26 April 2018
This understanding is fundamental to enable banks to be more transparent about their exposure to climate-related risks and opportunities in line with the TCFD. It will also inform banks’ strategies to contribute to and benefit from the low-carbon economic transition and help them engage and support their customers to that effect. This is key because the climate-related risks and opportunities that banks face arise primarily from their services to clients.
The methodology and supporting materials are the first output of a unique and collaborative process over the past 10 months. It has brought together various functions from within the banks including credit risk, stress testing, sustainability and business development with leading scientists, and risk and investment management experts.
The banks that are leading this work and that are currently piloting the methodology are ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS. They were guided by the consultancies Oliver Wyman, Mercer, and Acclimatise and supported by scientists from the International Institute for Applied Systems Analysis (IIASA) and the Potsdam Institute for Climate Impact Research (PIK).
“Many of the environmental challenges that the world faces today, especially climate change, can be traced back to one fundamental root cause: short-termism. Financial markets can become a catalyst for action on sustainability, but for that they need to become more long-term oriented,” said Erik Solheim, Head of UN Environment. “The beauty of the TCFD framework is that it encourages organizations to consider and disclose long-term impacts. This change in perspective is what we need to achieve sustainable development. That’s why as UN Environment we are excited to be working with such committed leaders in the finance industry.”
The methodology provides the first publicly available guidance designed specifically for banks to carry out forward-looking, climate-related risk and opportunity assessments as envisioned by the TCFD. More specifically, the methodology helps banks to apply the state-of-the-art global climate change scenarios that are available today - such as those developed and offered by PIK, IIASA, and the International Energy Agency (IEA) - to evaluate the risks and opportunities that the low-carbon economic transition may present to their lending portfolios.
Using detailed scenario data from the models MESSAGEix-GLOBIOM (IIASA) and and REMIND-MAgPIE (PIK), financial analysts developed ‘risk factor pathways’ for individual economic sectors in different world regions. Three scenarios were used in the project: a baseline, and deep decarbonization pathways consistent with 2 and 1.5°C warming. These scenarios were developed within the context of the ongoing European Commission Horizon 2020 research project ‘CD-LINKS’, which is coordinated by IIASA (www.cd-links.org). A forthcoming paper by McCollum et al. describes the scenario design and key model results related to energy investments.
“Bridging the gap between financial models and climate mitigation scenario models is not immediately straightforward. That’s why this pilot project with the banks is so important. The scientific community is starting to interact more closely with non-state actors, but more can and should be done,” says David McCollum, Senior Research Scholar, Energy Program, IIASA.
The methodology is designed to:
The progress made through the publication of this framework is foundational. “Through this highly collaborative effort of scientists, risk practitioners and sustainability experts, we have set forth an innovative methodology that will serve to underpin enhanced climate-risk aware decision making and resource allocation,” said John Colas, Oliver Wyman, Partner and Vice Chairman, Financial Services Americas. "We expect that this methodology will be further strengthened, as practices evolve and new and more granular data emerges from industry practitioners, corporates, policy makers, and climate scientists.”
Additional work is still needed across sectors and areas of expertise to develop best practices. Most publicly available scenarios are not intended for financial risk assessment. Together the scientific community and financial institutions could improve the granularity of the models and advance the financial risk variables generated. There will also be value in banks and borrowers engaging so that enhanced borrower-level information becomes available. Like the development of macroeconomic stress testing at financial institutions, forward-looking climate assessments and disclosures will continue to improve over time.
“When we published our recommendations less than a year ago, we were deliberate in viewing banks and other financial institutions not only as consumers of climate-related disclosures, but also as preparers and issuers of such disclosures. We did so to emphasize the key role that financial institutions will have to play in both safeguarding financial stability and financing economic decarbonisation,” said Christian Thimann, UNEP FI Co-Chair, TCFD Vice-Chair, and Senior Executive at AXA. “That is easy to understand. The hard part is finding effective yet practical ways for financial institutions to take such action, to carry out the required assessments, and to meaningfully disclose. I am thankful for the contribution that this group is today making to that effect.”
The methodology will be available at this URL: www.unepfi.org/tcfd-for-banks
Webinars will be held at 10.00 CEST and 16.00 CEST on 15th May for those interested in hearing more about the new methodology. Speakers will include risk and investment management experts from Oliver Wyman, climate scientists from the Potsdam Institute for Climate Science (PIK) and the International Institute for Applied Systems Analysis (IIASA), and representatives from the participating banks. To register, please email Peter Cripps at Environmental Finance: .
About UN Environment
UN Environment is the leading global voice on the environment. It provides leadership and encourages partnership in caring for the environment by inspiring, informing, and enabling nations and peoples to improve their quality of life without compromising that of future generations. UN Environment works with governments, the private sector, the civil society and with other UN entities and international organizations across the world. https://www.unenvironment.org/
About the UN Environment Finance Initiative
The UN Environment Finance Initiative is a global partnership between the United Nations Environment Programme and the financial sector. Over 200 institutions, including banks, insurers, and investors work with UNEP to bring about systemic change in finance to support a sustainable world. http://www.unepfi.org/
Last edited: 26 April 2018
International Institute for Applied Systems Analysis (IIASA)
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