The COP26 successfully concluded with a last-minute Glasgow Climate Pact which brought important progress to keep global warming below 2ºC. Whilst the final agreement did not go as far as some had hoped, it does represent a good compromise and it sets the global agenda on climate change for the next decade.
Perhaps more importantly, many achievements worth celebrating happened away from the central stage. The mobilisation of finance to achieve climate goals was one of the priorities of COP26, and Glasgow successfully managed to bring together financial institutions, corporations, and policymakers and provided a forum to discuss the practical considerations of accelerating net zero business strategies and mobilising net zero capital allocation.
The post-COP26 changes in the financial services sector are shaping to be monumental, reflecting a unified sense of urgency but also the gravity of the challenges ahead. These include:
- The newly announced International Sustainability Standards Board (ISSB) will fundamentally change reporting standards. The ISSB will develop a comprehensive global baseline of sustainability disclosure standards for financial markets which will include disclosure requirements that address companies’ impacts on sustainability matters relevant to assessing enterprise value and making investment decisions.
- The Glasgow Financial Alliance for Net Zero (GFANZ) announced commitments by the financial services sector to align their activities and deliver more than $100 trillion investments to achieve net zero by 2050. The GFANZ now accounts for 40% of the world’s total financial assets, and firms have committed to set science-based targets to achieve net-zero portfolios as well as develop tools and methodologies so that the climate is part of every financial decision.
- Central banks are shifting gears by actively supervising climate-related financial risks and firms will need to demonstrate their ability to understand and manage these risks. Part of this will also be ensuring firms hold sufficient capital requirements. While regulatory capital is not seen as the right tool to address the causes of climate change, changes in the design or calibration of the regulatory capital framework are possible in order to ensure resilience against climate-related financial risks.
- Monetary policy will change as well as central banks will start incorporating emission targets in their own operations. For example, the Bank of England has launched a new approach to investments by the Corporate Bond Purchase Scheme which will incorporate climate considerations to incentivising firms to take meaningful actions in supporting climate transition.
- Scenario analysis will have a key role to understand how firms and economies are exposed to physical risks, the impacts of different transition pathways, and implications for the macroeconomy. Firms should use scenario analysis to assess the resilience of their business models to a range of climate-related pathway and determine the impact of climate-related risk drivers on their overall risk profile, including credit, market, operational and liquidity risks.
- Scenario analysis will require a combination of bottom-up and top-down approaches to achieve comprehensive coverage across various asset classes. Bottom-up approaches enable insight into institutions’ own methods and abilities to analyse climate-related risks, foster data collection, and increase awareness of economic and financial implications of climate-related risks. The top-down approaches enable use of a consistent methodology, provide for sensitivity analysis as assumptions and parameters can be easily adjusted, and carry lower resource cost.
- Physical impacts of climate change are a highly material and immediate source of risks for many firms. For example, European Central Bank’s recent analysis shows that Euro area banks face higher expected losses if climate risks are not mitigated. Additionally, in the absence of climate policies banks’ expected losses would continue to increase non-linearly over time due to climate change’s irreversible nature.
- Broader ESG topics are coming to the fore, with deforestation and biodiversity as some of the leading topics. More than 30 leading financial institutions committed to eliminate agricultural commodity-driven deforestation from portfolios by 2025. This is a part of broader interest in “E” topics beyond climate and a shift towards more sustainable production.
Navigating Climate Risk
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 UN Climate Change Conference UK 2021, https://ukcop26.org/cop26-goals/finance/
 IFRS Foundation: “IFRS Foundation announces International Sustainability Standards Board”, 3 November 2021
 Glasgow Financial Alliance for Net Zero: “Our progress and plan towards a net-zero global economy”, November 2021
 Bank of England, Prudential Regulation Authority: “Climate-related financial risk management and the role of capital requirements”, 28 October 2021
 Bank of England: “Greening our Corporate Bond Purchase Scheme (CBPS)”, 5 November 2021
 The Basel Committee on Banking Supervision: “Principles for the effective management and supervision of climate-related financial risks”, November 2021
 Network for Greening the Financial System: “Scenarios in Action (NGFS): A progress report on global supervisory and central bank climate scenario exercises”, October 2021
 European Central Bank: “ECB economy-wide climate stress test”, Occasional Paper Series, September 2021
 Race to Zero: “Leading financial institutions commit to actively tackle deforestation”, 3 November 2021, https://racetozero.unfccc.int/leading-financial-institutions-commit-to-actively-tackle-deforestation/