Six ways to fix sustainable finance – 3: Standardize climate risk measurements

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By:
Helen Avery
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Euromoney has spoken to 20 sustainable finance experts about what is needed to make efforts more effective. The third of our six recommendations is to push for the standardization of climate risk measurements.

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SIX WAYS TO FIX SUSTAINABLE FINANCE
Introduction: Sustainable finance's biggest problems
1. Join the PRB
2. Mandate TCFD
3. Standardize climate risk measurements
4. Develop transition finance
5. Target deforestation reduction
6. Incentivize green finance

Sustainable finance heads say that standardized metrics and scenarios would help their banks feel more confident in disclosing their balance sheets in terms of green to brown and also in better managing their own risk.

“I’d like to see a standard around measurements and benchmarking. It could be SASB [Sustainability Accounting Standards Board] or set by the ratings agencies,” says one, adding that it will lessen the current confusion. “I see a lot of good intent and efforts, but we need to turn that into action otherwise the weariness plus the confusion plus a potential financial shock could undermine those efforts.”

SASB captures climate-related risks and opportunities in 90% of their industry standards. Anton Gorodniuk, who leads research in the financials sector at SASB, says they will continue to research and consult the market on how SASB’s standards might better capture transition, physical and regulatory risks.

“We are seen as a useful tool for TCFD implementation. Many of the examples of metrics and targets referenced by the TCFD come from the SASB standards,” says Gorodniuk. 

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Anton Gorodniuk, SASB

He adds that SASB will continue to look at creating a standardized approach to measuring climate risk exposure of banks’ loan books and asset managers’ portfolios. “We’re still having conversations around standard indicators that would allow banks and asset managers to assess carbon exposure,” he says.

Lauren Compere, director of shareholder engagement at Boston Common Asset Management says her firm has been asking banks to get involved in industry initiatives related to scenario analysis since 2015 and has made specific recommendations. “There are three things we have been asking banks to do that we feel will have the most impact in shifting the direction of finance towards a low-carbon future and reducing financial risk,” says Compere.

“The first is to consider joining the Principles for Responsible Banking. The second is to become a supporter or implementer of TCFD. And the third is to look at signing on to at least one scenario tool being worked on such as PCAF [the Partnership for Carbon Accounting Financials], CDP’s financial sector pilot [formerly the Carbon Disclosure Project] or SBTi.”

The asset management firm’s study this year showed 20% of the 58 banks it tracks had signed up to CDP and none had signed up to PCAF.

PCAF was set up in 2015 by a group of Dutch banks with the aim of developing and implementing open-source methodologies to measure the greenhouse gas emissions (GHG) of all asset classes in their loan and investment portfolios. Some 56 financial institutions have now signed up worldwide – although not the largest banks. Among those that have are Robeco, FirstRand, ING, Triodos Bank, Amalgamated Bank, Rabobank and ABN Amro.

Using the methodology ABN Amro, for example, disclosed the GHG emissions for its corporate loan portfolio last year. The bank’s €94.9 billion of corporate loans resulted in emissions of 14,474 kilotonnes of GHGe. The bank also assessed its 800,000 residential mortgages using PCAF and discovered it was one of the areas with the highest carbon impact, causing the bank to incentivize customers to take energy efficiency measures.

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Peter Blom, Triodos Bank

“We are really keen on making this movement big so that it will become a common feature or an obligation for banks to report according to PCAF guidelines on how much carbon is on the balance sheet,” says Peter Blom, chief executive of Triodos Bank, one of the banks leading the push. “It’s about being transparent. No one is fully green, we know this, but just be transparent about where you are on your journey.”

The CDP Financial Sector Pilot is another initiative that has the aim of helping banks disclose their emissions. Particularly important are Scope 3 emissions that show the emissions of clients due to bank financing. Bank of America, BMO, BNP Paribas, Citi, HSBC, Intesa Sanpaolo, Mizuho, NAB, Scotiabank, US Bank and Wells Fargo are among those that have signed up to the pilot – although not all have signed up to disclose information on Scope 3 emissions.

Gorodniuk says SASB is looking at both PCAF and CDP, among other frameworks providing climate-related indicators, to assess them against the SASB Framework for potential inclusion in the standards.