On the 6th of June, Supporting Institutions of the Climate Action in Financial Institutions Initiative gathered in London for the 2019 Annual Assembly of the Initiative hosted by the European Bank for Reconstruction and Development. The Annual Assembly of the Initiative brings together the membership to exchange on the strategic vision of the network, as well as dialogue on priority topics – this year focusing on climate risks and ‘Paris Alignment’.

Situating the Initiative in the Evolving Landscape for Climate Mainstreaming

At now over three years since its creation, the Initiative strives to actively position itself within the ever-changing landscape of discussions on climate change and the financial sector. Testament to the increasing up-take of climate-related subjects by the financial sector, close to thirty calls to action, networks and finance-sector specific initiatives exist today.

To help our Supporting Institutions better understand this evolving landscape, our ‘Connecting the Dots’ online resource has profiled over 27 of these initiatives and identified the principal insights for the implementation of the 5 voluntary Principles for Climate Mainstreaming.

At the Annual Assembly, the EBRD launched discussions by presenting an analysis of the principal climate and finance sector related initiatives influencing their work –  including the Network for Greening the Financial System and the Task-force on Climate-related Financial Disclosures. Many of these initiatives have been instrumental in advancing discussions on rules and defining common terminologies, principles, voluntary standards. In turn, many of our Supporting Institutions are directly or indirectly involved in one or more of these initiatives.

In this fast moving landscape, the role and added value of the Climate Action in Financial Institutions Initiative lies in ‘connecting the dots’

Discussions at the Annual Assembly identified the principal added value of what we do: while there is a growing body of work on climate change and the financial sector, no other initiative is in a position to ‘connect the dots’ as we can. Today, our Initiative is well placed to:

  • Connect institutions: The diversity of institutions supporting the 5 voluntary Principles of the Initiative contributes to its unique position to bridge typical public-private and institutional divides.
  • Connect people: Our initiative builds bridges between institutions, departments and individuals to directly share practice and experience.
  • Connect regions: As the number of our Supporting Institutions grows, we are in a unique position to foster regional discussions, bringing together institutions to discuss the specificities, opportunities and challenges.
  • Connect theory with practice: The principal raison d’être of the Initiative is to support our Supporting Institutions in accessing expertise – and to connect them with first-hand experience of how it can be operationalized.
  • Connect initiatives: We are exchanging with the other principal initiatives on climate either directly or through our Supporting Institutions who are active participants in many of these around the world.
  • Connect with the financial community: we as an Initiative aim to share knowledge and expertise with each other, but also with the broader financial community –  providing clear examples of what financial actors can do today on climate change.

At the Annual Assembly, the Secretariat housed by I4CE presented a report providing an overview of the Initiative’s recent activities and accomplishments. Through 2019, the Secretariat of the Initiative will continue to foster exchanges both within the Initiative and with external partners and stakeholders through its growing number of webinars, workshops, matchmaking activities and channeling of information to Supporting Institutions. All of the materials for the activities held to date are available in the Private Supporting Institutions section of our website.

Overview of Annual Assembly Content-Focused Sessions:

Part 1: Lessons learned from financial institutions in managing climate risks

The subject of climate-related risks has been a key topic at the heart of discussions among the Supporting Institutions. It is increasingly recognized that climate change will have far-reaching implications for how financial institutions identify, assess and manage a range of both risks and opportunities. Whether in the form of the implications of the physical impacts of climate change – or the policies and market shifts expected to be necessary to stabilize and reduce greenhouse gas emissions – financial institutions will need to recognize the importance of understanding and addressing climate change risks to their existing portfolio and operations, as well as to pipeline and future investments.

This year’s Annual Assembly was an opportunity for Supporting Institutions to have an overview of the current ‘trends’ in terms of climate risk discussions, as well as exchange on their emerging practice in this area.

First, Clément Bourgey, Head of Green Finance – Banque de France – Secretariat of the Network for Greening the Financial Systems (NGFS) introduced the discussions by highlighting how the NGFS as a “coalition of the willing” aims to mobilize mainstream finance to support the transition towards a sustainable economy and presenting the six main recommendations of the network for both central banks and supervisors and policy makers. [Read the NGFS “Call for Action”]

Second, James Leaton, Senior Credit Officer – Climate risk at Moody’s Investors Service, presented their ‘Carbon Transition Approach’ and the forward-looking, sector specific analysis and stress scenarios they have developed. Moody’s sector specific research and methodology provides a concrete case study of the integration of climate considerations by a rating agency and is currently open for public consultation . [Learn more about Moody’s work and respond to their consultation.]

The second part of the risk session focused on the experience of Supporting Institutions. To introduce the discussion, Michel Cardona from I4CE gave an overview presentation of the state of the art of climate risk assessment and integration into broader risk management frameworks. [Presentation]

Four Supporting Institutions then presented their approaches and how they are moving forward in managing climate-related risks:

  • The Agence Française de Développement shared its ongoing work on the issue of climate risk that began with the assessment of the exposure of a representative sample of its portfolio to physical risks using scores produced by a specialized climate data provider (the sample represented 80% of its lending portfolio). Based on these results, an in depth analysis was performed in 10% of this sample to identify what the implications for credit rating would be.  Taking into account the limits of the scores (no sectoral differentiation, no consideration of the counterparties adaptation capacity) and the difficulties to integrate these type of scores in AFD’s credit risk rating scheme, AFD is working on integrating physical risks qualitatively in its internal process for new loans at the borrower level with two main objectives: 1) identify the most vulnerable borrowers and provide them with adapted financing solutions, 2) monitor its risk on physical climate-related aspects.
  • Crédit Agricole began to assess the exposure of its portfolio to transition risks by adopting a top down macro-static approach developed by academics (find the case study here), progressively combined with a dynamic approach, using scenarios to assess the materiality of risks and a bottom-up approach to have the possibility to differentiate at the counterparty-level. Further developments are being considered, in particular on individual scoring of corporates. For physical climate risks, Crédit Agricole currently calculates a physical risks index combining a sectoral approach and a country approach. Moving forward, the team aims to adopt a more granular approach and to integrate the adaptation strategy of corporates.
  • EBRD has been active on the topic of physical and transition climate risks. Recently, it has taken steps to assess the exposure of its portfolio to both physical and transition risks and is in the process of defining how to incorporate climate risks assessments into the credit approval process.
  • HSBC is developing a CO2 transition risk framework to assess the exposure of the institution and is looking at the exposure to sovereign risks, the physical impacts of climate change at the country level and relying on a sector-based approach.

The ensuing discussion highlighted some of the challenges highlighted by participants in the assessment of risks are:

  • Fully appropriating the methodologies and tools proposed by service providers to correctly interpret results;
  • Data availability;
  • Integration in the credit rating, in particular due to different time horizons.

The next step for all of them is the management of these risks, taking into account the specific mandate of these institutions and other considerations.

 Part 2: Emerging Approaches on Aligning with the Paris Agreement

The final part of the Assembly focused on the emerging approaches of financial institutions in defining and developing strategies to ‘align’ their activities with the goals laid out in the Paris Agreement.

Ian Cochran, Head of the Climate Action Secretariat and Senior Advisor at I4CE, presented the initial findings of work being conducted as part of a project supported by the European Climate Foundation and the IDFC. This work, which will be circulated for consultation, presents a framework for assessing a “Paris Alignment strategy”.

Supporting Institutions, in turn, presented insights into the current state of progress on developing Paris Alignment approaches tailored to their mandates:

  • Société Générale presented the approach it is developing since the commitment its management made in 2015 to align its portfolio with a 2°C scenario. Since then, Société Générale announced that it will no longer finance coal-fueled power plants or related infrastructure. In 2016, SG developed a methodology for tracking the Mining and Coal-Fuelled Power Plants and these changes have been incorporated into the Group’s sector policies. In 2018, the Group was part of the pilot project with 2°C Investing Initiative for testing the PACTA tool and in early 2019 the decision was taken to develop its own tailored internal alignment tool.
  • AFD released its current climate strategy in 2017 that included the objective of being “100% Paris Agreement” consistent.  This objective reinforces its target of having 50% the group’s projects comprising climate co-benefits. AFD’s approach on alignment builds on its longstanding efforts to mainstream climate change in its operations and currently relies on a qualitative assessment performed as part of its sustainable development framework that includes the evaluation of each projects in regards to the low carbon and climate resilient development pathways of the countries were AFD operates. To support the country led efforts to develop those pathways AFD launched two specific facilities, Adapt’Action and the 2050 Facility.
  • FMO presented their interpretation of Paris Alignment as an evolution from ‘relative’ to ‘absolute’ thinking, taking into consideration the rapidly shrinking CO2 budget left to achieve the 1,5°C target. In addition to other measures, FMO adopted an approach aiming to position the Institution “on the right pathway”, based on a progressive portfolio emissions reduction approach informed by 1,5°C scenario.
  • The European Investment Bank and the EBRD presented the MDB’s joint framework for aligning their activities with the goals of the Paris Agreement composed of 6 building blocks. The MDBs have committed to working together in six key areas considered central to meeting the goals of the Agreement, which aims to limit the increase in global temperatures to well below 2°C, pursuing efforts for 1.5°C. In their presentation, they laid out the details of how they will develop their joint approach and the resulting deliverables.

The ensuing discussion highlighted a number of the challenges identified by Supporting Institutions, including:

  • Should an institution aim to align its existing portfolio, new transactions, or both?
  • What is the most pertinent structure of objectives and performance indicators for a given institution?
  • How to define what is a sufficient and credible pathway at the global or national scale?
  • How to manage uncertainty when evaluating near term actions in light of long term trajectories?

Whether on the topics of Climate Risks Management or Paris Alignment, Supporting Institutions agreed on the value-added of exchanges between peers and will be continuing discussions as part of the Work Streams of the Initiative and on a bilateral basis.