Companies’ Climate Transition Plans Lack Credibility, US Climate Risk Rules Should be Harmonized, and More

February 10, 2023

The top five climate risk stories this week.

Want access to deeper insights and curated climate news? Request a demo of our solution today.

Companies’ climate transition plans lack credibility — report

Few climate transition plans produced by companies are credible, research by environmental disclosure nonprofit CDP shows.

Of 4,100 companies that reported plans to align with a 1.5°C world last year through CDP, just 81 provided information on all the elements that make for a detailed and trustworthy disclosure. In addition, less than half the companies producing plans said they’re publicly available.

Climate transition plans shot up companies’ agendas last year as regulators and standard-setters advanced rules to make them mandatory. For example, US publicly listed companies would have to disclose information on their climate goals, targets, and transition plans under a climate risk disclosure rule proposed by the Securities and Exchange Commission (SEC). Meanwhile in the UK, the government-backed Transition Plan Taskforce released a disclosure framework last year to help firms comply with incoming reporting requirements.

CDP data shows that while 40% more companies produced climate transition plans last year than in 2021, most are lacking in quality and clarity. To gauge transition plan credibility, CDP checks their alignment with 21 key indicators covering transition plan governance, scenario analysis, financial planning, policy engagement, and more. Of the over 18,600 entities that disclosed through CDP last year, around 2,300 reported information aligned with between 14 and 20 of the indicators, while around 3,500 aligned with between seven and 14.

CDP also notes that around 3,400 companies disclosed that climate change may affect their strategies but said they do not intend to release 1.5°C-aligned transition plans.

“The need for companies to develop a credible climate transition plan is not an additional element but an essential part of any future planning,” said Amir Sokolowski, global director of climate at CDP. “Companies must evidence they are forward planning in order for us to avert the worst impacts of climate change and to send the correct signals to capital markets that they will remain profitable.”

Align US climate risk principles, banks say

Banking groups have urged three US financial regulators to harmonize their climate risk management guidance to save firms from potentially duplicative and conflicting requirements.

The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) have all issued draft climate risk principles for banks in the last year. A consultation on the Fed’s proposal closed on February 6.

In its response to the Fed guidance, trade group Institute of International Finance (IIF) said “uncoordinated policy development” could hobble regulators’ climate risk management efforts “particularly given significant uncertainties and knowledge gaps.” It recommends that the Fed, FDIC, and OCC produce “one common set of principles for large financial institutions.”

The Bank Policy Institute (BPI), a lobby group representing major US lenders, similarly pushed for the federal agencies’ guidance to be brought into alignment in its response to the Fed. It also asked the Fed to cut some provisions from its draft guidance, including a section asking bank boards to factor climate risk into their pay policies. “We are … concerned that inclusion of any language around compensation included in the final guidance may lead to such compensation being tied to specific climate or emissions targets, ultimately becoming overly prescriptive and limiting the ability for banks to utilize comprehensive risk management practices,” the letter says. The BPI also asked the Fed to walk back proposals that could be interpreted to mean banks should restrict lending to climate risk-vulnerable counterparties.

Civil society groups also weighed in on the Fed proposal. Left-leaning think tank the Center for American Progress welcomed the climate risk management guidance in its response. However, urged the central bank to go further and incorporate climate risk within its own system for rating the overall risk management of banks under its supervision.

Investors launch sovereign climate risk assessment

Asset owners and managers with USD$5trn of investments published a framework for assessing countries’ climate risks and opportunities on Tuesday.

The Assessing Sovereign Climate-Related Opportunities and Risks (ASCOR) collaboration — an initiative backed by investor networks, including the United Nations’ Principles for Responsible Investment — wants the framework to sharpen investors’ understanding of how climate issues may affect the risk and return of sovereign debt.

ASCOR’s end goal is to provide a publicly available assessment tool that investors can use to engage with governments on their net-zero goals and help them “showcase progress in addressing climate change.” The framework, which will inform the tool, sets out a checklist that investors can use to assess the state of countries’ transition plans, climate policies, and emissions metrics.

“There is an analysis dearth where investors do not have information on the climate risks and opportunities of sovereign issuers, and sovereign issuers are not clear on what information investors are seeking,” said Victoria Barron, ASCOR co-chair and head of sustainable investment at BT Pension Scheme Management. “This is leading to unfair extrapolations or missed investment opportunities. By translating the complexity of climate risk assessment into clear, assessable metrics that tie to long-term economic drivers, ASCOR is putting climate change at the heart of sovereign investment decision-making.”

The framework is out for public consultation until March 31.

Green central banks consult on climate scenarios

The Network for Greening the Financial System (NGFS) launched a consultation on the climate scenarios used by the Federal Reserve, Bank of England, and dozens of other institutions.

The survey findings will be used to inform the network’s development of climate scenarios. “As the user base continues to grow, we must ensure that the NGFS scenarios remain relevant and comprehensive: evolving as times change and capturing all the ingredients needed for an increasing range of climate risk assessment applications,” said Cornelia Holthausen, an official at the European Central Bank and chair of the NGFS’s scenario workstream.

The club of climate-focused central banks and supervisors released a first set of climate scenarios for financial institutions in 2020 and two follow-up sets in 2021 and 2022. The third vintage includes orderly and disorderly transition risk scenarios, plus two “hot house world” scenarios that assume global temperatures spiral above the 2015 Paris Climate Agreement targets.

The NGFS scenarios have come under fire in recent months from groups like the Real World Climate Scenarios (RWCS) initiative, a member of which argues that they rest on “flawed foundations.” A recent paper published by Spain’s central bank also highlighted that the NGFS scenarios do not account for how the financial sector may contribute to low-carbon transition pathways through lending and investment, an omission that may skew the scenarios’ outputs.

The NGFS consultation closes February 27.

European banks urged to stop new fossil fuel financing

Investors are demanding that Barclays, BNP Paribas, Crédit Agricole, Deutsche Bank, and Societe Generale cut off financing to new oil, gas, and coal projects in line with their net-zero commitments. 

In letters sent to the five banks on Friday, the investors — which together hold US$1.5trn in assets — said their support of new fossil fuel assets may undermine global climate efforts and take investment away from the clean energy transition. UK pressure group ShareAction orchestrated the letter-writing campaign, which includes leading European financial institutions Aegon Asset Management, Danske Bank, Ethos Foundation, and London Pensions Fund Authority.

ShareAction research shows the five banks were the largest European financiers of oil and gas companies that are expanding their operations over the half-decade to 2021 besides HSBC, which committed to halt all financing of new oil and gas fields last December. 

“Investors are putting these banks on notice that they will face ever increasing pressure if they don’t act soon to reverse their financing of new oil and gas,” said Jeanne Martin, head of ShareAction’s banking programme.