This U.N. guide aims to make it simpler for banks to talk about climate risks

Voluntary disclosure recommendations can be tough to interpret and even tougher to implement — especially within the framework of existing risk management models and mandated disclosure policies.

So, while hundreds of companies are talking up their intention to embrace the G20’s framework for disclosing risks related to climate change — issued by the Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) 10 months ago — far fewer organizations actually have worked out an official roadmap for doing exactly that.

Call it paralysis of analysis.

To kickstart progress in the banking sector, a group convened by the U.N. Environment Finance Initiative published Thursday what they’re calling a "methodology" for assessing and discussing specific risks — and opportunities — associated with the transition to a low-carbon economy. Examples might include planned or existing investments in renewable energy projects (on the plus side) versus legacy programs that back coal mining or oil exploration ventures.

The framework was developed by consultants at Oliver Wyman and Mercer with input from 16 banks, by experts in credit risk, stress testing, business development and sustainability. It also includes perspective from scientists developing climate-related data models at the International Institute for Applied Systems Analysis, the Potsdam Institute for Climate Impact Research and the International Energy Agency. A separate guide focused on grappling how to discuss physical risks related to climate change, such as floods, droughts and other extreme weather events is planned for release in late June. (Acclimatise is coordinating that publication.)

"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," said Kevin Corbally, chief risk officer for ANZ, a major bank in Australia and New Zealand, and one of the financial institutions involved in developing the methodology.

The other financial services companies involved represent the who’s-who of international banking: Barclays; BBVA; BNP Paribas; Bradesco; Citi; DNB; Itau Unibanco; National Australia Bank; Rabobank; Royal Bank of Canada; Santander; Societe Generale; Standard Chartered; TD Bank Group; and UBS.

The idea is to embed climate considerations within the context of banks’ existing stress testing and risk management functions, said John Colas, an Oliver Wyman partner and vice chairman of its Financial Services Americas group.

"From an industry perspective, this is a step forward in internalizing and beginning to model scenarios that take into explicit account climate risk," he told GreenBiz. "We believe this exercise will make the financial sector more climate-risk aware. And as banks begin to think about these factors in their own business, they will naturally look at the companies they invest in and think about those factors [that] should be considered."

The TCFD recommendations are meant to help better connect the processes for sustainability disclosure and traditional financial disclosures, such as the 10-K mandated by the U.S. Securities and Exchange Commission (used by domestically based companies) or the 20-F used by non-U.S. businesses that have securities, stocks or indices that are registered and traded in the United States. Right now, they mainly mostly separate functions — ones that often can be at odds with each.

"Many of the environmental challenges that the world faces today, especially climate change, can be traced back to one fundamental root cause: short-termism," said Erik Solheim, head of U.N. Environment, in a press release about the new banking guide. "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."

The TCFD recommendations intentionally were flexible, so that financial institutions, investors and large companies could determine the best path to implement them. Right now, however, many organizations are still struggling with the more tactical aspects of how to do this practically. Only 1 in 10 companies provides board-level or executive incentives for managing climate change issues, according to data released in March by CDP and the Climate Disclosure Standards Board (CDSB).

In early April, CDSB announced a five-year plan to align its own reporting framework with the TCFD recommendations, including changes to disclosure expectations, and new guidance related to risk management and resilience. "The message that the corporate sector has been sending to voluntary reporting organizations has been heard loud and clear: ensuring alignment and collaboration among the reporting frameworks and standards is critical to reach a tipping point in effective environmental reporting."

The Oliver Wyman team said the climate data insights contributed by the three scientific organizations that helped with its banking industry project — including models that are still unpublished but that should emerge in the near future — point to the need for new sorts of scenarios that can be used for risk planning.

"There is a real push to provide variables that are more useful to the economy and business in general," said Alban Pyanet, another partner involved with the project.

Noted Elmar Kriegler, a scientist with the Potsdam Institute, in a statement:

In the Paris Agreement, almost all governments worldwide decided to limit global warming to less than 2 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.