Welcome to the June/July issue of the Chronicle.
This edition covers the UK's mandatory TCFD plans and other aspects of its Green Finance Strategy; the EU's highly contested taxonomy; Wide-ranging recommendations from Canada's expert panel on sustainable finance; A less than encouraging TCFD second status report; and the first big US insurer to declare thermal coal restrictions.
We also highlight some interesting new reports on LNG stranded asset risks; energy infrastructure and the carbon budget; and climate risk factors in sovereign credit.
EU Technical Expert Group releases proposed taxonomy and more
After months of work, and sometimes tense scenes in European Commission committees, the EU Technical Expert Group on sustainable finance released three reports which will define a key piece of legislation to be developed next year.
The most-anticipated report was the one that sounds driest: the “taxonomy” clarifying terminology of sustainable financing activities. The proposed taxonomy (PDF) goes through a number of financed activities by sector and NACE code (the EU industry classification system), identifying thresholds required around climate mitigation, adaptation, circular economy, water use, and other environmental impacts.
Some notable decisions were to exclude nuclear from sustainable activity, and set a strict bar for emissions in the transition away from fossil fuels (100g CO2/kWh for electricity generation, and 50g CO2/km for cars), meaning that any new fossil fuel projects without CCS cannot be defined as clean, green or sustainable. A good summary is available on Environmental Finance (subscription required); Responsible Investor also has a series of expert opinion pieces on the TEG and other aspects of the EU action plan.
Canada’s “HLEG” releases wide-ranging recommendations:
The EU sustainable finance agenda influenced several countries, including the UK, New Zealand and Australia to pull together their own versions, albeit with a great deal of variation in terms of government participation and mandate.
Canada’s Expert Panel on Sustainable Finance, a small, industry-based panel appointed by government, released its final recommendations in mid-June.
The recommendations range from sustainable finance products to the real economy and industrial strategy; they include measures to boost the Canadian green finance markets; creating an oil & gas cluster that will help finance and develop climate-aligned solutions for the industry; and mapping out a sector-by-sector pathway to a low-emissions economy. There is also a recommendation to create a “Canadian Centre for Climate Information and Analytics”, or C3IA, to provide an authoritative source of climate information and decision analysis. Executive Summary and Full Report[PDF].
UK government publishes green finance strategy:
The strategy [PDF] brings together a number of new and existing announcements, plans and initiatives; all grouped together with objectives of both developing prospects for the country’s financial sector, and aligning private finance with climate goals (the UK just legislated a net zero emissions target by 2050).
Standards: The UK government also plans to “[work] with industry and the British Standards Institution to develop a set of Sustainable Finance Standards, and chairing a new International Organisation for Standardisation (ISO) Technical Committee on Sustainable Finance”.
The BSI is working on three standards: two already under development on a “sustainable finance framework” and a “sustainable investment management”. The first of these will be available for public review in July or August. The third of these “Publicly Available Specifications” is still being defined and scoped - but it “will seek to set out requirements for the assessment, governance, labelling and communication of funds presented as having sustainable credentials”. Details are on p. 27 of the Strategy.
New coal finance principles endorsed by UK government, PRI and more:
The UK government also announced it would support newly-released “finance principles” from the Powering Past Coal Alliance (PPCA). Signatories to the principles commit to withdrawing virtually all forms of financing for coal-fired power in the OECD by 2030, and 2050 for the rest of the world. Signatories also commit to advocating for the same timelines and related disclosures along the financial services supply chain, both to existing clients and to information service providers. The PRI became a PPCA partner and early signatories include Storebrand, Aviva, and CCLA.
Second TCFD status report
The second status update since the TCFD final recommendations were released in mid-2017 illustrates why more regulators and governments are leaning towards mandatory disclosure.
Its key findings are that progress on TCFD reporting has been very slow, patchy and non-comparable. While the number of companies indicating support for the TCFD has more than doubled to over 800 (with 150 alone coming from Japan; there was a big ramp-up just ahead of the G20 meeting); the number of actual disclosures lags far behind, and the quality - especially in the US - lags behind. The report also stresses that many are disclosing scenario analysis, but not revealing their own resilience against those scenarios.
- Companies disclosing or ‘preparing’ information under the TCFD framework were surveyed. About 180-190 “preparers”, or companies conducting disclosure, responded.
- 60% said they were conducting TCFD disclosures “because investors are requesting this information”
Almost half said climate risks were material now; while another 24% said they would be within 3-5 years.
- More than half said it had improved risk management of climate-related issues.
Chubb becomes first big US insurer to restrict coal underwriting & investment
Chubb announced it would rule out all underwriting of new coal-fired power plants from 2022, and by the same year it would phase out underwriting for or investing in companies that gained more than 30% of revenue from either thermal coal mining, or coal-fired power. In an interview with the FT, a Chubb official linked the decision to the threat posed by climate change impacts to the insurance industry.
The availability of insurance for thermal coal projects and businesses is shrinking as most large European insurers have made similar announcements, along with one large Australian insurer. Chubb is one of five big US property and general insurers (albeit headquartered in Switzerland). It was acquired in 2016 by ACE, which adopted the Chubb brand across the business.
LNG investments risk becoming stranded
Natural gas has largely escaped scrutiny for climate-related financial risk, with most attention being focused on fugitive and supply chain emissions. A new report from Global Energy Monitors (formerly CoalSwarm) looks at the specific risks that can hit LNG infrastructure, which has a different profile to natural gas exploration and production. News coverage at AJE.
Research: Existing and planned energy infrastructure takes us above 1.5C
A new Nature paper, finds that existing and planned energy infrastructure threatens the 1.5C target. Anotherpaper published earlier this year in Nature Communications, which only looked at existing energy infrastructure but included other sectors, concluded that there was still room in the carbon budget to keep the average temperature increase to 1.5C. More in The Conversation.
Research: Sovereign debt credit risk from ESG factors
Several new reports have been published exploring the role of climate risk and other ESG factors in sovereign bonds. A report by Hermes Investment Management and Beyond Ratings, which looks at credit default swap (CDS) spreads on the debt of 59 countries, finds countries with better scores across all three categories (environment, social, and governance) tend to have tighter spreads; with a particularly close correlation for governance. Another report, published in late May by Bluebay Asset Management and Verisk/Maplecroft, also found some positive correlations, but with more variation between the three main categories.