Imfino News


PHYSICAL RISK: Second part of guidance for banking industry to implement TCFD Recommendations now available

SDG 13: Climate action,
 Jul 2018

Geneva, 17 July, 2018 | Sixteen leading banks convened by the UN Environment Finance Initiative (UNEP FI) and supported by climate risk advisory firm Acclimatise, have released new methodologies that aim to help the banking industry to understand and manage the physical risks and opportunities of climate change in their loan portfolios.

The methodologies are designed to enable banks to be more transparent about their exposure to climate-related risks and opportunities, in line with the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).

“Climate change risks – such as storm surges, droughts and heat waves – can affect financial markets, and more market actors are demanding better data to evaluate those risks,” said Michael Bloomberg, Chair of the Task Force on Climate-related Financial Disclosures and UN Special Envoy for Climate Action. “The UN Environment Programme’s Finance Initiative will give banks tools they can use to implement our task force recommendations and disclose more accurate information about climate risk.”

The banks leading this work and currently piloting the methodologies 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.

Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics – Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.

The methodologies, published in the report Navigating a New Climate, were piloted across three climate-sensitive industry sectors: agriculture, energy and real estate. First piloting results demonstrate the need for a balanced approach to assessing the risks to banks’ clients and loan books from both incremental climate change (such as rising temperatures and changing precipitation patterns) and increasingly frequent and extreme weather events.

Extreme events often attract more attention as their impacts are more apparent, but incremental changes have the potential to gradually erode the financial performance of entire borrower segments. Understanding these phenomena and how they translate into financial risk and opportunity is fundamental to banks’ strategies to increase their resilience to a changing climate.

Case studies from leading banks who piloted the methodologies are provided in the report.

The methodologies demonstrate that physical risks will worsen if the global economy continues on its current greenhouse gas emissions pathway. Future negative impacts could be reduced somewhat, but not avoided completely, if strenuous and rapid efforts are made globally to cut emissions.

The guidance also aims to inform banks’ strategies to support clients in adapting to changing conditions. Clients who face physical risks may need to make investments to become more climate-resilient. What’s more, global markets are developing for providers of climate-related products and services, as companies such as engineering and technology providers are identifying opportunities to capitalise on shifting market trends. Banks may have opportunities to support these investments.

Global briefings to the industry will be carried out via webinars on Tuesday 14 August, 09:00 and 16:00 CET. To register please send an email to Remco Fischer.

Download the Navigating a New Climate report


Inquiry and contact information

Sally Wootton

UNEP FI - UN Environment Finance Initiative

+41 22 917 8591