it is increasingly important to grasp climate-related risks and opportunities to better serve our clients. The Financial Stability Board’s recommendations on climate-related financial disclosures can help provide important guidance and a consistent approach to assessing impacts, helping to improve decision making and long-term planning. As one of 16 global banks participating in UNEP FI’s pilot study of the recommendations, TD is committed to supporting the transition to a prosperous, low-carbon economy.
David McCollum, Senior Research Scholar, Energy Program, IIASA:
“Bridging the gap between financial models and climate mitigation scenario models is not immediately straightforward. That’s why this pilot project with the banks is so important. The scientific community is starting to interact more closely with non-state actors, but more can and should be done.”
Elmar Kriegler, Potsdam Institute for Climate Impact Research:
“Two-degree scenarios describe a new world – a world with CO2-free energy production and land use that takes up CO2 from the atmosphere instead of releasing it. In the Paris Agreement, almost all governments worldwide decided to limit global warming to less than two degrees Celsius in order to stabilize our climate. It is therefore extremely important that banks and companies can take into account the possibility of this two-degree world in their investment decisions. Only those who see the possibilities can adjust their expectations for the future – and thus make this future possible. We are pleased to be able to offer the scientific basis for this together with the UN, the banks and other researchers. We have computed the risks and opportunities. Now it is up to the financial sector to use this. Big money also means big responsibilities.”
The methodology is set out in the publication, “Extending our Horizons” – the first output from the working group and which focuses on transition-related risks and opportunities. A second report covering physical risk assessment methodologies will be released in June. Download the report here.
About UN Environment
UN Environment is the leading global voice on the environment. It provides leadership and encourages partnership in caring for the environment by inspiring, informing, and enabling nations and peoples to improve their quality of life without compromising that of future generations. UN Environment works with governments, the private sector, the civil society and with other UN entities and international organizations across the world.
About the UN Environment Finance Initiative
The UN Environment Finance Initiative is a global partnership between the United Nations Environment Programme and the financial sector. Over 200 institutions, including banks, insurers, and investors work with UNEP to bring about systemic change in finance to support a sustainable world.