Mark Carney of the Bank of England unveils climate stress test

Every financial institution needs a climate plan, says Mark Carney. Image: By Markus Spiske on Unsplash

by Kieran Cooke, Climate News Network, January 1, 2020

Tackling climate change isn’t just about replacing fossil fuels with renewables, or planting more trees. It’s about confronting climate stress across society.

LONDON – The warming world means climate stress now permeates every part of society. And so an entire financial system which has underpinned the growth of a global economy largely dependent on fossil fuels must be reoriented to deal with what is fast becoming a full-blown crisis.

A campaign to halt or withdraw multi-million dollar investments from industries associated with fossil fuel use is gaining momentum. And the central banks – the institutions responsible for regulating countries’ financial systems – are now taking action.

Leading the charge is the venerable Bank of England (BOE), one of the oldest such institutions in the world. In December it became the first central bank to announce what it terms a banking stress test on climate change.

Under the BOE’s stress test framework, banks and insurance companies will be required to go through their books to evaluate their exposure to the impacts of climate change.

If, for instance, a British bank has loaned money to a company building a coal-fired power plant, the BOE will require the bank concerned to hold a substantial amount of additional capital to cover the risks of the project being abandoned because of new regulations or other climate change-related factors.

“A question for every company, every financial institution, every asset manager, pension fund or insurer is what’s your plan on climate change”

In the same way, if an insurance group has granted cover to houses on a flood plain, or to coastal properties which could be subject to rises in sea level – or if a bank has granted mortgages on such properties – the BOE will require additional capital to be held to cover the financial risks involved.

Other financial institutions are examining ways in which their activities can be protected from the more serious impacts of a warming world.  Several insurance groups have announced plans to withdraw cover from fossil fuel projects.

Central banks are following the BOE’s lead: a body with the somewhat cumbersome title of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) now has more than 40 members – all involved in monitoring the risks climate change poses to the finance sector.

The BOE’s action has two aims. One is to ensure the financial system can withstand the considerable financial costs posed by climate change. The other is to encourage financial institutions to invest their funds in more sustainable, environmentally friendly projects.

Mark Carney, the outgoing BOE governor who is soon to take up a post as UN special envoy for climate action and finance, describes the BOE stress test as the first comprehensive assessment of whether the financial system is on track to help deliver a transition to a sustainable future.

Worthless assets possible

“A question for every company, every financial institution, every asset manager, pension fund or insurer is what’s your plan (on climate change),” Carney told the BBC.

He says that unless the finance sector and large companies wake up to the scale of the climate crisis, many of the assets they now hold in fossil fuels and other enterprises will become worthless.

Some financial institutions are taking action, says the BOE governor, divesting from investments in fossil fuels and becoming involved in more sustainable projects, but progress is still far too slow. Time is of the essence.

“The climate emergency continues to build. The next year will be critical,” says Carney.

https://climatenewsnetwork.net/bank-of-england-unveils-climate-stress-test/

Europe's Largest Asset Manager Sees 'Tipping Point' on Climate Risk Pricing

The world’s deepest-pocketed investors are starting to take climate change seriously, according to Amundi SA.

by Anna Hirtenstein, Bloomberg, May 30, 2018

“We are really observing a tipping point among the institutional investors on climate change,” said Frederic Samama, co-head of institutional clients at the Paris-based firm. “Until recently, that question was not on their radar screen. It’s changing, and it’s changing super fast.”

Risks from global warming range from damage to physical assets from extreme weather to falling prices on fossil fuel-related assets, as the world moves away from burning coal and oil. Bank of England governor Mark Carney has repeatedly warned that these risks are not priced in adequately and that investors may have exposure to a “climate Minsky moment” if they don’t take action.

Amundi’s remarks hold weight because it has 1.4 trillion euros ($1.6 trillion) under management, making it the largest asset manager in Europe. It runs the world’s largest green bond fund with the International Finance Corp. and is planning to deploy $2 billion into emerging markets. Mainstream investors are beginning to recognize both the threats and opportunities coming from climate-related issues, Samama said.

“If we have this major shift required in terms of how we manage the planet, for sure it will impact the asset prices,” he said. “Can we evaluate the automakers without taking into account the new bans of diesel cars? Can we evaluate the fossil fuel industry without taking into account the risks of regulation related to the drop of the price of renewable energy?”

The Paris climate deal reached by representatives from nearly 200 countries in 2015 sent a signal to the global economy that decarbonization was on the agenda. As just about every industry comes under pressure to become greener, the rules will change for the asset owners as well. France was the first country to make it mandatory for investors to disclose the carbon footprint of their portfolios, mandating it in a law the same year.

Another reason that institutional investors’ views are evolving is the availability of green financial instruments, according to Amundi. The asset manager developed low-carbon equity indexes, removing the polluting companies from commonly-used ones such as the S&P 500 and MSCI indexes. Investors from the California State Teachers’ Retirement System to Japan’s Government Pension Investment Fund are shifting their portfolios to these indexes, according to Samama.

“It means that if nothing happens, you have the market returns and that if the opposite, if polluting companies are getting penalized, they will bring the index down and if you have excluded them, you will outperform,” he said.

Green bonds are another avenue for redirecting institutional capital into environmental projects. The industry has soared from non-existence just over a decade ago to global issuance of $163 billion last year.

©2018 Bloomberg L.P.

https://www.bloombergquint.com/global-economics/2018/05/31/europe-s-largest-asset-manager-sees-tipping-point-on-climate