In recent years, climate change has become a pressing concern for the financial sector. In response to this concern, the Financial Stability Board (FSB) established the Task Force on Climate-related Financial Disclosures (TCFD) in 2015. It has developed recommendations for improving transparency and understanding of climate-related risks and opportunities. Also, TCFD provided specific guidance for each sector itself. In this article, we will explore the progress made by these industries in climate-related risks due to disclosure. Additionally, you can find an interesting case study on Standard Chartered PLC (SCB) in the end.
According to the FSB’s proposal, the financial sector’s disclosure of climate-related risks can have several benefits.
For instance, it can lead to an early evaluation of such risks. Promote market discipline.
Furthermore, it can enable authorities to analyze the data at a systemic level. Evaluate their significance to the industry. Identify how these risks businesses can transmit through various channels. The Task Force categorized the financial sector into four main industries: banks, insurance companies, asset managers and owners. Additionally, the Task Force identified specific areas where additional guidance was necessary:
Banks face climate-related risks and opportunities in their lending, intermediary activities, and operations. Borrowers, customers, or counterparties may expose them to threats. Banks holding credit or equity positions in fossil fuel producers. Users may accumulate climate-related risks. The growth of lower-carbon and energy-efficient alternatives also creates exposures. Banks could face litigation related to their financing activities. Investors and stakeholders must understand banks’ risk profiles to make informed decisions.
Insurance companies must disclose their evaluation and climate-related risks management in their core business. Especially, weather-related risk transfer business. Climate-related natural catastrophes will increasingly impact their operations. Stakeholders must know how their strategy, risk management, and investment decisions affect climate risks. Disclosure requirements pertain to the liability side of insurance activities. Refer to the supplemental guidance for asset owners for investment activities.
Asset owners invest assets for themselves or their beneficiaries. They hire asset managers and have diversified portfolios. Asset owners face potential risks. They have opportunities related to climate change. Additionally, play a key role in promoting better climate-related financial disclosures. Disclosing climate-related risks and opportunities allows stakeholders to assess their approach to climate change and investment decisions. Such disclosures may also encourage better disclosures across the investment chain. As a result, it benefits all parties.
Asset managers invest assets on behalf of clients and act as fiduciaries. Clients own investment results. Furthermore, bear the most potential climate-related risks and opportunities. Asset managers’ disclosures to clients are critical for understanding. How do they manage these risks and opportunities within each portfolio? Publicly traded asset managers have two audiences for climate-related financial disclosures: shareholders and clients. The provide guidance addresses considerations for asset managers when reporting to clients.
Let us now examine the current situation based on EY research:
*Please note that EY has conducted the following research on 88 financial institutions across the globe.
As of 2021/2022, the banking sector leads the finance industry regarding the comprehensiveness of their climate-related reporting across the four pillars of the TCFD framework. UK and European banks are generally more comprehensive in their climate reports than other global counterparts. They owe to more advanced regulatory standards and increasing pressure from investors, consumers, and other stakeholders. The banking sector’s journey towards net zero reflects an increasing number of companies obtaining some form of assurance over metrics. They disclose these metrics in their TCFD reporting. Over 90% provided a risk identification process description, 85% gave climate change mitigation efforts details, 70% declared scope 1 and scope 2 emissions, and 81% disclosed an operational net-zero target for BCM companies.
It is worth noting that forthcoming regulatory reporting requirements may include an obligation for companies to obtain assurance over disclosures as early as 2024. Such as the CSRD and SEC.
The insurance sector’s climate reporting has improved with greater transparency and detail. TCFD reporting in larger insurance companies is approaching or on par with BCM entities of similar size. Scenario analysis is disclosed by 77%, with 63% presenting qualitative and 58% giving quantitative results. Two companies have announced a CTP. Three-quarters of companies have mapped climate-related risks to existing risk types, with market, operational, reputational, and insurance risks being the most common. Few companies have disclosed the financial impact of climate-related risks. Over 60% of insurers have set net-zero targets for their operational footprint, with 50% aligned with SBTi.
EY Analysis indicates that Wealth and Asset Management (WAM) is in the early stages of TCFD disclosure quality compared to other sectors. Only 26% of WAM has obtained some assurance over climate data, primarily over their operational emissions. However, like other sectors, there is a trend towards third-party review. The industry’s low rate of scenario analysis is attributed to a need for a more transparent methodology. Almost all WAM recognizes the importance of climate change to the economy (86%) and their organization (80%). Nearly half have invested in improving their approach, methodology, and capability for defining metrics and calculating financed emissions, often seeking assistance from third-party consultants.
Standard Chartered PLC (SCB): Case Study Disclosure
Standard Chartered PLC (SCB) is a leading international bank in 59 markets. Since 2018, SCB has been reporting in alignment with TCFD recommendations. As climate-related risks and opportunities became a part of SCB’s strategy and climate risk oversight was enhanced, additional committees were formed to integrate governance of climate-related issues into SCB. Sustainability was established as a strategic pillar in SCB’s core strategy, and TCFD’s climate-related strategy was fully integrated into SCB’s “Stand of Accelerating Zero” program, which focuses on three pillars:
- Accelerating sustainable finance
- Reducing direct and financed emissions
- Managing financial and non-financial risks from climate change
The CSC is a subcommittee that oversees SCB’s overall sustainability strategy and monitors the implementation of the sustainability framework to align with the bank’s net-zero goals. Additionally, SCB established the Sustainable Finance Governance Committee in early 2019 to provide leadership, governance, and oversight in delivering sustainable finance offerings while reviewing the reputational risks associated with such products, including the dangers of greenwashing. As SCB’s coverage of climate-related considerations and sustainable finance product offerings expanded across markets, the bank developed robust governance measures that escalated to the board level.
In 2021, the TCFD Board approved SCB’s net-zero financed emissions by 2050 plan and published the net-zero methodology and roadmap via SCB’s net-zero white paper.
Modelling the impact of climate-related risks and SCB’s net-zero roadmap over long periods and across multiple dimensions has been challenging due to limitations in scenario data, pathways, client-specific data, and modelling review. Despite these challenges, the SCB board is actively involved in reviewing, overseeing, and monitoring the net-zero roadmap, presenting an opportunity for TCFD executives and board members to further educate themselves on the complexity of aligning with net-zero goals.
One of the critical challenges of building rigorous internal governance of climate-related issues is bringing different teams together to embed climate-related considerations throughout the company.
Typically, the climate-related analysis starts within risk teams. Still, to enhance comprehensive climate-related risk management, companies need to involve teams such as finance, risk, legal, compliance, and operations equally.
SCB recommends that companies at the beginning of their journey to enhance their response to climate-related issues spend a substantial amount of time and effort upfront to define key climate-related roles, responsibilities, and data transfer processes. Moreover, SCB designates climate-related risk as an integrated risk type, as the risks from climate change manifest through other existing risk types.
The financial sector’s disclosure of climate-related risks and opportunities has become increasingly important as climate change continues to impact the global economy significantly. As a result, the TCFD’s recommendations have guided the financial industry in reporting and disclosing climate-related risks and opportunities. While the industry has progressed, there is still room for improvement, particularly in scenario analysis and the financial impact of climate-related risks. Furthermore, the case study on Standard Chartered PLC highlights the importance of robust governance measures and involvement from various teams within a company to embed climate-related considerations throughout the organization. In general, increased transparency and understanding of climate-related risks and opportunities will ultimately benefit all stakeholders in the financial sector.
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