6 minute read 1 Jun 2020
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How banks are adopting recommendations on climate-related disclosures

By

Mathew Nelson

EY Global Climate Change and Sustainability Services Leader

Leading a purpose-driven team that shares a common passion for creating positive impact. Workplace diversity and equality advocate. Engineer. Father of two boys. Australian Football League fan.

6 minute read 1 Jun 2020

The banking sector continues to lead the way for financial services with the uptake of climate-related disclosures.

From the analysis of the 2019 EY Global Climate Risk Disclosure Barometer, overall the banking sector performed well. The sector scored higher for both quality and coverage of climate-related risk disclosures, when compared to the average. The sector also received the highest score for quality across the whole of the financial sector.

Each of the banks that were reviewed received a score for the coverage and quality metrics on the basis of how they addressed or implemented all of the 11 recommendations by the Task Force on Climate-related Financial Disclosures (TCFD). However, it continued to lag when compared with the other leading nonfinancial sectors, including energy and transport.

Below are some of the highlights from the sector:

  • Banks in the US market performed the best in terms of the quality of their climate risk disclosures. They also outperformed their Australian peers in relation to governance and risk management. This improved performance was supported by a growing awareness of the physical impact on infrastructure, combined with the “limit high-carbon financing” resolutions that were put for vote by several banks’ shareholders. Banks from the US and Australian markets are closely followed by those from France, South Korea and Spain. These markets also scored 100% in terms of coverage for their disclosures.
  • Banks in Kazakhstan, Russia, Kuwait, Saudi Arabia, mainland China, Taiwan, the Philippines, Indonesia, Mexico and New Zealand were some of the worst performers – all scoring below 10% for the quality of their climate risk disclosures. It is important to note that when analyzing the data, dual-listed New Zealand-based banks that reported through their Australian parent entities were excluded from the New Zealand data set.
  • Almost half of the banks assessed submitted Carbon Disclosure Project (CDP) responses. This was a common source of disclosure.
  • The United Nations Environment Programme Finance Initiative (UNEP FI) was referenced by several banks as a guidance tool for reporting against the TCFD recommendations.
  • A small number of banks from the US, Canada and France published TCFD specific reports, while others produced climate position statements or policies.
  • Except for the top-performing companies, disclosures generally excluded physical risks, which continue to be a threat to the banking sector overall because of their large mortgage portfolios.

We examined how the banking sector performed against the four areas, through which the TCFD recommendations are structured.

Governance

The details of governance structures were most frequently documented within the CDP responses and annual reports. Banks typically described their overall risk management governance processes and organizational structure. In some cases, this was for environmental, social and corporate governance (ESG) more broadly. But in others, it was specific to climate risk. 

Most banks provided a description of broad ESG governance and policies; however, they often did not include details of specific climate risk activities. Climate risk was commonly tied with ESG risks and the relevant governance committee. Some of the disclosures from top performers included:

  1. Indicating where overall responsibility for climate risk resides — e.g., at the board level with a dedicated subcommittee
  2. Describing the frequency of interactions with climate or risk subcommittees or the board
  3. Linking climate-related performance metrics to compensation
  4. Citing policy position statements signed by the board and chairperson
  5. Embedding climate change in the corporate strategy and risk management approach
  6. Providing descriptions of the roles and responsibilities of those individuals responsible for climate risk, including finance solutions and products
  7. Engaging with external stakeholders on climate change risk

Strategy

Across the sector, strategy disclosures were the most poorly developed of the four TCFD components, scoring 26% for quality. This was mainly because of the lack of disclosure relating to the results of scenario analysis or identified risk impacts. Banks that carried out a scenario analysis, generally focussed more on the transitional risks than the physical risks. Also, most did not disclose the results of scenario analysis, including the financial impact or statements on the resilience of the bank’s strategy.

Weak point

26%

The score on strategy disclosures across banking, the most poorly developed of the four TCFD components.

Many banks provided a qualitative description of the risks and opportunities, as well as their potential impacts. But only a few provided insights into their potential impacts on the organization. A number of banks provided general statements on the resilience of the organization in relation to the identified risks.

Some of the top-performing banks stood out by disclosing specific physical and transitional risks over the short-, medium- and long-term. They also provided a quantified, substantive financial impact under a two-degree scenario or less.

Risk management

A range of risk management strategies were disclosed.  Most banks noted that climate-related risks were assessed and managed as part of the broader, more established ESG risk policy and processes, or by investment committees that consider sustainability factors when making lending or investment decisions.

The most detailed disclosures provided specific examples of transitional and physical risks identified at a bank-wide level. Some banks also identified key sectors that were specifically considered within the risk management activities, including energy, manufacturing, property, agriculture and infrastructure. As part of their risk management approach, several banks also included information on how they were reducing their exposure to coal. 

Although 60% linked their climate risk activities to enterprise risk management, most did not disclose any detailed description of how this was achieved. This recommendation received one of the lowest scores in terms of quality, with an average score of 31%.

Top performers for risk management undertook the following: 

  1. Systematic monitoring of emerging risks by conducting periodic reviews to identify new and emerging risks, and trends
  2. Global capacity building initiatives by developing collaborations with clients, peers and regulators
  3. Preparing qualitative statements on climate risk in the risk appetite framework
  4. Carbon risk assessments as part of the lending and credit risk assessment of the customers’ lending portfolios

Some of the top-performing banks have been offering lower rates of interest for sustainability or cleaner energy projects, or other finance or insurance products. However, these tend to be pilots, or one-off product offerings rather than practices integrated into mainstream lending practices.

Targets and metrics

Sixty-three percent of banks disclosed some data in relation to targets and metrics. The quality score was the highest of the four TCFD components, at 32%, and attributable to the consistency of measuring a selection of environmental performance metrics (rather than target setting). Most banks disclosed their Scope 1 and 2 greenhouse gas (GHG) emissions and, in some cases, even Scope 3 emissions (such as those from purchased goods and services, travel, and waste).

Data disclosure

63%

of banks disclosed some data in relation to targets and metrics.

Climate-related targets predominantly focused on the banks’ own GHG emissions, which do not align to their key climate risks identified — those that are a risk to investment. Similar to 2018, the disclosure of financed emissions risks was not a common practice among most banks.

Several top performers also aligned their executive directors’ performance and remuneration with the achievement of GHG targets, and set an internal carbon price to pilot the impact on a customer’s loan portfolio, combined with a qualitative analysis of their exposure to carbon risks.

Some banks set targets to address transition risks to their investments. These targets were generally associated with their financing activities — e.g., setting qualitative or quantitative goals on financing of low-carbon activities, reducing financing of high-carbon activities or commitments to a total investment in clean or green financing. France was one of the leading markets disclosing metrics and targets, which can be linked to the national regulation falling in place (since reporting is obligatory under Article 173 of the French Energy Transition Law).

Summary

Overall, the banking sector scored the highest for quality of climate-related risk disclosures across the financial sector, although it continued to trail in other leading nonfinancial sectors, such as energy and transport. This article draws on the analysis from the 2019 EY Global Climate Risk Disclosure Barometer  and provides a snapshot of the banking sector’s uptake of the recommendations by the Task Force on Climate-related Financial Disclosures (TCFD).

About this article

By

Mathew Nelson

EY Global Climate Change and Sustainability Services Leader

Leading a purpose-driven team that shares a common passion for creating positive impact. Workplace diversity and equality advocate. Engineer. Father of two boys. Australian Football League fan.