Information presented in this profile is for reference only. The Climate Action in Financial Institutions Initiative does not guarantee as to the exhaustiveness of this information and invites you to contact the Secretariat (contact@mainstreamingclimate.org) if you wish to propose any modifications.

By including this profile, the Initiative, its Supporting Institutions and the Secretariat do not endorse the activities described below nor the guidance and information provided in this profile.

Last updated: June 2019

Website: www.unepfi.org/

Contact: info@unepfi.org

Summary: Launched in 1992 in the wake of the 1992 Earth Summit, the United Nations Environment Programme Finance Initiative (UNEP FI) is a global partnership between the United Nations Environment Programme and the financial sector.  Under the motto “Changing finance, financing change” UNEP FI aims “to promote sustainable finance”[1] and has a special focus on climate change. Today, over 200 institutions have signed the UNEP FI Statement and “committed to working collectively toward common sustainability goals”.

What are the objectives of the initiative?

UNEP FI’s motto “Changing finance, financing change” represents its two objectives of 1) promoting the integration of sustainability concerns into the financial services industry through mainstreaming of the issue within financial institutions; and 2) mobilizing financial institutions to channel finance towards a more sustainable economy.

How is climate change specifically addressed?

UNEP FI created a Climate Change Advisory Group (CCAG) pursuing political advocacy, technical advice for policy-makers and guidance for financial institutions. Regarding the latter, UNEP FI identified three main work streams:
– Technical advice to financial institutions – Briefing and training financial institutions on the risks and opportunities resulting from climate change.
– Research & development on measurement and disclosure systems – Supporting the development and adoption of frameworks and indicators for the measurement and disclosure of FIs’ i) climate-related risk exposures and ii) alignment with the low-carbon and climate-resilient economy.
– Platforms of climate leaders from the financial industry – Offering platforms gathering committed leaders from the industry, so as to present, document and monitor leadership, and facilitate the exchange of knowledge and experiences.

Who launched it? Who is participating?

The Initiative was initiated in the wake of the 1992 Earth Summit by a small group of commercial banks and the United Nations Environment Programme to “catalyse the banking industry’s awareness of the environmental agenda”[2]. Today, it has over 200 signatory financial institutions, including banks, insurers, and investors, working together with UN Environment in this initiative. Partners of UNEP FI are the Principles for Responsible Investment (PRI) and Global Canopy. 

Why has this been put into place?

UNEP FI was created to promote sustainable finance. The initiative acts as a platform for the United Nations and the financial sector: “UNEP has worked closely with industry in developing environmental management strategies, and started working with forward-looking organisations in the financial services sector at the beginning of the 1990s. UNEP was convinced that the financial sector had a valuable contribution to make in protecting the environment while maintaining the health and profitability of their businesses.”[3]

What are the main work streams/areas of work?

The work of UNEP FI is articulated around understanding “today’s environmental, social and governance challenges, why they matter to finance, and how to actively participate in addressing them”[4].

To this end, UNEP FI plays a key role in major initiatives and coalitions, such as:

UNEP FI also developed some set of Principles, such as:

The Principles for Positive Impact Finance;
The Principles for Sustainable Insurance.

UNEP FI is currently conducting a global consultation ahead of the lauch of the UNEP FI Principles for Responsible Banking. The Principles aim to provide “the framework for a sustainable banking system in which a bank’s business strategy is aligned with society’s goals, and guide banks in demonstrating how they are making a positive contribution to society – an increasing expectation of their customers, clients and investors, as well as society-at-large.”

Following the publication of the final recommendations report of the Task-force on Climate Related Financial Disclosures (TCFD), UNEP FI both welcomed the recommendations and convened working groups of banks, asset managers and owners and insurance companies to develop pilot methodologies to implement the recommendations.

UNEP FI also focuses on policy via dialogues between finance practitioners, supervisors, regulators and policy-makers and, since 1994, hosts a yearly Global Roundtable, and since 2017 regional roundtables.

What are concrete outcomes (both political and in terms of recommendations)?

The common denominator overarching the projects launched and conducted by UNEP FI is the UNEP Statement of Commitment by Financial Institutions on Sustainable Development. All members of UNEP FI endorse the statement recognizing “the role of the financial services sector in making our economy and lifestyles sustainable and commit to the integration of environmental and social considerations into all aspects of their operations”[6]. Signatories are not subject, however, to any binding objectives.

Have intermediate or final reports / guidance been issued?

A wide range of publications are published by UNEP FI, often in cooperation with other initiatives and research institutes, some examples include:

  • Publications on sustainability:
  • Publications on climate metrics:
    • Climate strategies and metrics: Exploring options for institutional investors (2015) – “This report reviews the strategies and metrics available to investors seeking to measure and improve the climate friendliness of their portfolios, defined as the intent to reduce GHG emissions and aid the transition to a low-carbon economy through investment activities.”
    • Exploring Metrics to Measure the Climate Progress of Banks (2018) – “The research paper assesses the metrics that can be used to assess a bank’s contribution to the climate solution or problem. Authors categorize the existing metrics into greenhouse gas (GHG) accounting, green or brown, and sector specific metrics; compare these metrics; and make recommendations for choosing metrics by asset class.”
    • Publications on climate risks:
      Environmental and Social Risk Briefings (only available for signatories)
      Global Climate Change: Risk to Bank Loans (2006) – “The purpose of this study is to evaluate the impact of climate change related risks on bank borrowers, utilizing as much data and analysis as possible. The first section of this report reviews the current climate change policies in place in Canada, Europe, and the US, in order to provide a framework for policy implementation in the future. The report then utilizes aggregated loan and lease data from Bank of America, CIBC, Citigroup, Scotiabank, and TD Bank Financial Group, to analyze the impact of climate change related risks on bank loans and leases.”
      Stability and Sustainability in banking reform: Are environmental risks missing in Basel III? (2014) – “This study analysis whether the Basel Capital Accord (‘Basel III’) adequately addresses systemic environmental risks in the context of its overriding objective of banking stability.”
      Carbon asset risk: Discussion framework (2015) – “This conceptual framework is intended to help financial intermediaries and investors think more consistently and systematically about carbon asset risk—what it is, and how it can be evaluated and managed—as well as to highlight existing analytical tools that may be helpful in this process”
      Extending our horizons – outputs of a working group of 16 banks piloting the TCFD recommendations (2018) – “This report is the result of a collaboration of sixteen of the world’s leading banks under the UN Environment Finance Initiative (UNEP FI) to pilot the recommendations published by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD)”. It presents a scenario-based methodology for assessing the risks and opportunities associated with the transition to a low-carbon economy.
      Navigating a new climate: assessing credit risk and opportunity in a changing climate (2018) “This report is the result of a collaboration between sixteen of the world’s leading banks with UN Environment Finance Initiative (UNEP FI), and climate risk and adaptation advisory firm Acclimatise. The banks set out to develop and test a widely applicable scenario-based approach for estimating the impact of climate change on their corporate lending portfolios as recommended by the Recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).”
    • Changing course: a comprehensive investor guide to scenario-based methods for climate risk assessment, in response to the TCFD, “Twenty institutional investors from eleven countries, convened by UNEP FI and supported by Carbon Delta, have worked throughout 2018–2019 to analyse, evaluate, and test, state-of-the-art methodologies to enable 1.5°C, 2°C, and 3°C scenario-based analysis of their portfolios in line with the recommendations of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD). The outputs and conclusions of this Pilot are captured in this report and aim to enhance the understanding and ease adoption of the TCFD recommendations by the wider investment industry.”
      Drought Stress Testing Tool

Calendar and milestones

Associated Supporting institutions of the Climate Action in Financial Institutions Initiative, members of UNEP FI:

[1] www.unepfi.org/about/

[2] www.unepfi.org/about/background/

[3] www.unepfi.org/about/background/

[4] www.unepfi.org/about/

[5] www.unepfi.org/extranet/banking-documents/development-of-banking-principles/

[6] www.unepfi.org/about/unep-fi-statement/

Links with the 5 Voluntary Principles for Mainstreaming Climate Action

This section aims to support discussions on the implementation of the 5 voluntary Principles for Mainstreaming Climate Action. Information provided in this section is for reference only; the Climate Action in Financial Institutions Initiative, its Supporting Institutions and the Secretariat do not endorse the activities nor the guidance and information provided in this section.

By signing the UNEP FI Statement institutions agree to “work towards integrating environmental and social considerations into our operations and business decisions in all markets”:

“1.3 We regard financial institutions to be important contributors to sustainable development, through their interaction with other economic sectors and consumers and through their own financing, investment and trading activities.

1.4 We recognize that sustainable development is an institutional commitment and an integral part of our pursuit of both good corporate citizenship and the fundamentals of sound business practices.”

According to the UNEP FI Statement members of UNEP FI endorse the following:

“2.2 We will comply with all applicable local, national and international regulations on environmental and social issues. Beyond compliance, we will work towards integrating environmental and social considerations into our operations and business decisions in all markets.

2.3 We recognize that identifying and quantifying environmental and social risks should be part of the normal process of risk assessment and management, both in domestic and international operations.”

In 2015, as part of the Portfolio Carbon Initiative, UNEP FI and the World Resources Institute published a Discussion framework on Carbon Asset Risk:

The Discussion framework presented different strategies that financial intermediaries and investors can follow to avoid and/or manage the risk:

After the release of the TCFD recommendations in 2017, UNEP FI co-developed with a working group of 16 banks piloting the TCFD recommendation a scenario-based methodology to assess transition risks described in the report Extending our horizons. The proposed transition risk assessment methodology encompasses three integrated modules:

“By linking the three modules, banks can address the major challenges inherent to modelling transition risk:

  • Transition scenarios provide plausible views of how transition risk might evolve across sectors over the next few decades;
  • Borrower-level calibration allows each bank to tailor the approach and overcome a lack of empirical data to estimate changes in credit outcomes;
  • Portfolio impact assessment, together with the scenarios, provides a structured analytical framework that makes the approach repeatable, systematic, and consistent and helps coordinate and integrate analysis and judgment across a bank”

The report provides recommendations to identify the most useful scenario sources for financial assessments of transition risk:

  • Scenario availability: Ideally, for financial assessment of transition risk, a baseline, 2°C, and lower than 2°C scenario should be analysed. Multiple temperature targets enable the study of how more aggressive assumptions can impact risk. A consistent baseline, or reference, scenario is necessary to understand the incremental risk of transition scenarios relative to business as usual. Since more severe transition risks are likely to evolve over longer time horizons, scenarios should project impacts to at least 2040.”
  • Output breadth: Ideally, reference scenarios would cover all regions of the world where banks have exposures and all sectors of economic activity where transition risk is most material. Analytical breadth varied widely across sources. Among major scenarios analysed, only certain climate models, for example, contain detailed representations of land use, including agriculture. In other instances, valuable scenario sources did not have complete regional representations.”
  • Output granularity: Though some models may cover the entire world, they do not always report the results of this analysis in a granular way. Scenario sources should also report economic and emissions results at a sector level, so that the major differences in sector relationships to risk drivers are capture. Additionally, regional or country level outputs are useful for capturing differences in transition risk across jurisdictions and levels of economic development.”
  • Update frequency: Since important socioeconomic and policy inputs into transition risk models will evolve in the real world, frequent publication of scenario model outputs is necessary. To avoid disruption or obsolescence, selected scenario models should be maintained actively by a group with a mandate to continuously publish.”

The report then presents how risk factor pathways were developed to interpret these economic scenario impacts in corporate financial terms. The criteria set up by the pilot group were the following:

  • “Enable a financial interpretation for corporate risk exposure analysis: Risk factor pathways should indicate financial loss or gain for corporates across an economic sector and geography that is intuitive and based on analysis of the scenario.
  • Allow common comparisons across sectors: To achieve consistency, the structure of the risk factors should be applicable to multiple economic sectors (though the specific values they take are expected to differ across sectors). If these metrics were not common risk drivers, differing risk analysis frameworks would have to be developed for different sectors.
  • Apply to multiple scenarios from various models: The metrics used to generate risk factor pathways should be common outputs of leading transition scenario models. This allows additional flexibility for future transition risk analysis to occur across multiple scenarios and model sources.”

As a conclusion, the report highlights several “avenues for future developments”, and among other the integration of transition risk assessment in the organization:

“The methodology outlined in this document provides for scenario-based assessment of transition risk. However, institutions need to go beyond risk assessment and disclosure to properly manage transition risks. As climate risks materialize, institutions would benefit from their broader incorporation into a range of business management and risk management processes at financial institutions. While specifics may differ across institutions depending on particular profiles, potential examples of areas for integration include:

  • Integration across other risk measurement processes including physical risk;
    Embedding into risk identification processes;
    Incorporation of climate risk considerations in underwriting and credit rating processes;
    Consideration of climate-related limits and exposure monitoring;
    Climate risk-related portfolio management and structuring;
    Consideration within business planning and strategic planning.”

By signing the UNEP FI Statement institutions agree to “work towards integrating environmental and social considerations into our operations and business decisions in all markets”:

2.4 We will endeavor to pursue the best practice in environmental management, including energy and water efficiency, recycling and water reduction. We will seek to form business relations with customers, partners, suppliers and subcontractors who follow similarly high environmental standards.

2.7 We recognize the need for the financial services sector to adapt and develop products and services which will promote the principles of sustainable development.”

The UNEP FI’s Principles for positive impact finance present a set of guidelines “to provide a broad, common framework to achieve the financing of sustainable development.”

The Principles define Positive Impact Finance as serving to “finance Positive Impact Business. It is that which serves to deliver a positive contribution to one or more of the three pillars of sustainable development (economic, environmental and social), once any potential negative impacts to any of the pillars have been duly identified and mitigated. By virtue of this holistic appraisal of sustainability issues, Positive Impact Finance constitutes a direct response to the challenge of financing the Sustainable Development Goals (SDGs).”

UNEP FI provides expertise on metrics and tools improving the sustainability of the activities of financial actors in line with the UNEP FI Statement stating:

“2.6 We recognize the need to conduct regular internal reviews and to measure our progress against our sustainability goals.

In 2018, the report Exploring Metrics to Measure the Climate Progress of Banks provides a presentation of pros and cons of climate performance metrics for banks:

Authors highlighted the main differences between banks and investors with respect to tracking climate progress:

▪ “Reputational risk may be more significant for commercial banks, as compared to investors, due to consumer choice (i.e., in some markets individuals may not be able to choose their pension fund but can choose their bank).

▪ Banks generally have a larger presence of non-listed companies and SMEs than their equivalent in investment portfolios (e.g., equity and corporate bonds). This has two practical consequences that are discussed further in the next chapter:

  • Data and confidentiality challenges may be significantly greater for commercial banks than for institutional investors because financial and environmental data of counterparties may be private and of varying quality or not subject to regulatory reporting.
  • Comparative benchmarks (e.g., equity indexes) are more widely available for investor asset classes than for commercial lending portfolios.”

The report also provides the following recommendations:

▪ “To fully understand a bank’s contribution to the low-carbon transition, there needs to be more comprehensive reporting on activities related to climate problems in addition to climate solutions. Banks should not be reporting on their contribution to climate solutions without also reporting on their contribution to the climate problem.

▪ Banks should consider the criteria of completeness, context, fair share, and transparency when evaluating and choosing metrics to assess climate progress.

▪ GHG accounting approaches, including project emissions and financed emissions, are the most useful for asset classes when the use of proceeds is known. Financed emissions may also be useful to provide a high-level picture of a bank’s exposure to emissions.

▪ A green or brown metric is recommended when a bank wants to understand both its significance of exposure to climate solutions and problems in relation to each other.

▪ The current discussions on the climate progress of banking exhibit strong regionality. Therefore, the best selection of accounting and reporting metrics may vary regionally. Peer comparisons and stakeholder outreach can be important aspects for performance tracking.

▪ Most importantly, in spite of evolving climate-friendliness assessment practices, banks should not wait to begin measuring and disclosing metrics on climate progress and tracking performance. Meaningful and practical metrics are currently available for numerous asset classes, and banks can improve their approach over time as more useful metrics become available.”

Although not binding, the UNEP FI Statement recommends regarding disclosure:

“3.1 We recommend that financial institutions develop and publish a statement of their sustainability policy and periodically report on the steps they have taken to promote the integration of environmental and social considerations into their operations.

3.2 We are committed to share relevant information with customers, as appropriate, so that they may strengthen their own capacity to reduce environmental and social risk and promote sustainable development.

3.3 We will foster openness and dialogue relating to sustainability matters with relevant stakeholders, including shareholders, employees, customers, regulators, policy-makers and the public.”