ISO14097 Scoping Report
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sriguruISO14097 Scoping Report
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sriguru- ISO 14097: Scope and Objective
- Introduction
- FI’s Disclosure on Climate-Related Actions
- Review of Existing Standards
- Recommendations for ISO 14097
- Conclusions of ISO 14097
Supported
by:
ISO STANDARD FOR INVESTMENT, FINANCING
AND CLIMATE CHANGE (ISO 14097)
WORKING GROUP SCOPING DOCUMENT -‐ NOV 2017
1
TABLE
OF
CONTENTS
INTRODUCTION 4
1. FIs’ DISCLOSURE ON CLIMATE-‐RELATED ACTIONS 5
1.1 Landscape Report: Process And Methodology 5
1.2 Landscape Report: Examples Of FIs’ Actions 6
1.3 Critical Analysis 9
2. REVIEW OF EXISTING STANDARDS 12
2.1 ISO Standards 14
2.2 Other Organizations’ Standards 16
2.3 Disclosure Frameworks Standardizing Disclosure Practices 20
2.4 Gap Analysis 36
2.5. Additional frameworks
3. RECOMMENDATIONS FOR ISO 14097 39
3.1 Clarify the Objective: Risk Management or Contribution to Climate Goals? 39
3.2 Define the Scope of the Working Group 40
3.3 Define Financial Institutions’ Actions 40
3.4 Document How Actions Link With Achievement of the Objectives 41
3.5 Define Metrics that Serve the Objective 42
4. CONCLUSIONS OF ISO 14097 45
2
ISO
14097:
SCOPE
AND
OBJECTIVE
The
ISO
14097
"Framework
and
principles
for
assessing
and
reporting
investments
and
financing
activities
related
to
climate
change,"
was
proposed
by
the
French
standardization
body
AFNOR
and
approved
by
ballot
in
January
2017.
The
convenors
are
Stan
Dupré (CEO
of
2° Investing
Initiative
– commissioned
by
AFNOR)
and
Massamba Thioye (UNFCCC
secretariat),
with
AFNOR
acting
as
secretariat.
OBJECTIVE.
The
overarching
objective
of
ISO
14097
is
to
create
the
first
standard
for
assessing
and
reporting
investments
and
financing
activities
related
to
climate
change,
including:
• The
impact
of
investment
decisions
on
GHG
emissions
and
resilience
trends
in
the
real
economy;
• Alignment
of
investment
and
financing
decisions
with
low
carbon
transition
pathways
and
the
Paris
Agreement
climate
goal;
and
• The
risk
to
financial
value
for
owners
of
financial
assets
(e.g.
private
equity,
listed
stocks,
bonds,
loans)
arising
from
international
climate
targets
or
national
climate
policies.
USE
CASE.
The
specific
scope
of
ISO
14097,
to
be
clarified
during
the
project
scoping
period,
includes:
• Defining
benchmarks
on
decarbonisation
pathways
and
resilience/adaptation
goals;
• Tracking
of
progress
of
investment
portfolios
and
financing
activities
with
respect
to
these
benchmarks;
• Identifying
best-‐practice
methodologies
for
the
definition
of
“science-‐based”
targets
for
investment
portfolios;
and
• Developing
metrics
for
tracking
targets’
progress
with
respect
to
low
carbon
transition
pathways
and
broader
climate
change
goals.
The standard will support investors’ work on climate-‐related issues by:
1. Harmonizing
definitions,
concepts
and
methodological
frameworks
related
to
the
measurement
of
contributions
to
climate
goals
(mitigation
and
adaptation)
and
exposure
to
climate-‐related
risks;
2. Identifying
relevant
climate
actions
for
each
type
of
financial
activity;
3. Provide
reporting
and
communication
requirements
and
guidance
for
financial
institutions;
and
4. Provide
a
measurement
framework
to
connect
financial
activities
to
their
impact
on
mitigation/adaptation
on
the
ground.
The
following
table
describes
the
use
cases
of
both
direct
users
of
the
Standard
and
potential
users
of
the
information
provided
by
organizations
in
compliance
with
the
standard:
USERS USE CASE
Financial • Set target and identify action for climate contributions to voluntary commitment
Institutions platforms and track their performance over time
• Report on contribution to climate targets via emerging mandatory reporting programs
Climate • Track global progress toward the Paris Agreement (and future climate policies) via
Policymakers commitment and monitoring platforms
• Understand financial risk associated with different financial portfolios and investments
in the context of 2°C goal and other policy ambition levels
• Set indicative targets, reporting requirements against these targets, develop
negotiated agreements, and introduce incentives (e.g. tax breaks) for private financial
institutions
Financial • Design new climate-‐related capital requirements
Authorities • Ensure market transparency on material climate-‐related risks
3
INTRODUCTION
This report provides the options for standardizations examined by the working group of ISO 14097. It is based on a
review of more than 130 financial institutions’ actions and initiatives on the integration of climate-‐related issues
and current standards and disclosure frameworks aiming at improving financial institutions' practices and its
comparability.
The report identifies 7 concepts (see figure 1 next page) as the most used by financial institutions currently
considering climate issues in their practices and presents a critical analysis of concepts building on the criteria
developed by the French government and 2° Investing Initiative (2Dii) in the context of the International Award on
Investor Climate-‐related Disclosures. The criteria was developed to assess the best practices of climate disclosure in
the context of the implementation of the Article 173 of the Energy Transition Law on mandatory climate disclosure for
investors and banks. An independent jury composed of Public Administration, Members of the Parliament, Investor
Groups and Advocacy NGO’s applied this criteria in the selection of the Award winners.
The report provides an overview of how current standards integrate this concepts as they are presented by
standards organizations and policy documents, highlights the caveats and gaps. The analysis reveals that:
• There is a lot of guidance about disclosure, but limited technical guidance on how to actually manage climate risks
and impacts;
• As far as guidance on disclosure for financial institutions is concerned, there is a lot of high-‐level guidance on how
to report on the approach, but the guidance on metrics to be used is much more scattered and limited.
• More precisely on metrics, it is to be noted that the existing guidance almost exclusively focus on various ways to
measure the ’exposure’ of financial institutions to climate-‐relevant activities (using indicators such as carbon
intensity, and green and brown taxonomies on business activities and technologies) but is almost inexistent when
it comes to calculating the consistency with climate goals, the related value-‐at-‐risk, or the impact of the actions
undertaken by the financial institution.
• Finally, the guidance generally presents caveats in the consistency between the concepts used (e.g. green
investments) and the way they are translated into metrics (e.g. impact metrics).
We build on this analysis to provide a set of recommendations for the WG10 members of ISO 14097 to consider
when defining the scope of the standard moving forward:
• Clarify the objective(s) addressed by the standard based on the current objectives pursued by financial
institutions, these being i.) the management of climate-‐related financial risks; and ii.) the contribution to the
achievement of climate goals.
• Define the scope of the working group. We suggest to focus the the of the ISO 14097 working group on the
functions of investment portfolio and loan book management, assuming that the standard created will be adapted
to other services at a second stage
• Define a list of financial institutions ‘actions’ that can contribute to climate-‐related risk management and/or
support the achievement of climate goals and document how these actions are linked to the achievement of the
objective(s).
• Define metrics that serve each of the objective. Value at risk metrics for the assessment of climate-‐related risks
should include a relevant forward-‐looking time frame and account for the adaptive capacity of investees in a
portfolio. Impact metrics assessing the contribution to climate goals should track the evolution of company
indicators at ‘physical asset-‐level’ (e.g. CAPEX expenditures).
Based on these recommendations the WG10 examined the advantages and disadvantages of standardizing
processes for the assessment, management and disclosure of climate-‐related risk and financial institutions’
contribution to the Paris Agreement.
This process led to the definition of the scope of the standard: at a first stage, the standard will focus on developing
a framework to assess the contribution of investments to the Paris Agreement. Standardization avenues around
climate scenarios will be as well considered. At a second stage the group will focus on developing a framework for the
management of climate-‐related risks associated to different climate scenarios, the extent at which this topic will be
addressed will depend on the market’s response to the TCFD and the HLEG recommendations.
Section one of this report provides an overview of investor’s disclosure on climate–related actions, section 2 provides
a review of existing standards, section 3 provides the implications of the findings for the work of ISO 14097. Section 4
provides the scope of ISO 14097 and explores the advantages and disadvantages around each standardisation option. 4
1 FI’S
DICLOSURE
ON
CLIMATE-‐RELATED
ACTIONS
1.1 LANDSCAPE REPORT: PROCESS AND METHODOLOGY
The need for standardization arises primarily from what is being executed in practice. Thus, to determine these needs
and the possible standardization priorities of ISO 14097, the climate-‐related investment actions or initiatives of a wide
range of financial institutions have been examined. A focus was given to the identification of concepts and/or
“buzzwords” used by financial institutions when disclosing their climate-‐related actions. It thus does not pretend to
disentangle discrepancies or caveats in the use of those concepts but rather present a snapshot of financial
institutions’ narratives on climate-‐related actions.
The types of actions considered include both individual and cooperative actions or initiatives. Individual actions
considered are related to financial institutions undertaking standalone climate activities while cooperative
actions/initiatives relate to coalition of financial institutions providing support on climate actions:
Individual actions are those carried out by a single entity being a financial institution or investor on its own. Around
80 individual initiatives were selected from the NAZCA platform due to their relevance for climate-‐related
investments. These individual initiatives stem from banks, insurance companies, pension funds, asset owners and
asset managers. In addition, a series of top 20 financial institutions rated by the Asset Owner Disclosure Project
(AODP), top 10 banks and multilateral banks (MDBs) based on the amount of assets under management were
considered in the analysis as well as the initiatives of the winners of the International Award on Investor Climate-‐
related Disclosures.
Cooperative actions/initiative in general have a broader scope as they involve coalitions of financial institutions (e.g.
IGCC, IIGCC, PRI) providing technical support on a wide range of investor practices. There are some coalitions focusing
on a specific climate practice (e.g. Aiming for A on shareholder engagement) and other initiatives regrouping financial
institutions’ commitments on climate change (e.g. PDC, Montreal Carbon Pledge). There are also platforms where
financial institutions disclose their climate actions (e.g. low carbon registry, NAZCA) thus signaling to other financial
institutions the work of their peers. In total around 50 cooperative initiatives were studied for this report.
Sources of information. Several sources of information were considered. For individual initiatives, public
announcements, sustainability and climate reports were used. Most of the initiatives included come from
sustainability reports as very few organizations have published climate reports. The publication of climate reports
mainly emerged in 2016 in the context of the International Award on Investors Climate-‐related Disclosures. In the
case of cooperative initiatives, their websites and published reports have been reviewed.
Categorization process. Content analysis of the aforementioned data sources was carried out. The content study was
of qualitative nature and so a categorization process was adopted. The initiatives were grouped into conceptual
categories based on the narrative and terminology used by the investor or coalition. Thus, categorization provides a
snapshot of the types of actions pursued by financial institutions and coalitions. Seven categories emerged from the
130 initiatives analyzed. Notably, these categories do not operate at the same level. For example, some of them relate
to the actions taken in the process of target setting (e.g. alignment and risk), while others relate to actions taken to
achieve the target (e.g. divest/include). Some others are associated with processes (e.g. portfolio decarbonisation).
The breakdown of these categories is shown in figure 1 below.
Figure 1: Breakdown of actions by type (Source: authors)
Multiple
Assessment of alignment
Climate lobbying
Shareholder engagement cooperative
Divestment/Exclusion Individual
Portfolio decarbonisation
Climate-‐related risks assessment
Green Investment
0 10 20 30 40 50 5
1.2 LANDSCAPE REPORT: EXAMPLES OF FI’ ACTIONS
Assessment of the alignment with Climate Goals relates to all actions integrating the use of a 2°C or related
benchmark in investment practices enabling the estimation or definition of the exposure to sectors/asset
classes/activities that are ‘misaligned’ with climate goals. In the case of financial institutions, it relates to the use of
methodologies capable of quantifying the alignment with the 2°C climate goal based on a specific scenario and the use
of the results to inform investment decision-‐making. Overall, actions on alignment with climate goals are not widely
spread amongst financial institutions. The main methodologies reported by financial institutions are the 2°C portfolio
check (2II 2015b) and Trucost’s energy mix methodology (ERAFP 2017).
Below a few examples of financial institutions’ practices/initiatives:
AXA
Managers AXA does not have an objective to align its investments with a
2°C scenario. However, the insurer has back-‐tested its equity
and corporate portfolios to identify a plan for stock reallocation
to improve intra-‐stock allocation and meet potential climate
goals using a portfolio benchmark methodology.
NDC
Invest
by
IDB Platform to help countries implement their commitments under
the Paris Agreement including internal and external funding
mobilization.
ERAFP ERAFP’s target is to align its portfolio with a 2°C scenario. Since
2016, ERAFP measures and discloses the current energy mix of
its equity portfolio and benchmarks it against the energy mix
needed under a 2°C scenario in 2030 and 2050.
Climate-‐related risk assessment relates to actions in which the narrative is focused on the mitigation and adaptation
to both transition and physical risks. In the case of financial institutions, it relates to the processes and use of metrics
to assess risk exposure. The metrics used vary. The proprietary models identified provide either a cross-‐asset class (i.e.
Mercer TRIP model) or a cross-‐sector analysis (i.e. Moody’s environmental heat map). The in-‐house models generally
focus on one risk parameter such as carbon prices for transition risks or windstorm events for physical risks. In the
case of cooperative initiatives, it the climate-‐related risk assessment relates to the promotion of best practices
including the use and development of disclosure frameworks.
Below a few examples of financial institutions’ practices/initiatives:
Initiative
The
Environment
Agency
Pension
Fund
(EAPF) Assesses climate-‐related risks using Mercer TRIP model.
Mercer’s analysis is undertaken as part of strategic asset
allocation reviews.
Wells Fargo Bank Assesses risks in their loan portfolios including modelling the
effect of a carbon price on their power and utilities industry
customers.
AXA
Managers Assesses the credit impact of environmental issues using the
Moody’s approach, which examines direct environmental
hazards, consequences of regulatory or policy initiatives across
86 sectors.
Green Investments are mostly related to investments in companies that support or provide environmentally friendly
products or that follow environmentally friendly practices. Thus, a broad set of activities can be included. Green
investment is the most common action undertaken by financial institutions. Only few of FIs are however more specific
in their narrative by reporting actions on climate solutions. Regardless of the label used, financial institutions tend to
use green investment goals or the results of green/brown metrics to communicate their contribution to climate goals.
However, the narrative on how the current green shares or targets relate to the Paris Agreement target is in most
cases unclear. Cooperative initiatives focus their efforts on increasing the amount of assets invested but only a few of
them promote overarching investment goals in line with climate scenarios (e.g. Ceres Clean Trillion Campaign).
6
Below are a few examples of financial institutions' practices/initiatives:
Bank
of
America
The bank has a $125 billion goal to support clients connected to
clean energy and other environmentally supportive activities. It
has directed $49 billion since 2013, with $15.9 billion in 2016
alone.
Local
Government Super
LGS invests in a mandate in which all international listed
companies must derive 50% of revenue from resource efficiency
and environmental markets
Clean
Trillion Campaign To
encourage
investors,
companies
and
policymakers
to
invest
an
additional
$1
trillion
per
year
globally
in
low-‐carbon
energy
Divestment/Exclusion relates to the selling of assets or avoidance of purchase of assets that are, generally, carbon
intensive or highly exposed to the fossil fuel extractive industry. Financial institutions tend to associate their
divestment/exclusion actions with either their climate risk management policy or the overarching objective of
contributing to the Paris Agreement goals. When divestment/exclusion is a result of risk management measures,
financial institutions mainly rely on carbon and even alignment metrics (e.g. IRCANTEC 2016). When
divestment/exclusion is initiated to contribute to policy goals, decisions are mainly driven by long-‐term national or
international goals or NGO pressure (e.g. Deutsche bank and JP Morgan decision to stop financing new coal projects in
developed countries).
Below are a few examples of financial institutions’ practices/initiatives:
Initiative
BNP
Paribas The bank’s coal policy excludes all mining companies that
generate more than 10% of their revenues from thermal coal
and power producers that emit more than 600kg of CO2/MWh.
JP
Morgan JPMC will not provide project financing or other forms of asset-‐
specific financing where the proceeds will be used to develop a
new greenfield coal mine.
AXA
In May 2015, AXA decided to divest from the companies most
exposed to coal-‐related activities. The divestment concerns
electric utilities and mining sectors deriving over 50% of their
turnover from coal combustion / coal mining.
Portfolio Decarbonisation is the process through which financial institutions reduce portfolio exposure to GHG-‐
emissions and align their portfolios with the climate economy of the future (ICC 2017). This concept can may integrate
elements of two general objectives financial institutions are pursuing: i.) risk/return management through the
reduction of the exposure to GHG emissions; and ii.) contribution to policy goals related to the aim to align portfolios
with the real economy. This interpretation can however change from one investor to another. Portfolio
decarbonisation implies an initial first step of determining a ‘starting point’ to understand the current situation,
generally accomplished by measuring the carbon footprint of the portfolio, followed by the initiation of climate
actions (e.g. divest/invest, shareholder engagement).
Below are a few examples of investor’s practices/initiatives:
Initiative
Mirova Mirova offers three specific funds that are dedicated to
decarbonisation, its Global Energy Transition Fund (equity)
which only invests in companies providing solutions to the
energy transition issue, its Green Bond fund and Mirova
Eurofideme 3, a fund dedicated to renewable energy
infrastructure.
7
Below are a few examples of financial institutions’ practices/initiatives (Cont.) :
Initiative
Ciasse des
dépôts Group The Group set a carbon footprint reduction goal of 20% per
thousand euros invested in all its directly held listed equity
portfolios from 2014 to 2020. From 12/2014 to Dec. 12/2016
the carbon footprint of its portfolio has reduced by 27%. The
reduction is due to reallocations within the portfolio and to a
reduction in GHG emissions from companies.
Shareholder Engagement refers to financial institutions’ encouragement of companies to reduce GHG emissions,
developing CAPEX plans aligned with a 2°C goal and improving practices on climate-‐risk assessment and scenario
analysis and disclosure, among others. As in the case of divestment, shareholder engagement actions can be driven
either by the objective to manager risk exposure or the objective to contribute to the Paris agreement by reducing the
investees GHG emission levels. Due to the different pathways of engagement (e.g. one-‐to-‐one dialogue, collaborative,
AGM), both individual and cooperative initiatives on engagement can be numerous, however, the review showed that
disclosure of individual engagement activities is not a common practice.
Below are a few examples of financial institutions’ practices/initiatives:
Initiative
APG
Asset
Management
/
Stichting
Asked the Chinese wind energy company Longyuan to
Pensioenfonds
ABP
(ABP)
reconsider its coal activities (about 10% of total turnover) and
investigate whether a complete transition to renewable energy
would be more attractive
Transition
Pathways
Initiative Provides data on how future carbon performance would
compare to the international targets and national pledges made
as part of the Paris Agreement for use in investment decisions
and engagement
Aiming
for
A Investor
coalition
undertaking
engagement
with
the
ten
largest
UK-‐listed
extractives
and
utilities
companies
Climate Lobbying is the act of attempting to influence companies, governments and policy makers to create
legislation or conduct activities that support the fight against climate change. Climate lobbying can be both a
cooperative practice and an individual one, however, there is much more evidence on cooperative efforts that
individuals. This is partly due to the confidential nature of climate lobbying and the limited regulations on disclosure.
Below are a few examples of investor’s practices/initiatives:
Initiative
Global
Investor
Statement
on
Climate
Change Call on governments to develop an ambitious global agreement
on climate change by the end of 2015 to give investors the
confidence to support and accelerate the investments in low
carbon technologies, energy efficiency and climate change
adaptation.
PRI
Investor
Working
Group
on
Corporate
The group is focused on inconsistencies between companies’
Climate
Lobbying public positions and those of the trade associations which they
support, as well as inconsistencies between policy positions and
policies to limit warming to 2 degrees Celsius.
IIGCC
Initiative
on
EU
Company
Climate
IIGCC coordinated a letter on behalf of 51 investors from 8
Lobbying countries representing over 4.4 trillion in AUM which asks
companies about their positions on investor-‐agreed climate
policy issues in relation to their business strategy and how they
ensure alignment between their stated positions and lobbying
practices.
8
1.3 CRITICAL
ANALYSIS
As described in 1.1, the previous section summarizes the concepts as they are presented by investors and banks,
irrespective of their relevance or the consistency of their application. This section provides a critical analysis
of investor’s practices based on the evaluation criteria of the International Award on Investor’s Climate-‐related
Disclosures. A focus is given to the best-‐practices.
The
review
shows
that
financial
institutions
actions
fundamentally
pursue
two
climate-‐related
objectives
through
their
investments
and
lending
activities:
• Managing climate-‐related financial risks and opportunities relates to the evaluation of financial risks associated
with the materialization of climate change and the transition to a low-‐carbon economy, and the strategies needed
to avoid or minimize the negative impact of such risks on the portfolio;
• Contributing to climate goals relates to the objective of reducing greenhouse gas (GHG) emissions to support the
transition to a low-‐carbon economy and the objectives of the Paris Agreement; and
While the objectives for pursuing climate-‐related actions are in general disclosed by investors, the disclosure on the
process carried out to pursue these objectives shows some inconsistencies. Most investors tend to use metrics to set
targets that are not directly linked with their objective. This is turn, creates a disconnection between the actions taken
to achieve the target, the way its results are going to be measured and the way to track progress on the target.
A more consistent process to pursue these objectives, could potentially include: i. the identification of the available
climate-‐related actions (e.g. portfolio construction, engagement) that are consistent with the objective; ii.the
definition of KPIs that will allow the for measurement of results of the action; iii. setting a target based on the
relevant actions and measuring its progress. This process was however not observed in current disclosure.
To highlight the caveats that might be preventing financial institutions from adopting a better structured process, we
present here a critical analysis of the concepts and their integration in the investment process by building on the
criteria developed by the French government and 2Dii to assess the best practices of climate disclosure in the context
of the implementation of the Article 173 of the Energy Transition Law on mandatory climate disclosure for investors
and banks (2ii 2015d, 2016b).
Table
1
(Cont):
Analysis
of
current
disclosure
practices
based
on
the
evaluation
criteria
of
the
2°C
Award
(Source:
Authors)
PROCESS CRITERIA PRACTICES CAVEATS
Definition of the ”A detailed description Best practice •By definition, contributing to the
“starting point” of of the depth of the methodologies for Paris agreement is a dynamic concept
an investor whose analysis, the defining the starting that requires understanding the
objective is to shortcomings of the point include the use of
starting point, meaning how
contribute to the methodology, and the the 2°C portfolio check well/poorly the investor is situated
Paris Agreement data granularity and (2ii 2015b) or the Trucost
with respect to the climate goals, and
uncertainty is Energy Mix indicators deciding on the climate actions that
provided. A plan to (ERAFP 2017). are more likely to have an impact in
address them is the real economy. Thus, this starting
communicated” Some other investors are point should be able to inform on the
(Criteria 2.1.2) either using green/ investor’s ‘alignment’ with the climate
brown share metrics goals.
“The entity discloses a from data providers (e.g. •Both best practice methodologies
quantitative FTSE Russel, inform on the exposure to activities
assessment of the Morningstar) or using an that are ‘misaligned with the climate
misalignment with in-‐house taxonomy. Few goals’, enabling an understanding of
targets and precisely other investors use the the current situation.
identifies the hotspots carbon footprint results •The other methodologies used (e.g.
and actions required” to define the starting green/brown, carbon footprint) do
(Criteria 2.1.2) point. not consider a 2°C benchmark,
therefore they do not allow us to
understand the investor’s current
situation.
9
Table 1 (Cont): Best-‐practices on the disclosure of the landscape report concepts based on the evaluation criteria
of the 2°C Award (Source: Authors)
PROCESS CRITERIA APPLICATION CAVEATS
Definition of the “The method and Among the best-‐practice •The methodology used to define the
“starting point” indicator used directly methodologies investors starting point should account for the
of an investor inform the value at use the Mercer TRIP model materialization of risks related to
whose objective risk for the portfolio, to assess the exposure to either transition or physical or both
is to manage regarding both ET risks physical and transition risks types of risks (depending on the type
climate-‐ related and physical risks” across asset classes and the of investor). This requires the use of
risks (Criteria 2.3.1)… “The Moody’s environmental scenarios or scenario parameters
value at risk disclosed heat map to assess the (e.g. commodity prices) that model
is based on a clearly exposure to transition risks the economy’s situation under
defined adverse across sectors in their fixed climate stress.
scenario, precise and income portfolio. Other •Best practice methodologies account
consistent with the practices include the for this by indicating the exposure of
investment horizon of assessment of a single risk the portfolio/assets in some form of
the assets and e.g. carbon prices or value at risk. These methodologies
portfolio” (Criteria windstorm events. may however present caveats around
2.3.2)… “The entity the time horizon considered and the
states that the Some other investors use usability of the results for portfolio
financial analysis is the results of the carbon construction or even engagement
based on issuer by footprint and compare their activities.
issuer” (Criteria results against the market’s •Other methodologies used, such as
2.3.4)… benchmark. the carbon footprint, do not assess
the investees’ exposure to market,
policy and technology factors related
to the transition. Furthermore, the
metric does not inform us about the
investor’s financial risks associated to
their portfolio composition.
Target
setting
”The
entity
discloses
a
Investors
are
setting
two
•Neither
green
share
targets
nor
comprehensive
set
of
types
of
targets:
i.)
emissions
can
be
directly
related
to
targets,
based
on
a
“qualitative”
targets
on
the
climate
targets
as
current
robust
methodological
alignment
of
their
portfolio
methodologies
do
not
allow
the
approach
(i.e.
with
a
2°C
scenario
or
the
quantification
of
green
investment
consistent
with
the
decarbonisation
of
their
levels
or
the
share
of
the
carbon
Paris
Agreement
portfolio.
ii.)
“quantitative”
budget
needed
to
achieve
the
Paris
goals”.
(Criteria
2.2.1.) targets
expressed
in
the
Agreement
goals.
SBTI
is
currently
unit
of
measurement
(e.g.
working
towards
a
methodology
for
“The
target
is
defined
TWh,
returns,
CO2)
of
the
financial
institutions (see
page
18).
in
such
a
way
that
its
metrics
used
to
define
the
•This
limitation
however
does
not
achievement
starting
point.
prevent
financial
institutions
from
necessarily
leads
to
defining
actions
that
can
support
quantifiable
additional
The
review
showed
that
no
their
objective(s).
The
review
showed
reductions
of
GHG
investor
is
currently
setting
that
investors’
practices
on
this
emissions
in
the
real
“quantitative”
targets
aspect
present
inconsistencies.
This
is
economy,
directly
based
on
best-‐practice
because
in
some
cases
one
action
can
triggered
by
the
metrics,
thus
here
we
will
be
used
to
address
either
or
both
actions
of
the
focus
on
highlighting
the
objectives.
However,
the
analysis
of
investors.
The
target
is
caveats
associated
with
the
results
of
the
actions,
or
the
KPIs
benchmarked
to
targets
set
based
on
the
measuring
the
results
of
the
actions
international
and/or
results
of
less
suitable
should
be
objective-‐specific.
In
this
national
climate
methodologies.
These
way
it
is
possible
to
determine
that
targets…”
(Criteria
targets
are
generally
set
in
the
action
carried
out
is
actually
2.1.3)
the
form
of
green
share
or
supporting
the
achievement
of
the
emissions
reduction
target.
targets.
10
Table
1
(Cont):
Best-‐practices
on
the
disclosure
of
the
landscape
report
concepts
based
on
the
evaluation
criteria
of
the
2°C
Award
(Source:
Authors)
PROCESS CRITERIA APPLICATION CAVEATS
Execution of ”The description of Climate actions generally •There are several
climate actions engagement activities refer to portfolio inconsistencies when investors
describe the level of construction and disclose their climate actions.
support brought to engagement actions: These inconsistencies do not only
relevant bilateral concern the relevance of the
engagement, investor •Portfolio construction actions (see above) but also the
support for external relates to the re-‐allocation KPIs or other metrics used to
resolutions and projects of of investments that can measure the results of the
resolution, the leadership impact the cost and actions. Inconsistencies on the
of the investor in initiating availability of capital of KPIs or metrics used are present
resolutions, the positions low/high-‐carbon intensive due to the lack of metrics which
adopted, questions asked companies, projects or are both relevant, and
in AGMs and the impact on assets. The actions sufficiently well-‐adapted to each
the companies’ decisions considered in the review type of action and to the
and plans. Where no are green investments, overarching climate objective.
impact has occurred, a portfolio decarbonisation •Most financial institutions use
description is provided on and divestment/exclusion. exposure metrics (e.g. green
why the assets are kept •Engagement relates to share, carbon intensity) to
even if the company the process of influencing measure their contribution to
strategy is not in line with corporate behavior and climate goals, however, these
the required changes.” capital allocation decisions metrics do not communicate
(Criteria 2.1.3) of investees. The actions changes in the real economy.
considered in the review Likewise, financial institutions
NB: The criteria of the are shareholder use exposure metrics to measure
award assess the engagement. the change in carbon-‐related
disclosure of engagement risks associated with their
actions, they do not assess Climate lobbying is not climate actions, however these
disclosure on portfolio considered here as impact metrics do not capture the
reallocation actions. is difficult to measure due changes in technology, policy
to the involvement of and market prices that will affect
multiple stakeholders (e.g. the investor’s financial exposure.
investees) and the lack of
publicly available
information on their
actions.
11
2 1
REVIEW
OF
EXISTING
STANDARDS
Overview
In order to support climate-‐related activities amongst various stakeholders, there are a number of ongoing
standardization processes. In general, these processes fall into two main categories: the development of framework
standards and the development of disclosure guidance and frameworks. The focus of this section is fourfold:
• to review the supply of climate-‐related and broader ESG frameworks that integrate climate issues;
• to identify the coverage of the concepts/’buzzwords’ financial institutions include in their narrative;
• to identify the gaps presented by the most relevant standards; and
• to identify sources of improvement and prioritize options for standardization moving forward.
Table 2 provides a high-‐level summary of the standards and disclosure frameworks reviewed, and it relation with the
concepts identified in section 1 (see page 5-‐8). The colour coding is as follows: green for no use of concepts, yellow for
use of one or two concepts and red for use of three or more concepts.
The review showed that most frequently-‐addressed concepts are climate risk assessment and green investments.
These two concepts are however addressed in different forms with frameworks including either a quantitative or a
qualitative assessment of climate-‐related risk and green investments being considered as a subset of environmental
investments. It was found too that there are more disclosure frameworks than standards covering multiple topics,
however, such frameworks present a significant trade-‐off between the scope of topics included and granularity of the
disclosure and related guidance.
Table
2:
Overview
of
overlap
between
landscape
review
concepts
and
concepts
in
relevant
standards
and
initiatives
(Source:
authors)
Name
of
standard/initiative Concept
addressed
ISO
14007-‐ Environmental
management:
Determining
environmental
costs
and
benefits-‐Guidance
ISO
14008-‐Monetary
valuation
of
environmental
impacts
and
related
environmental
aspects:
Principles,
requirements
and
guidelines
ISO
14080-‐Greenhouse
gas
management
and
related
activities:
Framework
and
principles
for
methodologies
ISO
standards
on
climate
actions
ISO
14090-‐Framework
for
adaptation
to
climate
change
Principles,
requirements
and
guidelines
ISO/NP
14030
Green
Bonds
-‐ Environmental
performance
Green
investment
of
nominated
projects
and
assets
NWIP
Green
Finance:
Assessment
of
Green
Financial
Green
investment
Projects
GHG
Protocol
Portfolio
decarbonisation
ORSE – Carbon
footprint
sector
guidance Climate
risk
assessment
Green
investments,
climate risk
CICERO
assessment
Natural
Capital
Coalition
-‐ Financial
sector
supplement Climate
risk
assessment
Climate
risk
assessment,
Portfolio
Carbon
Initiative divestment,
shareholder
engagement
Other
Organizations Science
Based
Target
Initiative Assessment
of
alignment
EC
High
Level
Expert
Group
-‐ Green
Bonds
Standard
Green
investment
GRESB
Real
Estate
Assessment
Climate
risk
assessment
China
Green
bond
regulation Green
investment
Climate
Bonds
Standard Green
investment
IFIs
framework
for
Green
Gas Accounting Climate risk
assessment
Climate risk
assessment
EIB
Environmental and
Social
Handbook
Green
investment
12
Table
2
(Cont.):
Overview
of
overlap
between
landscape
review
concepts
and
concepts
in
relevant
standards
and
initiatives
(Source:
authors)
Name of standard/initiative Concept addressed
CDSB Reporting Framework
Green
investments,
Standardisation
GRI-‐ Financial
Sector
guidance Shareholder
engagement
Organizations
Climate
risk
assessment,
green
SASB
Financial
Supplement investments,
shareholder
engagement
Climate
risk
assessment,
green
investments,
shareholder
AODP
Survey engagement,
climate
lobbying,
Non-‐Profit divest/exclude,
portfolio
decarbonisation
Climate
risk
assessment
and
CDP
Climate
Change
Questionnaire
climate
lobbying
Climate
risk
assessment,
Task
Force on
Climate-‐related
Financial
shareholder
engagement,
Disclosures
portfolio
decarbonisation
JSE
Socially
Responsible
Investment
index
Disclosure
Singapore
Exchange
Ltd.,
Policy
Statement
on,
Frameworks Industry and
Guide
to,
Sustainability
Reporting
for
Listed
Companies
Green
Bond
Principles Green
investments
BM&FBOVESPA Corporate Sustainability Index
(ISE)
Climate risk assessment, green
investments, shareholder
Article 173 of the French Energy Transition Law engagement, divest/exclude,
assessment of the alignment to
climate goals
Climate risk assessment,
Policy makers shareholder engagement,
and regulators International Award on Investor Climate-‐related assessment of the alignment to
Disclosures climate goals, Green
investments, portfolio
decarbonization
US SEC Commission Guidance Regarding
Climate risk assessment
Disclosure Related to Climate Change
NAICS Insurer Climate Risk Disclosure Survey Climate risk assessment
13
2.1 ISO STANDARDS
The urgent call for organizations to act on climate change and the increasing number of climate-‐related activities
being undertaken by organizations imperatively calls for more standardization. To address this need, several ISO
standards are currently under development. The following tables summarizes the climate-‐related focus of the
relevant ISO standards in relation to the concepts identified from financial institutions’ narratives in section 1 of this
report.
There are however other ISO standards not described here that could be used to draw inspiration from in terms of
definitions and principles to be used in the ISO 14097. This is the case of ISO 14064-‐1 on general rules on carbon
accounting, ISO 14064-‐2 on the definition of emissions reductions, ISO 14067 on the carbon footprint of products, ISO
14026 on environmental communication for rules to prevent greenwashing and ISO 31000 on risk management.
The ISO standards analysed here have distinct scopes in the provision of guidance to cater to climate change efforts.
In general, these standards are more focused on companies’ direct impacts on climate change or broader sustainable
development goals, with the exception of the ISO 14030 on Green Bonds, thus not covering financial actors across the
investment chain.
The standard provides a framework to determine the monetary values of environmental
ISO 14008 – aspects (i.e., natural resources use and releases) and impacts (i.e., impact of 1kg of CO2
Monetary valuation emitted on health, the built and natural environment) resulting from an organization’s
of environmental activities. A number of monetization methods are included for all types of
impacts and related environmental impacts; this is not mitigation or adaptation specific.
environmental
aspects: Principles,
requirements and The standard does not cover any of the concepts identified. This standard could be used
guidelines (under to assess the level of “greenness” of a company and potentially its “climate friendliness”
development) provided it is jointly used with guidance defining green activities.
The standard provides a framework to establish approaches and processes to identify,
assess, revise, develop and manage methodologies that reduce current and/or future
ISO 14080 -‐ climate change risk, with a focus on GHG-‐related methodologies. The standard defines
Greenhouse gas climate actions as any initiative to achieve climate change measures or goals based on
management and mitigation and/or adaptation priorities under climate change policies. Financing
related activities: institutions (if applicable) should test the applicability of new methodologies developed
Framework and to assess climate actions and their role in the deployment of resources in a way that
principles for supports cost effective and potentially efficient mitigation or adaptation.
methodologies on
climate actions (under
development) The standard does not cover any of the concepts identified. It has a focus on direct
actions made by the company thus its application for financial institutions is limited to
operational issues.
The standard provides guidance on the integration of adaptation to climate change
within or across organizations, understanding vulnerabilities and uncertainties. It
ISO 14090 -‐ includes assessment of the exposure of operations and activities to climate hazards,
Framework for including sensitivity analysis of operations, and assessment of an organization’s ability
adaptation to climate to cope with climate related hazards (adaptive capacity).
change Principles,
requirements and
No direct overlap was identified, as the standard focuses on companies’ direct exposure
guidelines (under
development) to climate risks. The standard would be of particular value to funding organizations such
as financial institutions and insurance firms by providing assurance that adaptation
investments meet a robust standard of quality.
14
The standard will aim at harmonising multiple green bond definitions and the
EXECUTIVE SUMMARY principles followed in the specification of requirements for nominating projects and
assets for funding, including the eligibility, use of proceeds, disclosure requirements
ISO/NP 14030 Green and description of assurance options. It aims at defining the assessment and
Bonds – description of the environmental benefits associated with green bonds. The potential
Environmental main users of the standard are issuers of debt obligations but the disclosure associated
performance of might be used as well by any financial institution or analyst.
nominated projects
and assets (under ISO/NP 14030 integrates the concept of green investments. It does not aim at refining
development) the concept of “green” but rather at developing a framework to promote investments
in the green bond market. At the time of the drafting of this report, there is no
evidence that an intended objective of this standard is to support investors’ risk or
contribution actions.
This
new
work
item
proposal
(NWIP)
proposed
by
the
Standardization
Administration
of
China
aims
at:
• providing
a
universal
definition
and
classification
of
green
financial
projects
based
on
international
consensus
and
best
practices;
and
• providing
a
comprehensive
framework
for
assessing
green
financial
projects.
NWIP
Green
Finance:
Its objective is to enable a better allocation of financial resources, risks management,
Assessment
of
Green
evaluation of progress, understanding of impact and communication of information
Financial
Projects about green projects.
The NWIP on green finance notably integrates the concepts of green investments. It
not only aims at developing a green taxonomy but also at defining the impact of the
investments’ underlying projects. The standard however does not plan to assess the
impact of financial instruments.
The standard offers organizations guidance on determining, and communicating, the
ISO 14007-‐ environmental costs and benefits (covering both non-‐monetary and monetary terms)
Environmental associated with their environmental aspects. Climate change is one of the impacts to
management: be quantified. The provisions include benchmarking impact relative to a reference (e.g.
Determining carbon dioxide for global warming).
environmental costs
and benefits-‐Guidance The standard does not cover any of the concepts identified. The usefulness of the
(under development) standard’s reporting provisions for financial analysts is limited as companies can
choose the environmental impacts to report on.
15
2.2
OTHER
ORGANIZATIONS’
STANDARDS
Several other organizations beyond ISO are working towards the standardization of investor practices on climate
change. The scope of each organization varies, with some starting to work on company standardization and
subsequently producing additional documentation for financial institutions. Others are dedicated only to defining
standards for the financial sector. This standards are then more targeted and thus integrate at least one of the
concepts identified in the landscape review.
The GHG protocol developed one of the most important carbon accounting standards
for direct (scope 1 and 2) and indirect (scope 3) emissions. The Corporate Value Chain
Standard on scope 3 emissions provides guidance on accounting and reporting of GHG
EXECUTIVE
SUMMARY emissions from equity and debt investments and project finance. The standard
however was not a success among financial institutions due to the lack of more
detailed guidance on the accounting of emissions. In order to overcome the confines
of the Corporate Value Chain Standard, the GHG Protocol, together with UNEP FI
launched in 2014 the Financed Emissions Initiative. This initiative, however, was not
GHG
Protocol successful in standardizing carbon accounting rules due to the lack of sufficient
understanding and consensus on the most meaningful, practical and actionable climate
metrics.
The standard is related to the concept of portfolio decarbonisation as, from a
conceptual point of view, the first step towards decarbonizing a portfolio is to measure
the carbon footprint. This standard is not yet developed but it is worth considering as
it has been one of the most important efforts made towards the harmonization and
comparability of GHG accounting of investment portfolios.
Developed by the French Observatory on Corporate Social Responsibility (ORSE), the
guide aims at helping financial institutions to gain a better understanding of how issues
relating to climate change affect it and the need to quantify the Greenhouse Gas
EXECUTIVE SUMMARY Emissions from its operations. A range of approaches are recommended in this guide
according to the specific features (and objectives) of the financial institutions. The
guide:
-‐ Defines the general principles for quantifying GHG emissions (scope 1, 2, 3,
ORSE – Carbon excluding financed emissions);
footprint sector -‐ Offers methodological recommendations for quantifying the emissions financed by
guidance their activities (Scope 3 – category 15 ‘Investments’); and
-‐ Contribute to the emergence of shared methodological principles at European and
International level.
The guide touches upon the concept of climate-‐related risk by referring to the
methodology proposed as a “first step towards having access to the strategic tools for
measuring climate and carbon risks”. It gives a particular focus to the country risks
related to the location of the assets being financed (i.e. not the institutions)
The assessment is the global standard for ESG benchmarking and reporting for listed
property companies, private property funds, and investors that invest directly in real
estate. It assesses performance against 7 sustainability aspects, including the risks and
opportunities associated with investments. Among the climate-‐related risks it includes
GRESB
Real
Estate
climate change adaptation and natural hazards. At the time of this review access to the
Assessment
ESG scorecard was not granted, this the visibility on the requirements is limited.
The assessment notably integrates the concept of climate-‐related risks, specifically the
exposure to physical risks, as part of its ESG framework. Visibility on the assessment
process is limited due to the lack of public documentation.
16
The Initiative launched by UNEP FI, WRI and 2° Investing Initiative emerged as a second
EXECUTIVE
SUMMARY step of the Financed Emissions Initiative to develop alternative metrics for financial
institutions. PCI has two goals:
i.) provide guidance on how to define, assess, and track climate performance for asset
owners and banks; and
ii.) provide guidance on how to identify, assess, manage, and track GHG-‐related risks
(recently renamed transition-‐risks) for financial institutions.
The initiative has produced a conceptual framework on transition risks assessment and
management (WRI/UNEP FI 2015) and a framework for defining and measuring the
“climate friendliness” of portfolios(2ii 2015c).
The carbon asset risk framework provides key elements to consider in the
identification, assessment of exposure, evaluation of financial impact and management
of risks. The framework describes:
• the risk factors affecting investees and consequently the factors affecting financial
intermediaries and investors. It examines risk factors such as policy and legal,
technology, market and economic, and reputational;
• the differences between factors affecting the exposure to transition risks. It analyses
differences across sectors and companies’ business models including differences in
physical assets and operations as well as differences in the financial instruments (i.e.
Portfolio
Carbon
investments or loans) providing financing to companies; and
Initiative
• the processes to follow in the assessment and management of transition risks. It
includes avenues for the evaluation of risks, data needs, use of scenario analysis, and
risk assessment models. In addition, it addresses the pathways to manage transition
risks of new and current investments for financial intermediaries and investors.
The framework for defining and measuring the “climate friendliness” of portfolios
defines “climate friendliness” as the intent to reduce GHG emissions and aid the
transition to a low-‐carbon economy through investment activities. The framework:
• defines and analyses the conceptual and operational differences between the
objectives pursued by investors actions on climate change, namely climate
friendliness and carbon risk;
• defines avenues for investors to increase their climate friendliness by asset class and
achieve a positive climate impact, defined as GHG emissions reductions in the real
economy through positioning and signaling; and
• assesses the landscape of available metrics and their suitability for different climate
strategy.
For more specific information on PCI’s frameworks refer to Annex 3.
The initiative is focused on one of the main concepts of the landscape review, namely
climate-‐risk assessment. In addition, it highlights the concepts of divestment and
shareholder engagement as the actions to be undertaken in other to manage risks.
SBTI was launched by CDP, WRI, WWF and UNGC. It defines, guides and promotes
science-‐based target setting from companies. The aim of the initiative is to establish
target setting as a standard business practice by 2020. So far 297 companies have
joined the initiative of which 65 have approved science based targets. The initiative
proposes several methods for target setting, two of which are based on an approach
that allocates the respective share of an estimated carbon budget in a 2°C world to a
Science
Based
Target
company based on a sectoral or economic allocation. The initiative is currently
Initiative
exploring how to extend the methodology to investment and lending portfolios.
The initiative can be associated with the concept of assessment of the alignment with
climate goals, as it defines the trajectory of carbon emissions that a company should
follow under a 2°C scenario. Deviations from the target or the target’s pathway would
imply a misalignment with respect to the 2°C benchmark.
17
The financial sector supplement of the Natural Capital Protocol, currently under public
consultation, provides guidance on i.) identification of natural capital-‐related risks and
opportunities; ii.) definition of the objective(s) and scope of the analysis (e.g.
shareholder engagement, assessment of portfolio risk and opportunities); and iii.)
measurement and valuation of natural capital. The valuation techniques of natural
Natural
Capital
capital include qualitative, quantitative, monetary and value transfer. Thus, the
Protocol’s
Finance
supplement does not intend to standardize the use of value at risk nor the
Sector
Supplement
– methodologies but rather to provide the basic principles needed in the calculation such
Natural
Capital
as the baselines, time horizons, spatial boundaries etc.
Coalition
The standard integrates the concept of climate-‐related risks assessment while focusing
on a broader set of risks: natural capital risks. The standard does not prioritize the types
of risks (physical or transition) that financial institutions should consider, rather it leaves
open the option to financial institutions to address the risks that are material to them.
The Standard’s objective is to provide the green bond market with the trust and
assurance needed to scale up the market. It standardises: i. Mandatory requirements in
the use of proceeds, their tracking and management, and reporting prior and post
issuance; and ii.) The eligibility criteria for projects and assets. CBI provides a taxonomy
Climate
Bonds
of investible areas (also referred to as a “Green taxonomy”) and additional screening
Standard
and
criteria for some technologies (e.g. solar, wind) within a sector (e.g. power).
Certification
– Climate
The Standard is aligned with the recommendations of the Green Bond Principles (see
Bonds
Initiative page 23).
The Standard is associated with the concept of green investment as its overarching
objective is to allow financial institutions and governments to screen and prioritize
investments in climate and green bonds under good conditions of assurance.
In July 2017 the HLEG on Sustainable Finance published its early recommendations to
create a financial system that supports sustainable investments in Europe. Among its 8
recommendations, there is one that has been signalled as one of the priorities moving
Green
Bonds
Standard
forward: the development of an European Standard and label for green bonds. The
and
label
main driver of this recommendation relates to the need to spur green bond market
recommendation
-‐ growth through official European standards. The successful implementation of the
European
Commission
recommendation will be backed by the already developed standards and principles on
High
Level
Expert
green bonds (see page 23) and the French TEEC label for investment funds.
Group
on
Sustainable
Finance
This standardization initiative is notably related to the concept of green investments.
The development of the standard and level will include among other things the
definition of “green” at European level. Since it is an early recommendation, visibility of
the integration of other concepts identified in the landscape review is limited.
The IFI’s framework sets out a common approach of accounting and reporting of GHG
emissions. It includes guidance on the use and reporting of GHG accounting
methodologies (e.g. GHG Protocol, Clean Development Mechanism methodology, etc)
International
Financial
including the output indicators used, baselines, boundaries and scope of emissions
Institution
Framework
considered. Specific guidance for GHG accounting of energy efficiency and renewable
for
an
harmonized
energy projects has been developed by IFI. The financial institutions following the
approach
to
framework are AfDB, AfD, ADB, EBRD, EIB, GEF, IDB, KFW, NDF, NEFCO, and WBG.
Greenhouse
accounting
The framework does not directly communicate the concepts reviewed. However, since
GHG emissions are used for the appraisal of projects, it could be indirectly related to
climate or broader environmental risks assessment. This however depends on the
bank’s communication strategy.
18
The guidelines define green bonds as a corporate bond through which fundraising is
aimed at supporting green projects. The green projects taxonomy used is the one
defined by the Green Finance Committee. The guidelines require a commitment letter
to the CSRC relating to the green attributes of the issuance and prohibit the issuance of
China
Securities
green bonds by non-‐green issuers (e.g. oil companies) although exceptions can apply.
Regulatory
The guidelines recommend that issuers disclose the environmental impacts or benefits
Commission
– Green
associated to the bond. These guidelines apply to listed companies. Issuance of green
Bonds
Guidelines
bonds by financial entities are regulated by China’s central bank.
The guidelines address the concept of green investments though the use of the green
projects taxonomy developed by the Green Finance Committee.
EIB Handbook provides guidelines on the assessment and management of
environmental and social impacts and risks. The guidelines cover EIB’s internal policies
as well as those needed to be followed by banks, fund managers, and project promoters
that collaborate with EIB. The guidelines include a climate-‐related standard that
comprises EIB’s policy, its policy in practice and the requirements of banks, fund
managers and project promoters. The policy requires its financing to be aligned with EU
climate policy. This is done through:
• Assessing and reporting the carbon footprint of financed investment projects the
annual aggregate GHG emissions and savings.
• Reflecting the value of carbon – both financial and economic – in its financing
decision-‐making requirements and processes. The carbon price varies from 30 to 50
EUR depending on the project’s timeline.
European Investment
Bank -‐ Environmental • Including Key Performance Indicators for the Corporate Operational Plan with
and Social Handbook currently an annual percentage target for lending of at least 25% based on a
consistent set of definitions regarding climate action projects.
• Assessing carbon credits potential
In the appraisal of financial intermediaries, EIB assesses banks and fund managers on
their capacity to on-‐lend funds in line with the climate standard. EIB requires financial
intermediaries to apply the same eligibility criteria for global loans or equity/debt funds
dedicated to renewable energy, energy efficiency or climate action.
The EIB handbook guidelines refer to two concepts identified: climate-‐related risk
assessment and green investments. The climate-‐related risk assessment concept is
addressed in the integration of a carbon price in the project’s appraisal while the green
investments concepts is partially addressed through their lending target on “climate
actions”.
19
2.3
DISCLOSURE
FRAMEWORKS
STANDARDIZING
DISCLOSURE
PRACTICES
Disclosure is the aspect most addressed by standardization initiatives and frameworks, with standardization
organizations, non-‐profits, industry, policymakers and regulators developing and promoting multiple frameworks.
Disclosure on climate issues is currently prescribed in broader ESG disclosure frameworks and climate-‐related
frameworks for companies and financial institutions or only for financial institutions. Of the 14 disclosure frameworks
reviewed, 11 cover all types of industries and only 3 are financial sector-‐specific.
Contrary to process-‐based standards, which tend to focus on one standardization topic or process (e.g. methodologies
to define the starting point, to set targets etc.), disclosure can focus on multiple processes. In the latter case,
disclosure can either complement standards or focus on topics that have not yet been standardized.
2.3.1 FRAMEWORKS FROM STANDARDIZATION ORGANIZATIONS
SASB’s supplement is financial institution-‐specific. It recommends to describe the
process for identifying and assessing climate-‐related risks as well as other sustainability-‐
related risks in order to identify the industries and geographies in a portfolio that are
EXECUTIVE SUMMARY most exposed to these risks and quantify the risk exposure (e.g. dollar amounts of
investments, changes in cash flow) to these industries. The supplement for commercial
banks/asset managers advises reporting on the amount and percentage of sustainability
themed (incl. climate change) lending and project finance/investments. The guidelines
Sustainability for asset managers advise to disclose the number of proxy votes supporting ESG issues,
Accounting Standard including climate change, and the percentage of shareholder resolutions resulting in
Board -‐ Financial company action. It advises reporting on the ratio of embedded CO2 emissions of proved
Supplement hydrocarbon reserves held by investees based on a standard formula.
The reporting standard integrates three concepts identified in the landscape report:
climate risk assessment by suggesting both a qualitative and quantitative assessment,
green investments by advising the quantification of sustainability/green themed assets
and shareholder engagement through the reporting of proxy voting activities of asset
managers. For more information please refer to Annex 3.
The CDSB corporate reporting framework communicates material climate-‐related
information from companies to financial institutions. Among the disclosure
requirements it includes: management’s strategy to address long-‐ and short-‐term
climate risks and its relation to the future outlook of the organization, and the principles
Climate Disclosure to report on GHG emissions and GHG reduction targets.
Standards Board
Reporting Framework
The standard does not consider any of the concepts identified in the landscape review
as it is refers mainly to company related processes. It is however important to consider
it as its reporting requirements can be useful for future standards on investors’ climate
actions on engagement and divestments/investments.
GRI provides additional guidance for FIs (i.e. asset management, insurance, retail,
commercial and corporate banking) on broader environmental and social (E&S) issues.
Organisations are encouraged to adopt and implement policies to carry out the
assessment of E&S risks and report the percentage of their investment portfolio that
has been designed to deliver a specific environmental or social benefit, the percentage
Global
Reporting
of assets subject to positive and negative E&S screening, and the percentage and
Initiative’s
Financial
number of companies with which engagement on E&S issues has occurred.
Sector
Supplement
The reporting guidance includes climate issues within the reporting of environmental
aspects. It indirectly addresses two concepts identified in the landscape report: green
investments and shareholder engagement. Climate risk assessment is addressed to a
lesser extent as disclosure is focused on the risks of transactions.
20
2.3.2 FRAMEWORKS FROM NON PROFIT ORGANIZATIONS
AODP conducts and publishes the results of an annual survey issued to the world’s 1000
largest asset owners on their management of climate change risks and opportunities.
Investors decide whether they would like to publish their responses, thus limiting the
visibility of investors’ practices. The questions include topics such as the role of climate
strategy and climate risk assessment in governance and management processes. Thus,
investors do not have to disclose the results of portfolio or other investment-‐related risk
assessment but rather describe the process. Regarding risk management, the survey
assesses the internal and external (e.g. with asset managers) processes for managing
climate-‐related risks including the use of scenario analysis, portfolio reallocation
actions, and the availability of their proxy voting record and votes of some specific
Asset
Owners
shareholder resolutions. The survey also includes engagement activities with other
Disclosure
Project
stakeholders such as credit agencies and policymakers. The survey additionally includes
Survey questions on metrics used and results including carbon intensity and reduction targets
as well as assets invested in low-‐carbon solutions. For more information on the specific
questions refer to Annex 3.
This initiative addresses several concepts identified in the landscape review, including
climate risk assessment, shareholder engagement, green investments, climate lobbying,
divest/exclude and portfolio decarbonisation. However, a focus is given to two
concepts: risk assessment and engagement.
The CDP questionnaire is being used by both companies and financial institutions. Its
core elements address climate strategy, level of governance, carbon targets (scope 1
and 2), and climate risks and opportunities. The questions are mainly related to
companies’ direct activities, with no specific questions on financial institution portfolios.
Investors however have the opportunity to additionally disclose information on their
investment-‐related activities. However, the information collected tends to be very
general. Investors can provide information on: i. the process to identify, assess and
Carbon
Disclosure
manage risks (physical and transition) and opportunities, its prioritization and
Project
Climate
integration in business strategy; ii. the engagement activities in climate policy; and ii.
Change
Questionnaire the scope 3 emissions of their investment portfolio. For more information on the
questions through which investors could potentially disclose on their risk assessment
and management processes please refer to Annex 3.
The questionnaire includes two main concepts: the assessment of climate related risk
assessment and climate lobbying. Climate risk assessment can be both qualitative or
quantitative. Reporting on climate lobbying includes the focus of the legislation and the
proposed legislative solution.
2.3.3 INDUSTRY-‐LED FRAMEWORKS
The SRI index assesses company performance in 4 categories: environment, society,
EXECUTIVE SUMMARY governance and related sustainability concerns as well as climate change. The climate
change category requires companies to report their climate-‐related policies, their
Johannesburg Stock
Exchange Socially absolute or normalised GHG emissions, and the long-‐and short-‐term targets on
Responsible emissions reduction.
Investment index
The index does not relate to any of the concepts identified in the landscape report. So
far, disclosures from financial institutions do not concern their investment portfolios.
21
Launched by the International Capital Market Association, the principles provide
voluntary process guidelines that recommend transparency and disclosure in four
priority areas: i.) the use of proceeds; ii.) the process for project evaluation and
selection; iii) the management of proceeds; and iv) overarching reporting principles. The
GBP do not attempt to define “green” nor take a position on what should be considered
as “green”. Thus its criteria only mentions a non-‐exhaustive list of what could be
considered green.
Climate
Bonds
Standard
and
The GBP recommend the use of qualitative performance indicators and, where feasible,
Certification
– Climate
quantitative performance measures (e.g. energy capacity, electricity generation, etc.),
Bonds
Initiative and disclosure of the underlying methodology and or assumptions. It encourages the
monitoring and disclosure of impact. The GBP provides voluntary guidance for impact
reporting for some types of projects (i.e. renewable energy, energy efficiency, water
and wastewater).
The GBP are associated with the concept of green investment as the overarching
objective of the initiative is to drive the growth of the market though improved
transparency.
The sustainability reporting guide encourages the adoption of internationally accepted
Singapore Exchange reporting frameworks, such as the GRI Sustainability Reporting Guidelines, in disclosing
Ltd., Policy Statement the company’s sustainability performance. The guide encourages companies to report
on, and Guide to, business or legal developments related to climate change mitigation or adaptation that
Sustainability may have an impact on the organization. It is thus very general and does not provide
Reporting for Listed details on how this information should be disclosed.
Companies
The guide does not relate to any of the concepts identified in the landscape report.
The 4 core climate-‐related disclosure elements applicable to both companies and
financial institutions of the TCFD recommendations are: i. governance; ii. strategy; iii.
risk management; and iv. targets and metrics. The TCFD also encourages the use of
scenario analysis. Here we will focus on the specific disclosure guidance for risk
management, metrics and targets, and scenario analysis. For the specific
recommendations refer to Annex 3.
Risk management relates to the description of the process for identifying, assessing and
managing climate-‐related risks. Banks should adopt the use of traditional risk categories
such as credit, market, liquidity and operational risk as well as a classification of the
types of risks (i.e. according to their impact potential). Insurance companies should
assess re-‐insurance portfolios including in the analysis the spatial location, business
divisions or product segments. The risks that should be considered relate to physical,
Task Force on Climate-‐ transition and liability risks. Asset owners should describe the engagement activities
related Financial with investees on climate-‐related risks and their portfolio’s positioning in relation to the
Disclosures transition to a low-‐carbon economy. Asset managers should describe the engagement
activities with investees and their process for assessing and managing climate-‐related
risks for each product or investment strategy.
Metrics and targets general recommendations relate to disclosure of metrics used to
assess climate-‐related risks, GHG emissions and targets set to manage climate risks.
Banks should disclose the metrics used in their lending portfolio and other financial
intermediary business. Possible metrics relate to credit exposure or equity and debt
holdings broken down at a relevant granularity (e.g. industry, geography). Banks should
also provide the relative percentage of carbon-‐related assets to total assets, lending and
other financing sources. Insurance companies should provide the aggregated risk
exposure to weather-‐related catastrophes of their property business by jurisdiction.
Asset owners/asset managers should describe the metrics used to assess climate-‐
related risks in each fund/product or investment strategy.
22
Metrics and targets (cont.) The TCFD recommends that asset owners/asset managers
disclose the weighted average carbon intensity for each fund/product or investment
strategy. While the TCFD acknowledges that carbon footprint should not be interpreted
as a risk metric it believes that this is an important first step in disclosure which can help
the development of relevant climate-‐related metrics. Carbon footprint is however not a
good proxy metric due to its backward-‐looking nature. In addition, methodologies
generally do not consider scope 3 emissions, thus disregarding the most relevant
emissions from energy-‐intensive sectors. Carbon footprint (measured as CO2 per $ of
Task Force on Climate-‐ AUM) can also be affected by market cycles, meaning that in a bearish market the
related Financial carbon footprint decreases as the value of companies increases (2ii 2017c).
Disclosures Scenario analysis is recommended to be applied using a 2°C or lower scenario in
addition to two or three other scenarios. Organisations should disclose the scenario
assumptions (e.g. technology changes, input parameters) and the sensitivity,
timeframes and information on the resiliency of the organization.
The disclosure guidelines include three concepts identified: climate risk assessment,
portfolio decarbonisation and shareholder engagement. Recommendations on risk
management are however more precise than in other disclosure frameworks as they
include industry-‐specific risk and most relevant portfolios by type of investor.
Launched by the International Capital Market Association, the principles provide
voluntary process guidelines that recommend transparency and disclosure in four
priority areas: i.) the use of proceeds; ii.) the process for project evaluation and
selection; iii) the management of proceeds; and iv) overarching reporting principles. The
GBP do not attempt to define “green” nor take a position on what should be considered
as “green”. Thus its criteria only mentions a non-‐exhaustive list of what could be
considered green.
The GBP recommend the use of qualitative performance indicators and, where feasible,
Green Bond Principles quantitative performance measures (e.g. energy capacity, electricity generation, etc.),
and disclosure of the underlying methodology and or assumptions. It encourages the
monitoring and disclosure of impact. The GBP provides voluntary guidance for impact
reporting for some types of projects (i.e. renewable energy, energy efficiency, water
and wastewater).
The GBP are associated with the concept of green investment as the overarching
objective of the initiative is to drive the growth of the market though improved
transparency.
23
2.3.4 POLICY MAKERS AND REGULATORS
Article 173 includes provisions on disclosure of climate-‐specific criteria by institutional
investors. Investors should disclose the consideration and assessment of their i.)
exposure to physical and transition risks; and ii.) contribution to the international
climate goals and the energy transition. Examples of indicators to use in the analysis are
the investments in thematic funds, the coherence of CAPEX of issuers with climate
objectives, and past, current and future GHG emissions of investees.
To assess their contribution, investors should set indicative targets that are aligned to a
2°C pathway and measure their progress and deviations. Investors should explain how
these targets are consistent with the French low-‐carbon strategy and the actions taken
to achieve the target. These actions can include engagement with issuers, changes in
Article 173-‐VI French investment/divestment policy or an increase of thematic funds, labelled funds or other
Energy Transition Law relevant assets.
The guidelines of the International Award on Investor Climate-‐related Disclosures (2ii
2016b), an initiative launched by the French Ministry of Environment and the Treasury,
provide a detailed description of what should be considered as best-‐practice reporting
under the provisions of Article 173 (see page 25).
This standardization initiative includes nearly all the concepts identified in the landscape
review, notably the assessment of climate risks, green investments, shareholder
engagement and divest/exclude. It as well includes the concept of alignment to climate
goals in the target setting process.
The survey comprises eight questions that assess insurers’ strategy and preparedness in
the areas of investment, mitigation, financial solvency, emissions/carbon footprint and
engaging consumers. Insurers are encouraged to disclose climate risks as per US SEC
disclosure. For climate-‐related risks, insurers have to consider methods of risk
NAICs
2010
insurer
distribution such as contingency plans to reduce financial leverage and resolve any
climate
risk
disclosure
liquidity issues in the event of a sudden loss in surplus and cash outflows as a result of a
survey catastrophic event, risks assessment or catastrophe re-‐insurance.
NAICs survey integrates the concept of climate-‐related risks assessment, related to the
exposure to physical risks. For more information on the questions refer to Annex 3.
SEC’s guidance is complementary to the Regulation S-‐K. The guidance suggests the
EXECUTIVE
SUMMARY
inclusion of climate related information on four main reporting items of Regulation S-‐K:
i. Item 101 on the description of the business activities and compliance with
environmental regulation and capital expenditures for environmental control facilities;
ii. Item 103 on the administrative or judicial proceedings arising from laws and
regulations targeting discharge of materials into the environment or primarily for the
purpose of protecting the environment; iii. Item 303 relates to disclosure on the
US
SEC
Commission
liquidity, capital resources and operations allowing analysts to understand the known
Guidance
Regarding
trends, events or uncertainties that might have a material effect on the financial
Disclosure
Related
to
performance of the business; and iv. Item 503 on the most significant risk factors that
Climate
Change
make an investment in the company speculative or risky. Disclosure on these items
should consider the impact that climate change might have have on a company’s
business, through changes in legislation and regulation, international accords (e.g. EU
ETS), business trends and physical impacts.
The disclosure guidance on climate change integrates the concept of climate-‐related
risks assessment. The format of the filings however calls for a more qualitative
disclosure.
24
The award was launched in close collaboration with the French Treasury by the French
Minister of Environment and 2°Investing Initiative. It is a voluntary instrument that acts
as guidance on climate-‐related disclosure and an enhancer to current and forthcoming
legislation. It enables governments and regulators to follow and track progress on
metrics and reporting practices, and the overall market uptake. The Award signals best-‐
practice metrics to financial institutions of all sizes, thus increasing accessibility to small
financial institutions.
The evaluation criteria were set up to capture the climate-‐related guidelines provided
International
Award
by in the implementation guidelines of Article 173. Four areas of disclosure were
on
Investor
Climate-‐ identified and assessed through a total of 24 criteria. The four areas are: i.) climate
related
Disclosures strategy, ii.) consistency with climate goals, iii.) exposure to climate risk and iv.)
communication to clients and beneficiaries. To allow for full visibility across practices,
no weighting of the criteria was done. The criteria were submitted for public
consultation and publicly available during the whole application process.
The Award is focused on two of the concepts identified in the landscape review: climate
risk assessment and alignment to climate goals. It however provide provides guidance
on other topics such as shareholder engagement and Green investments.
25
2.4 GAP
ANALYSIS
The previous section summarizes the concepts as they are presented by standards organizations and policy
documents, irrespective of their relevance. In the table below we summarize the items included in the most relevant
and prescriptive guidance documents, by providing the most precise recommendations and highlighting their
constraints or gaps based on a list of standardization topics that could be addressed in ISO 14097. We further assess
the additional work required in order to be able to build on and use these standards and guidance frameworks as a
base for the ISO 14097. For more details on each recommendation please refer to Annex 3.
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC
MOST
PRECISE
RECOMMENDATIONS INCONSISTENCIES STEPS
MOVING
OR
GAPS
FORWARD
MANAGEMENT
Management
processes
Climate-‐related
PCI
Carbon
Asset
Risk
framework
(see
page The
list
of
mitigation
The
WG
would
need
to
financial risks 81): Defines
the
options
for
managing
transition
actions
is
non-‐ fine-‐tune
the
list
of
risks
considering
the
type
of
investor
(e.g.
exhaustive
and
high-‐ mitigation
actions
and
underwriters,
lenders,
shareholders)
and
the
level,
however,
it
build
on
the
investment
type
(new
investments
or
current
provides
a
good
base management
options
holdings).
Among
the
options
for managing
for how
management
to
develop
a
risks,
it
considers
the
promotion
of
risk
strategies
can change
framework
describing
disclosure,
proper
risk
pricing,
thorough
due
across
investors.
The
both
the
standard
risk
diligence,
sectoral
policies,
sector
and
subsector
framework
does
not
management
process,
diversification,
investments
with
ESG
screens,
document
the
and
the
process
to
sector/security
avoidance,
and
engagement
to
process
for
follow
when
understand
risk
management
and
align
risk
and
evaluating
the
impact
measuring
the
actions’
return
perspectives.
of
the
actions.
impact.
The
Natural
Capital
Coalition
Financial sector
The
list
of
mitigation
The
WG
would
need
to
supplement
(see
page
85): The
decisions
to
actions
is
high-‐level. fine-‐tune
the
list
of
manage risks
could
include:
i.
Adjust
sector
or
It
does
not
make
mitigation
actions
to
asset
allocation
in
your
portfolio
to
enhance
risk
distinctions
on
more
climate-‐specific
management;
ii.
Support
certain
sectors
over
differences
across
ones.
A
framework
others
on
the
grounds
of
their
natural
capital
investors.
describing
the
process
impacts
or
dependencies;
iii.
Engage
companies
to
follow
when
or
other
entities
to
take
action
to
minimize
measuring
the
actions’
specific
impacts
or
reduce
specific
impact
also
needs to
dependencies;
and others be
developed.
GHG
emissions
PCI
climate metrics
report
(see
page 95):
PCI
does
not
provide
•Consider more
recent
reduction
The
following
best practices
are
recommended:
guidance
on
the
best
practice
metrics
induced
by
the
-‐ Employ
carbon
footprinting at
portfolio
level
impact
pathways
(e.g. 2°C
portfolio
activities to
understand
broad exposure
across
asset
associated
with
each
check)
relevant in
the
classes.
action,
nor
on
the
target
setting
process.
-‐ Use
a
mix
of
sector-‐specific
metrics
to
inform
KPIs
needed
to
track
•Include
a
list
of
target
setting
in
climate
relevant
industries
(e.g. and
measure
the
climate-‐relevant
set
technology
exposure
targets
for
industries
results
of
the
actions.
actions
and
associated
with
decarbonisation roadmaps).
The
guidance
processes
to
measure
-‐ Select
screening
thresholds
intentionally
(e.g.
:
provides
general
impact,
which
screening
30%
vs.
50%
of
revenues
for
recommendations
on
interacts
with
the
brown/green
activities)
metrics
to
be
used
in
target
setting
and
-‐ Combine
portfolio
construction
activities
with
the
process
of
target
measurement
of
shareholder
engagement
to
influence
investee
setting, but
does
not
progress
process.
capex,
R&D
strategy,
and
GHG
emissions.
provide
a
framework
•Develop
impact
-‐ Prioritize
efforts
in
segments
and
markets
for
for
target
setting
metrics
that
quantify
which
a
small
additional
investment
can
make
a
itself,
meaning that the
additional
or
difference. This
includes
technologies
that
the
application
of
the
incremental
GHG
currently
have
a
large
investment
gap
and
recommendations
emissions
reduction
in
lower
liquidity
asset
classes.
are
limited
in
the
real
economy
due
practice.
to
climate
actions
26
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC
MOST
PRECISE
RECOMMENDATIONS INCONSISTENCIES
STEPS
MOVING
OR
GAPS
FORWARD
MANAGEMENT
Scenario
choice
Scenario
The
PCI
Carbon
Asset
Risk
framework: Both
frameworks
More
specific
guidance
design
process -‐ The
choice
of
scenarios
(and
any
alterations
to
provide
general
on
the
design
and
use
underlying
assumptions)
should
reflect
recommendations
on
of
scenarios
needs
to
perspectives
on
the
most
likely
manner
in
which
factors
to
consider
be
developed.
The
risk
factors
(policy,
technology,
and
market
when
selecting
a
guidance
can
provide
conditions)
will
play
out
over
time.
scenario
including
recommendations
on
-‐The
scenario
should
also
reflect
a
time
frame
the
probability
of
the
relevant
factors
that
is
consistent
with
financial
exposure. occurrence,
risk
(e.g.
assumptions,
-‐ Scenarios
should
account
for
all
current
and
factors,
timeframes
scope,
timeframe,
likely-‐to-‐be-‐enacted
policies
and
commitments. and
macroeconomic
ambition,
uncertainty)
-‐ Assumptions
regarding
demand
can
be
crucial,
assumptions.
More
to
consider
depending
as
they
drive
company
choices
on
potential
specific
on
the
objective
capital
expenditure,
and
form
a
key
input
to
recommendations
on
behind
the
use
of
forecasting
commodity
prices.
these
factors
taking
scenarios.
The
Natural
Capital
Coalition
Financial
sector
into
account
the
type
supplement: of
investor
and
thus
Scenarios
could
consider:
i.
amending
line
items
the
scenario’s
use
in
financial
models
(e.g.,
assuming
the
cost
of
a
case
is
need
in
order
specific
natural
resource
doubles); ii.
altering
to
enable
its
probabilities
(e.g.,
making
certain
scenarios
more
application
by
likely);
iii.
altering
discount
rates
(e.g.,
giving
investors.
greater
weight
to
future
impacts).
Scenario No standard or initiative reviewed covers these topics.
‘translation’
process
Standard
scenarios
DISCLOSURE OF…
Process for AODP survey (see page 86): The survey could be The WG can build on
climate risk The questions include: improved by the list of climate
management -‐ What range of climate change-‐related portfolio providing guidance mitigation actions
risk mitigation actions do you undertake? (e.g. on what is provided by the survey
hedging allocation of low carbon assets to hedge considered as best and define a list of
against high carbon stranded assets, negative practice. The climate-‐related actions
screens (or positive inclusion criteria) on selected granularity of the relevant to the
investment options). survey questions investors’ objectives.
-‐ What percentage of your total portfolio is could be improved. In terms of disclosure,
invested in high carbon and/or emissions-‐ This can be done by the WG could use the
intensive sector assets? asking more specific survey’s climate action
-‐ Do you identify, disclose and quantify your questions on the related questions and
investments in low carbon assets? analysis carried out improve its granularity
-‐ Have you made a commitment to invest in low and its results, and using the list of climate
carbon assets as part of a strategy to how the results actions mentioned
manage/mitigate climate risk in your portfolio? responded to above. A clear
-‐ Have you successfully engaged with companies differences in distinction between
on climate change related issues over the last exposures at asset reporting on the
year, resulting in demonstrable achievements? class, sector or actions, and reporting
-‐ What were the most notable and demonstrable geographic level. on the impact of the
achievements of your climate change related actions, needs to be
engagement activities in this period? made.
27
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC
MOST
PRECISE
RECOMMENDATIONS INCONSISTENCIES
STEPS
MOVING
OR
GAPS
FORWARD
DISCLOSURE
OF…
Process
for
TCFD
recommendations
(see
page
89):
The
guidance
Moving
forward
the
climate
risk
Insurance
companies
should: provided
by
the
TCFD
WG
could
potentially
management -‐ describe
key
tools
or
instruments,
such
as
risk
on
the
disclosure
of
define
relevant
models,
used
to
manage
climate-‐related
risks
in
the
activities
carried
parameters
enabling
relation
to
product
development
and
pricing. out
to
manage
an
understanding
of
-‐ describe
the
climate-‐related
scenarios
used
in
climate-‐related
risks
the
rationality
behind
the
analysis
of
their
underwriting
activities,
is
very
general.
This
investor
management
including
the
critical
input
parameters,
means
that
a
practices
(e.g.
types
of
assumptions
and
considerations,
and
analytical
comparative
actions,
management
choices.
overview
of
the
processes
and
data
Asset
managers
should:
processes,
actions
needs,
and
exposure
-‐ describe
how
they
manage
material
climate
and
strategies
carried
thresholds).
risks
for
each
product
or
investment
strategy. out
by
financial
The
WG
should
then
-‐ describe
the
engagement
activity
with
investee
institutions
is
not
require
disclosure
companies
to
encourage
better
disclosure
and
clear. based
on
these
practices
related
to
climate-‐related
risk. The
scenario
analysis
parameters.
Asset
owners
should: disclosure
The
scenario
analysis
-‐ describe
how
they
consider
the
positioning
of
recommendations
recommendations
their
total
portfolio
with
respect
to
the
transition
are
also
general,
and
could
be
improved
by
to
a
lower-‐carbon
energy
supply,
production,
and
are
limited
to
requiring
the
use.
This
could
include
explaining
how
asset
insurers
and
asset
disclosure
of
owners
actively
manage
their
portfolios’
owners.
parameters
that
positioning
in
relation
to
this
transition. inform
on
the
-‐ describe
engagement
activity
with
investee
relevance,
likelihood
companies
to
encourage
better
disclosure
and
and
implications
of
the
practices
related
to
climate-‐related
risks. materialization
of
an
-‐ consider
including
discussion
of
how
climate-‐ adverse
scenario.
related
scenarios
are
used,
for
example
to
inform
investments
in
specific
assets.
Article
173
(see
page
93): Article
173’s
The
WG
could
build
on
-‐ For
the
criteria
relating
to
environmental
reporting
on
the
risk
the
disclosure
objectives,
an
indication
that
they
cover: management
process
recommendations
of
i.
the
climate
change-‐related
risks
corresponding covers
general
Article
173
but
will
to
physical
risks
and
to
transition
risks. changes
in
need
to
ensure
that
-‐ On
the
integration
of
the
results
of
ESG
and
investment
policy
these
are
adapted
to
climate-‐related
analysis
in
the
investment
policy:
(e.g.
portfolio
its
user
types,
description
of
the
way
in
which
the
results
of
the
reallocation
and
considering
variances
analysis
are
integrated
in
the
investment
policy: engagement)
and
in
the
management
i.
Description
of
the
changes
made
to
the
management
process
across
investment
policy
following
this
analysis,
in
terms
processes.
It
does
not
different
investors.
of
divestment
decisions
and
risk
management
provide
granularity
Such
differences
ii.
Implementation
of
an
engagement
strategy
on
the
relevant
should
be
identified
with
issuers:
presentation
of
engagement
business
segments
to
and
specified
in
a
policies;
voting
policy;
and
assessments
of
the
disclose
(e.g.
framework
for
implementations
of
these
policies. product,
portfolio)
by
managing
climate-‐
iii.
Implementation
of
an
engagement
strategy
type
of
financial
related
risks
(see
page
with
portfolio
management
companies:
institution.
This
in
26).
presentation
of
engagement
policies,
terms
of
turn
creates
a
exercising
voting
rights
for
which
the
problem
of
management
is
delegated,
and
assessment
of
the
comparability
of
implementation
of
these
policies actions
and
processes
among
peers.
28
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC
MOST
PRECISE
RECOMMENDATIONS INCONSISTENCIES
STEPS
MOVING
OR
GAPS
FORWARD
DISCLOSURE
OF…
Process
for
NAICS
Insurer
Climate
risk
Disclosure
Survey
There
is
no
detailed
The
most
relevant
climate
risk
(see
page
89):
guidance
on
the
input
to
the
WG
is
the
management -‐ Does
the
company
have
a
climate
change
policy
disclosure
of
the
recommendations
on
with
respect
to
risk
management
and
investment
changes
of
the
disclosure
of
actions
management?
If
no,
how
do
you
account
for
investment
strategy.
based
on
the
results
of
climate
change
in
your
risk
management?
It
however
covers
scenario
analysis
and
-‐ Has
the
company
considered
the
impact
of
the
disclosure
on
the
stress
testing
(see
climate
change
on
its
investment
portfolio?
Has
it
process
in
place
for
page
85).
The
group
altered
its
investment
strategy
in
response
to
the
management
of
could
build
on
this
to
these
considerations?
risks
pertaining
to
develop
specific
-‐ Describe
actions
the
company
is
taking
to
both
underwriting
recommendations
on
manage
the
risks
climate
change
poses
to
your
and
investment
scenario
analysis
for
business
including,
the
use
of
computer
activities.
the
insurance
sector.
modeling.
Process
for
Article
173: The
application
The
WG
could
climate
impact
The
contribution
to
compliance
with
the
decree
requires
potentially
build
on
management international
objective
to
limit
global
warming
disclosure
on
the
Article
173’s
disclosure
and
to
achieving
the
energy
and
ecological
different
avenues
requirements
as
they
transition
objectives
shall
be
assessed
using
that
can
be
taken
to
satisfy
the
general
information
relating: “assess”
the
reporting
needs
of
a
-‐ to
the
way
in
which
the
entity
analyses
the
contribution
to
the
framework
on
the
coherence
of
its
investment
policy
with
these
climate
goals.
Here
management
process
objectives; assessment
can
be
of
GHG
emissions
(see
-‐ to
indicative
targets
by
specifying
how
the
interpreted
more
as
page
24).
The
WG
will
investor
assesses
their
consistency
with
the
the
“intended”
however
have
to
international
and
national
objectives; contribution
of
the
include
additional
-‐ to
the
actions
carried
including
changes
to
the
investor
as
these
disclosure
provisions
investment/divestment
policy,
engagement
with
avenues
do
not
on
the
process
used
to
issuers,
increase
in
assets
invested
in
thematic
inform
directly
on
define
climate
actions,
funds,
in
financial
securities
or
infrastructure
impact
but
rather
on
setting
targets
based
assets
contributing
to
the
energy
and
ecological
the
process
put
in
on
a
defined
scenario,
transition,
in
UCTIS
falling
under
a
label,
charter
place
to
support
the
and
tracking
its
or
initiative;
and investor’s
objective.
impacts.
-‐ for
the
last
completed
financial
year,
to
its
position
in
relation
to
indicative
targets
that
it
set
and
the
reasons
that
explain
any
differences.
2° Invest
Award
(highest
score)
(see
page
25): The
award
criteria
The
WG
can
Financial
institutions
should
disclose: evaluate
the
results
complement
the
-‐ a
‘contribution’
target defined
in
such
a
way
of
a
process
for
disclosure
that
its
achievement
leads
to
quantifiable
climate
impact
recommendations
of
additional
reductions
of
GHG
emissions
in
the
management.
The
the
framework
for
real
economy,
triggered
by
the
actions
of
the
criteria
mention
key
”managing
climate
investors.
The
target
is
benchmarked
to
factors
to
consider
in
impact”
(see
page
24)
international
and/or
national
climate
targets.
the
process
(e.g.
with
those
of
the
-‐ A
comprehensive
set
of
targets
based
on
a
benchmark
your
award.
robust
methodological
approach.
targets
to
-‐ A
quantitative
assessment
of
the
misalignment
international
targets)
with
targets
and
precisely
identifies
the
hotspots
but
does
not
provide
and
actions
required.
enough
details
on
the
-‐On
bilateral
engagement
activities,
support
for
process
to
follow
nor
external
resolutions
and
projects
of
resolution,
its
disclosure.
the
leadership
in
initiating
resolutions,
positions
adopted,
questions
asked
in
AGMs
and
the
impact
on
the
companies’
decisions
and
plans.
29
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC
MOST
PRECISE
RECOMMENDATIONS INCONSISTENCIES
OR
STEPS
MOVING
GAPS
FORWARD
MEASUREMENT
AND
DISCLOSURE
OF…
Results
of
portfolio
assessment
Exposure
to
The
Natural
Capital
Coalition
Financial
The
supplement
is
The
WG
can
build
on
climate-‐ sector
supplement: process-‐based.
It
does
not
the
different
types
of
relevant
The
supplement
provides
guidance
on
the
provide
a
methodological
analysis
and
examples
activities assessment
of
risks
related
to
natural
framework;
thus,
it
is
not
that
the
supplement
capital.
It
addresses
the
definition
of
the
prescriptive
on
the
covers
(e.g.
assessment
objective
of
the
assessment
(e.g.
financial
methodological
of
risk
and
consequences
of
biodiversity
impacts),
the
assumptions
to
follow
opportunities,
scope
(e.g.
portfolio
or
entity
level),
the
(e.g.
allocation
rules),
the
estimation
of
total
targeted
audience,
the
coverage
of
impact
indicators
to
use
and
the
value)
to
define
or
dependencies,
the
baselines
of
the
ways
to
report.
concepts
that
are
assessment,
the
scenarios,
the
geographic
currently
being
used
by
and
temporal
boundaries,
possible
analysis
investors
to
run
based
on
natural
capital
interchangeably
such
as
information
including
the
estimation
of
the
“exposure”
and
“risk”.
financial
value
associated
to
risks
and
the
portfolio
exposure
to
climate
risks
and
opportunities
(e.g.
green
investments)
SASB
Financial
sector
guidance: The
standard
requires
Draw
inspiration
from
-‐ The
criteria
on
integration
of
ESG
risk
reporting
on
green/brown
available
taxonomies
to
factors
requires
the
reporting
of
the
share
indicators
as
part
of
classify
green/brown
or
percentage
of
assets
under
management,
the
disclosure
on
ESG
aligned/misaligned
by
major
asset
class,
that
employ
issues
integrated
in
the
investments.
In
the
case
sustainability
themed
investing
(incl.
risk
analysis.
The
of
corporate
bonds,
climate
change)
and
screening
indicators
however
do
not
Moody’s
heatmap
can
(exclusionary,
inclusionary,
or
communicate
on
risk
but
be
used.
For
other
asset
benchmarked). rather
on
the
exposure
to
classes,
taxonomies
will
-‐ Asset
managers
should
report
the
ratio
of
climate
activities.
The
have
to
be
developed.
embedded
CO2 emissions
of
proved
standard
does
not
provide
The
work
of
rating
hydrocarbon
reserves
held
by
investees
a
classification
of
agencies
can
be
based
on
a
standard
formula.
sustainability
themed
reviewed
for
that
investments.
purpose
(see
page
37).
Building
on
this
classification
and
the
use
of
asset-‐level
data
of
investees,
the
WG
can
then
define
company
exposure
indicators
and
rules
to
allocate
this
exposure
to
securities.
Article
173: These
disclosure
The
WG
should
consider
The
description
of
the
methodologies
used
requirements
apply
to
including
disclosure
in
the
analysis
implemented
may
include: methodologies
used
for
provisions
that
will
help
– the
overall
characteristics
of
the
the
integration
of
climate-‐ users
to
understand
methodology; related
criteria
in
the
clearly
the
relation
–details
on
the
main
underlying
investment
process.
It
is
between
the
exposure
assumptions
and
their
compatibility
with
thus
very
general
and
metrics
use
case
and
the
international
objective
to
limit
global
does
not
provide
specific
the
investor’s
objective,
warming; information
on
the
units
specially
in
cases
in
– explanations
for
the
relevance
of
the
of
the
output
indicators
which
the
metric
does
method
and
scope
used. and
the
key
assumptions.
not
inform
directly
on
the
objective.
30
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC MOST PRECISE RECOMMENDATIONS INCONSISTENCIES STEPS MOVING
OR GAPS FORWARD
MEASUREMENT AND DISCLOSURE OF…
Results of portfolio assessment
Exposure to Criteria of 2° Invest Award (highest score): The criteria of the 2° The WG could
climate-‐ Financial institutions should provide a detailed Invest Award allows complement
relevant description of the depth of the analysis, the to assess all types of disclosure
activities shortcomings of the methodology, and the data methodologies used requirements on
granularity and uncertainty. A plan to address for the integration of exposure indicators
them is communicated. climate-‐related with some provisions
criteria in the of the award criteria
investment process. by requiring investors
This generality is to highlight the
later compensated shortcomings of the
by evaluating specific methodology (e.g.
elements relevant to relevance of allocation
processes and rules) and its accuracy.
methodologies for
the assessment of
the consistency with
climate goals and
climate risks (see
below and page 32).
TCFD recommendations: As highlighted by the The WG could
-‐ Asset owners/asset managers should disclose TCFD, the weighted examine the extent to
the weighted average carbon intensity for each average carbon which exposure
fund/product or investment strategy. While the intensity is not a risk indicators (in this case
TCFD acknowledges that carbon footprint should metric. The carbon footprint and
not be interpreted as a risk metric, it believes recommendations brown share) could be
that is an important first step in disclosure that however do not useful to inform risk
can help the development of relevant climate-‐ provide information assessment and
related metrics. on which practices to management process.
-‐ Banks should provide the amount and avoid, limit or This will require
percentage of carbon-‐related assets relative to continue when using examining the
total assets as well as the amount of lending and the indicator. limitations of current
other financing connected with climate-‐related metrics and setting
opportunities guidelines of effective
use.
Value at Risk Criteria of 2° Invest Award (highest score): The criteria evaluates The WG can build the
Financial institutions disclose: disclosure of results, standard’s disclosure
-‐ Method and indicators that directly informs the in that sense the requirements on the
value at risk for the portfolio, regarding both criteria provide the value at risk based on
transition risks and physical risks. necessary details to the general principles
-‐ A value at risk based on a clearly defined understand the covered in the award
adverse scenario, precise and consistent with the relevance of the criteria. The disclosure
investment horizon of the assets and portfolio. indicator. However, requirements will
-‐ The most relevant types of impacts related to the visibility on the however have to
physical/transition risks for the investor. methodology and include as well
-‐ A financial analysis is based on micro-‐level data. scenario assumptions requirements on the
-‐ An analysis covering all relevant asset is limited to some process used to assess
categories offering a comprehensive picture of factors (e.g. scope, risk (see next page).
the value at risk for the investor. Exclusions are granularity,
limited and duly justified. consistency of time
-‐ An analysis covers all climate-‐relevant sectors horizons).
and technologies, including both upside and
downside. Exclusions are duly justified.
31
Table 3 : Analysis of the potential use of the reviewed standards and guidance documents (Source: authors)
TOPIC MOST PRECISE RECOMMENDATIONS INCONSISTENCIES STEPS MOVING
OR GAPS FORWARD
MEASUREMENT AND DISCLOSURE OF…
Results of portfolio assessment
Value at Risk TCFD recommendations: The TCFD The WG can build on
Banks should : recommendations the disclosure
-‐ consider characterizing their climate-‐related require a description requirements of the
risks in the context of traditional banking industry of the process used TCFD, in particular
risk categories such as credit, market, liquidity to identify and assess regarding the
and operational risk. climate-‐related risks, differences by types of
-‐ Provide the metrics used to assess the impact of and the metrics used investors. This will
(transition and physical) climate-‐related risks on in the assessment. It require specifying the
their lending and other financial intermediary therefore allows for disclosure of key
business activities in the short, medium, and long different levels of model assumptions
term. Metrics provided may relate to credit disclosure i.e. from a (e.g. time horizons,
exposure, equity and debt holdings, or trading general to a more adaptive capacity,
positions, broken down by: industry, geography, specific one. The ambition of the
credit quality, average tenor. TCFD does not scenario), and
Insurance companies should: provide detailed principles that risk
-‐ describe the processes for identifying and recommendations on indicators should
assessing climate-‐related risks on re-‐/insurance the disclosure of the follow (e.g. forward
portfolios by geography, business division, or main assumptions of looking).
product segments, including i. physical risks from the methodology
changing frequencies and intensities of weather-‐ used (e.g. allocation
related perils; ii. transition risks resulting from a rules) their relevance
reduction in insurable interest due to a decline in for risk assessment,
value, changing energy costs, or implementation and the scenarios
of carbon regulation; and iii. liability risks that considered in the
could intensify due to a possible increase in methodologies.
litigation.
-‐ describe the range of climate-‐related events
considered and how the risks generated by the
rising propensity and severity of such events are
managed.
-‐ provide the aggregated risk exposure to
weather-‐related catastrophes in their property
business by relevant jurisdiction.
Asset managers should: describe how they
identify and assess material climate-‐related risks
for each product or investment strategy. This
might include a description of the resources and
tools used.
Asses owners should: describe how climate-‐
related risks and opportunities are factored into
relevant investment strategies. This could be
described from the perspective of the total fund
or investment strategy or individual investment
strategies for various asset classes
Asset managers/asset owners should:
-‐ describe metrics used to assess climate-‐related
risks and opportunities in each product/fund or
investment strategy and how these metrics have
changed over time.
-‐ provide metrics considered in investment
decisions and monitoring
32
Table
3
:
Analysis
of
the
potential
use
of
the
reviewed
standards
and
guidance
documents
(Source:
authors)
TOPIC
MOST
PRECISE
RECOMMENDATIONS INCONSISTENCIES
NEEDS
MOVING
OR
GAPS
FORWARD
MEASUREMENT
AND
DISCLOSURE
OF…
Results
of
portfolio
assessment
Value-‐at-‐risk AODP
Survey:
AODP disregards the The WG needs to
-‐ Do you measure portfolio-‐level risk associated risk associated with phrase the disclosure
with physical impacts relating to climate technology and requirements in a way
change/potential climate change related production risk that covers exposure
'stranded assets'? factors. The to the most material
-‐ Does your organisation calculate/estimate questions on risk risk factors, while
portfolio level carbon liabilities/stranded asset assessment are allowing investors to
levels under direct or intrinsic carbon price general and allow for disclose on those
scenarios? a wide range of other risk factors
-‐ Do you use a forward looking base case for responses. being addressed
climate change risk mitigation? through the
methodology.
Consistency
Article
173: These disclosure Despite having good
with
climate
The description of the methodologies used in the requirements apply frameworks providing
goals
(e.g.
2D
analysis implemented may include: to all methodologies guidance on
benchmark) – the overall characteristics of the methodology; used. It is thus very disclosure, there is no
–details on the main underlying assumptions and general and does not framework developed
their compatibility with the international provide specific on the assessment of
objective to limit global warming; information on the the consistency with
– explanations for the relevance of the method units of the output climate goals. Thus,
and scope used. indicators and key prior to providing
assumptions. guidance on
Criteria of 2° Invest Award (highest score): The criteria evaluates disclosure, the WG
Investors and financial institutions disclose: the disclosure of should focus on
-‐ A detailed description of the depth of the results and the ensuring that current
analysis, the shortcomings of the methodology, relevance of the and future metrics
and the data granularity and uncertainty. methodology used. account for a good
-‐ A comprehensive set of targets based on a No major gaps were methodological basis
robust methodological approach. identified in the that includes the use
-‐ A quantitative assessment of the misalignment disclosure of consistent 2°C
with targets and precisely identifies the hotspots requirements. benchmarks, time
and actions required. frames and output
-‐ All relevant asset categories. Exclusions are indicators.
limited and duly justified.
-‐ All climate relevant sectors and technologies,
including both brown and green.
-‐ How it relies on both direct and indirect
activities associated with issuers in key relevant
sectors and specifies hypothesis and shortfalls.
-‐ An analysis that is both forward and backward
looking.
-‐ An analysis based on country-‐ geolocated data,
thus allowing the analysis of the alignment with
local, national, and global targets and policies.
Outcomes of ‘actions’
Impact on No standard or initiative promoting standardization reviewed covers these topics.
GHG emissions
and resilience
Impact on
financial risk
exposure
33
Table 3 : Analysis of the potential use of the reviewed standards and guidance documents (Source: authors)
TOPIC MOST PRECISE RECOMMENDATIONS INCONSISTENCIES NEEDS MOVING
OR GAPS FORWARD
MEASUREMENT AND DISCLOSURE OF…
Results of portfolio assessment
Value-‐at-‐risk The PCI Carbon Asset Risk framework: The framework is The WG could
1.Identifies and discusses two main types of conceptual. Although potentially build on
approaches to evaluating risks: i. company level it does provide the the company-‐risk
using asset-‐level data for existing portfolios and general factors to framework to define
new investments; and ii. financial portfolio level consider in the risk or exposure
applicable to existing investment portfolios. assessment of indicators. Building on
2. Defines the steps towards assessing transition climate risks, it does the portfolio
risk at company level through the screening of not provide framework could
companies using exposure data and risk factors methodological however be more
(e.g. asset level data, type and duration of the guidance on how to challenging as the
financial relationship and baseline scenario data). calculate value at risk framework is high-‐
The framework identifies other qualitative at portfolio level, level. The WG group
factors (e.g. corporate strategy, efforts to instead, it covers will have to define
engagement with investors) relating to the company level best practice
company’s management of carbon-‐related risks analysis. allocation rules by
should be considered to understand their type of asset class (see
positioning against future challenges. page 45) and best
3. Defines the steps for the assessment of risk at practice
portfolio level. The steps consist in the i.) methodologies. In the
identification of risk factors, ii.) testing the absence of relevant
relationships among them to ensure they are metrics, the WG
unique, ii.) combine them with macro-‐scenario should explore the
data to stress test the portfolio, iv.) generate the development of
data describing the impacts of changes in risk metrics building on
factors to the portfolio; v. analyze results and existing frameworks
optimize the portfolio with regard to the risk (e.g. Moody’s
factors. heatmap, Barclays’
financial road map,
carbon supply costs
curves of the Carbon
Tracker Initiative).
SASB Financial sector guidance: SASB requires The WG can build on
-‐ Commercial banks/asset managers/insurers disclosure of value at the SASB
should discuss how it assesses climate risks to its risk indicators at recommendations by
loan portfolio/funds and/or clients sector level. including disclosure
portfolios/investment portfolio. Disclosure should recommendations at a
-‐ The registrant shall identify specific industries however be more granular level.
(or sectors) in which it has exposure to risks from addressed across The WG disclosure
the trends it has identified. asset classes in order recommendations on
-‐ The registrant shall identify specific geographies to inform strategic value at risk indicators
(e.g., regions, countries, states, etc.) and/or asset allocation. can also account for
demographic segments (e.g., income, education, More granular the terminology used
etc.) in which the registrant has activity and disclosure on the in the SASB framework
recognizes risks from the broad sustainability methodology’s in order to ensure
trends disclosed. assumptions is need consistency across
-‐The registrant should quantify its exposure to to understand the frameworks.
sustainability risks as the dollar amount of consistency between
investment in industries most susceptible to the the methodology
risks the registrant has identified, or if available, used and the
as a risk-‐adjusted exposure (e.g. to cash flow or investor’s
discount rates) to these industries. management
strategy.
34
The analysis reveals the following elements:
•There is a lot of guidance about disclosure, but limited technical guidance on how to actually manage climate risks
and impacts. The most precise guidance documents the ISO 14097 working group can build on are:
• PCI -‐ Carbon Asset Risk (WRI/UNEP FI 2015)
• PCI -‐Climate Strategies and Metrics -‐ Exploring Options for Institutional Investors. (2ii 2015c).
• Natural Capital Coalition. Financial Sector Supplement
•There
is
little
guidance
on
scenario
design
and
no
guidance
on
how
to
‘translate’
scenarios
to
make
them
relevant
for
their
use
case.
There
most
relevant
(but
still
high
level)
recommendations
come
from:
• PCI -‐ Carbon Asset Risk (WRI/UNEP FI 2015)
• Natural Capital Coalition. Financial Sector Supplement
•As far as guidance on disclosure for financial institutions is concerned, there is a lot of high-‐level guidance on how to
report on the approach, but the guidance on metrics to be used is much more scattered and limited. The most precise
guidance can be found in the International Award on Investor Climate-‐related Disclosures evaluation criteria
(2ii/MEEM 2016b).
•More precisely on metrics, it is to be noted that the existing guidance almost exclusively focus on various ways to
disclose on the’ exposure’ of financial institutions to climate-‐relevant activities (using indicators such as carbon
intensity, and green and brown taxonomies on business activities and technologies) but methodological guidance is
almost inexistent specially when it comes to calculating the consistency with climate goals, the related value-‐at-‐risk.
There is little guidance provided on this by standardization organizations and initiatives, more relevant documents
developed by other organizations include:
•Investor Climate Disclosure: Stitching Together Best Practices (2ii 2016a)
• Lighting the Way to Best Practice -‐ Climate Reporting Award Case Studies. (2ii 2017b).
• Finally,
a
critical
element
to
highlight
is
the
lack
of
guidance
on
metrics
that
quantify
the
impact
of
climate-‐
related
actions.
Currently
there
is
no
guidance
allowing
to
track,
estimate
and
report
on
the
impact
of
actions
consistent
with
the
investor’s
objective
(i.e.
contribute
to
climate
goals
or
manage
risks)
and
investors
targets
under
a
2°C
scenario.
35
2.5 ADDITIONAL FRAMEWORKS TO CONSIDER
The review of standards and initiatives showed that there is enough room for improvement provided there is an
interest on building on the current work of certain organizations. More critically, it showed that there are topics
currently not addressed, notably in the case of scenarios and impact of actions. This section reviews additional
documents developed by public or private organizations that do not work towards standardization but which work
could be of use for ISO 14097 when considering the standardization avenues identified in 2.4.
2.5.1 SCENARIO CHOICE
When considering standardization options around the scenario choice, one can think about three possibilities:
1. General guidance to design scenarios that can be used by financial institutions and can communicate on their key
assumptions, including scope, timeframe, ambition, uncertainty, etc.
2. Guidance on the outputs necessary to inform risk assessment or/and consistency of financial assets with climate
goals, and guidance on the associated steps to ‘translate’ climate scenarios and technology roadmaps.
3. Production of ‘standard scenarios’ (2°C or a range) that can be directly used by financial institutions.
As reviewed in section 2.4, the are few initiatives providing relevant guidance for the design of scenarios, and no
initiative addressing the ‘translation’ of outputs or the production of standard scenarios. When looking at the
developments of other organizations around this topic, the outlook is very similar. A couple of organizations stand out
due to their technical angles, which complement the conceptual frameworks and general recommendations layout by
the standardization initiatives reviewed. Two major sources of information stand out, these are the
Intergovernmental Panel on Climate Change (IPCCC) guidance on Climate and Socio-‐Economic Scenario Development
and the tool developed by the Deep Decarbonisation Pathways Project (DDPP).
TOPIC DESCRIPTION INCONSISTENCIES OR STEPS MOVING
GAPS FORWARD
MANAGEMENT
Scenario choice
Scenario IPCCC’s guidance on Climate and Socio-‐Economic The guidance is designed Both sources
design Scenarios Development: The guidance provides an to address the main provide
process overview of the different methods for developing methodological challenges information on
climate and socio-‐economic scenarios, the for different types of different
advantages and disadvantages of the existing climate and economic approaches
methods and its relevance in impact assessment ( scenarios that integrate used for the
from a physical viewpoint). It provides both physical and design of
recommendations on the selection of the baseline technology changes under scenarios. Thus,
period, the input and output variables to consider, a certain GHG the study of
the approach to follow when combining baselines concentration trajectory. both is
with modelled data, the geographic and sectoral This approach notably necessary if the
scope and granularity of the chosen data, the time limits the granularity of WG is
horizons, the factors to consider when converting the recommendations interested in
emissions pathways to atmospheric concentrations provided for the scenarios providing
or radiative forcing, the consistent use of scenario and models that are guidance by
components (e.g. differences between CO2 and CO2-‐ mainly used by the type of
equivalent concentrations), and the most relevant financial industry (e.g. scenarios (i.e.
uncertainties to consider. IAMs). transition or
DDPP’s tool: The DDPP provides guidance through •Assumes the scenario physical
an excel tool allowing any user to develop scenarios trajectory is linear over scenarios).
based on an energy system model. The tool time, meaning that
compares a reference scenario with a mitigation changes in trends
scenario, thus any climate outcome can be between periods are not
modelled. It covers several sectors including power, captured.
fossil fuels, cement, steel, auto, shipping and real •Drivers such us
state and their aggregation. Users are required to commodity prices, and
provide the baseline and the 2050 values of key policy changes are not
input indicators (e.g. efficiencies, plan modelled and thus have
characteristics, emissions and capacity factors). to be captured indirectly
36
2.5.2. EXPOSURE TO CLIMATE-‐RELEVANT ACTIVITIES
The standards and standardization initiatives reviewed mainly focus on the disclosure of ‘exposure’ indicators, without
providing guidance of the principles or characteristics that these exposure indicators should fulfil. This approach which
aims at increasing comparability across reporting, limits and in some occasions misleads as the underlying
methodology of the exposure indicator varies from provider/FI to provider/FI.
This section provides an overview of the exposure indicators’ current offers, including carbon footprint, green/brown
exposure and ESG rating providers. It does not aim to discuss the methodological constraints in connecting exposure
indicators with climate goal or climate risks, but to identify approaches or taxonomies that could eventually be
reviewed in ISO 14097 to define guidelines on how to assess the exposure of a portfolio to climate-‐relevant business
activities or/and technologies
TOPIC DESCRIPTION INCONSISTENCIES OR STEPS MOVING
GAPS FORWARD
MEASUREMENT AND DISCLOSURE OF…
Results of portfolio assessment
Exposure to Carbon footprint data providers: Carbon As highlighted above Provided there is a
climate-‐ footprint is perhaps the most frequently-‐offered one can argue about common
relevant service of providers. Methodological differences the ability of these understanding on
activities in their offering and use rely on the accounting metrics to capture the most suitable
rules used (e.g. scope, double counting, time forward-‐looking metrics to quantify
boundaries, allocation rules to investors), the information under a 2°C exposure, the
asset class coverage, the sources of GHG data and scenario moving working group can
the quality of their data processing and forward. review the offering
uncertainties reduction. For a review of It is however important of the mentioned
differences across 12 providers see 2ii 2015c. to understand to what organizations to
extend these metrics determine which
Green/brown exposure: Investors primarily can better capture indicators (e.g.
access green/brown exposure metrics through today climate issues production capacity
ESG data providers or bespoke databases. and which changes or units, carbo
Examples include Verisk Analytics on oil, gas, & need to be made in intensity) can be of
coal sectors, ThomsonReuters on project finance, order to develop more potential use and
and GlobalData for the power sector. adapted climate under which
Methodological differences in their offering and exposure indicators. conditions.
use respond to the exposure data used (e.g. share This is however an open
of renewable technology, fuel efficiencies etc), discussions today that
the scope of sectors and companies covered, and will not be addressed
the classification system of companies. For a through this document.
review of differences across 13 providers see 2ii
2015c.
At project level the offering varies. Few ESG data
providers have green/brown classifications at
project level (e.g. Trucost, Moody’s). Most of the
classification and certification is being done by
second opinion providers such as CICERO and CBI.
ESG rating providers: Several providers
systematically evaluate companies on a variety of
ESG criteria. The scores are based mainly on
qualitative data and benchmarking against
industry practices. Methodological differences in
their offering and usage respond to the sector and
company coverage, the components assessed, the
scoring system (e.g. From D-‐ to A+) and the
primary sources of information. For a review of
differences across 10 providers see 2ii 2015c.
37
2.5.3.
OUTCOMES
OF
ACTIONS
The review of standards and initiatives showed that current guidelines address the actions that investor’s undertake
without focusing on the complexities around the relevance and additionality or impact related to the action and
associated objective behind the action. There are however few other frameworks that do not necessarily address the
topic from a portfolio construction perspective that can be considered for its process-‐based and project-‐level
approach.
TOPIC DESCRIPTION INCONSISTENCIES OR STEPS MOVING
GAPS FORWARD
MEASUREMENT AND DISCLOSURE OF…
Outcomes of ‘actions’
Impact on CDM methodologies: The Clean Development -‐ There are gaps in the -‐ Develop integrated
GHG Mechanism (CDM) requires the application of a available approaches for
emissions and baseline and monitoring methodology in order to methodological relevant sectors
resilience determine the amount of Certified Emission approaches in some including reliable
Reductions (CERs) generated by a mitigation CDM sectors (e.g. integrated and conservative
project activity. Over 7700 projects and 380 approaches for urban defaults to achieve
Programmes of activities registered under the sector climate action, simplification. Apply
CDM are hosted in nearly 100 developing some specific areas of technology (e.g.
countries. To date CDM projects and programmes agriculture). CDM digitisation) to
have generated more than 1.8 Billion CERs. Over methodologies do not reduce transaction
200 methodologies developed, tested and refined cover the quantification costs for broader
under the CDM over the last 15 years represent of the impacts of uptake and to cover
one of the most comprehensive repository of policies. Not all the needs of
monitoring and emission reduction estimation methodologies include different type of
methods. The CDM methodologies were tiered approaches ( i.e. applications and
developed in a bottom up process to respond to ranging from tier one stakeholders.
the context in developing countries (e.g. including conservative macro
tiered approaches for monitoring, addressing level defaults to tier 3
issues related to data gaps). CDM methodologies requiring accurate and
tend to detail the emission reduction estimates frequent
(i.e. ‘ how to’ besides ‘what to’ measure and measurements within
quantify), where possible including conservative the project boundary
default factors. IFIs technical working group on with potentially higher
harmonisation of methodologies, with over 25 credit generation).
members, employs some elements of the CDM -‐ CDM methodologies
methodologies besides its tools (e.g. grid emission notably only apply at
factors developed under the CDM) project level.
ICAT Transformational Change Guidance: The guidance is relevant The limitations in
Developed by the Initiative for Climate Action for a sub group of adapting the
Transparency, the guidance aims for a better financial institutions, guidance to a
understanding of the impacts and potential notably mainly broader audience of
impacts of policies on the National Determined development banks. Its financial institutions
Contributions and the SDGs at international, application to other relate mainly to the
national and sub-‐national level. The guide financial institutions is guidance’s focus on
provides a general approach to assessing the limited as drivers for the policy side
impact of policy actions or instruments by actions are not always rather than
providing principles, concepts and procedures to policy oriented. investment side.
follow before, during and after the However, the
implementation of the policy. For the financial structuring of the
industry, the framework can be used to assess the process can draw
impact of changes on policies for loans, credits inspiration for the
and grants. Two other interesting guidelines development of a
around the same vein are the GHG protocol policy framework to assess
and action standard (GHG 2014) and the ADEME impact of portfolio
method to quantify the GHG impact of an action construction
to reduce emissions (ADEME 2015). actions.
38
EXECUTIVE SUMMARY
3 RECOMMENDATIONS FOR ISO 14097
3.1. CLARIFY THE OBJECTIVE: RISK MANAGEMENT OR CONTRIBUTION TO CLIMATE GOALS
The landscape review confirmed the conclusion of the previous pre-‐standardization work conducted by WRI, UNEP-‐FI
and 2Dii in the context of the Portfolio Carbon Initiative -‐ PCI -‐ (see figure 2):
• Most standards and standardization initiatives have been designed for non-‐financial companies, which have a
more direct impact on GHG emissions than financial institutions. The indirect nature of financial institutions’
connection with GHG emitting activities creates complexity in understanding the dynamic of risk transfer on the
one hand, and its potential influence on GHG emissions in the real economy on the other hand.
• In line with the findings and recommendations of PCI, our review concludes that financial institutions can
fundamentally pursue two climate-‐related objectives through their investments and lending activities:
1. Managing climate-‐related financial risks and opportunities, by better assessing, mitigating and hedging
them.
2. Contributing to the achievement of climate goals, through the influence they have on investee companies’
GHG emissions.
• Each of these objectives fundamentally require different approaches, metrics, tools and types of actions:
• For instance, the easiest way to manage climate-‐related financial risks related to a stock portfolio is to
reduce its exposure to the most risky activities, or hedge the risks through the use of derivatives. However,
none of these actions contribute significantly to GHG emissions reductions, since the activities in the real
economy are likely to be impacted very marginally – or not at all – by these decisions.
• Equally, if shareholders request an investee power company to shut down a coal-‐fired power plant before
the end of its lifetime, the action might contribute to GHG emissions reductions, but it will not necessarily
improve the financial returns of the company and the investor.
The review of financial institutions’ narratives related to their climate actions reveals that they very often mix these
two objectives: sometimes because they pursue both at the same time, sometimes because they primarily seek
reputational benefits, without a clear understanding of the actual concrete outcomes expected.
Figure
2:
Framework
for
Assessing
Carbon
Risk
and
Assessing
and
Managing
Carbon
Asset
Risk
(Source:
WRI/UNEP
FI
2015)
39
3.2. DEFINE THE SCOPE OF THE WORKING GROUP
Financial institutions develop various financial activities that can have an impact on climate (contribution) or
contribute to mitigate climate-‐related financial risks (risk management), they notably include:
• Origination of loans and deals,
• Services of underwriting of equity and debt,
• Securitization,
• Design of derivative contracts,
• Asset-‐management,
• Investment product packaging and retail.
These core functions are associated with hundreds of support services such as advisory, legal and marketing at each
stage, construction of indexes, equity research and credit ratings, clearing, custody of securities, etc. In the context of
PCI, UNEP-‐FI, WRI and 2°ii have started to list these services (WRI/UNEP FI 2015). Besides financial institutions also
undertake various actions that are not related to investment and lending, such as lobbying activities, communication
and operational plans to reduce GHG emissions (e.g. policy related to travel, use of paper, etc.).
In line with the focus of most methodological and standardization work identified, including the core scope of PCI and
the TCFD, we suggest the ISO 14097 working group to focus on the functions of investment portfolio (see above) and
loan book management, assuming that the standard created will be adapted to other services at a second stage. The
scope of the standard will exclude all actions that are not specific to the finance sector, such as lobbying activities, and
operational GHG emissions management, these actions being relevant but already covered by existing standards.
3.3. DEFINE FINANCIAL INSTITUTIONS’ ACTIONS
In the context of investment portfolio and loan book management, financial institutions undertake a number of
‘actions’ that can contribute to climate-‐related risk management and/or support the achievement of climate goals, as
opposed to a ‘business as usual’ approach. The table below lists these core actions for illustrative purposes.
The standardization work will involve further developing and documenting this list and turning it into a ‘library’ of
climate-‐related actions.
ASSETS ACTION
Equity
investments
in
Blacklist/limit exposure to
certain
projects
VC,
PE,
real
assets Invest more
in
certain
projects
Set
climate-‐related conditions
Listed
equities Divest/reduce
exposure
to
certain
stocks
Invest
more
in
certain
stock
Engagement
with
the
issuers
on
their
actions
Bonds Divest/reduce
exposure
to
certain
bonds
Invest
more
in
certain
bonds
Favor bonds
associated
with
climate-‐related
actions
from
the
issuer
Loans Limit lending
to
certain
activities
Limit
exposure
to
certain
activities
through
securitization
Set
above-‐market conditions
for
lending
to
certain
activities
to
increase
volume
Increase
lending
to
certain
activities
through
marketing
Define
climate-‐related conditions
for
lending
to
certain
activities
Change
risk
weights
and
related capital
charges
for
certain
activities
in
internal
risk
models
Commodities Limit
trading activities
on
certain
commodities
to
prevent
impact
on
market
prices
Derivatives Use
of
derivatives
to
hedge
climate-‐related risks
40
3.4. DOCUMENT HOW ACTIONS LINK WITH THE ACHIEVEMENT OF THE OBJECTIVES
3.4.1. LINK WITH RISK MANAGEMENT
These actions are linked to risk management in four ways:
• Limiting the exposure to assets perceived as ‘more risky’ (e.g. high cost oil extraction, coal power) than
currently reflected in risk pricing, and therefore reducing the ‘value-‐at-‐risk’ if the climate risk materializes faster
and stronger than expected by the market;
• Similarly, increasing the exposure to other activities positively exposed to climate-‐related opportunities (e.g.
renewable power, electric vehicles) for which the market might undervalue the potential.
• Influencing risk mitigation actions by the investee/issuer, by setting conditions.
• Hedging a risk by getting exposed to an instrument (security, derivative) with reverse correlation.
It is to be noted that the link between actions and the outcomes in terms of risk mitigation is very poorly
documented, both in the guidance documents and in the investors’ disclosures. In many cases, actions that have
questionable impact on the risk exposure (due to flawed risk metrics in many cases) are presented as risk
management measures. For instance, the reduction of the carbon footprint of a portfolio, using scope 1 and scope
2 emissions (direct and related to electricity purchase) is very often presented as a risk management measure,
even though there is strong evidence that carbon intensity at portfolio level and carbon-‐related risk exposure are
very poorly correlated (2ii 2017c). Another frequent confusion relates to the association of investments in ‘climate
labelled’ bonds issued by corporates or sovereigns (labelling of the issuer based on ring-‐fenced climate-‐related
activities) with risk mitigation, even though the creditworthiness of the issuer remain uncharged by the label,
relative to ‘standard’ bonds from the same issuer. On the other hand, straightforward risk management measures
such as the use of derivatives are very rarely described.
In this context, a possible task of the ISO 14097 working group will be to better document the potential impact of
various types of actions on risk exposure, and develop genuine risk metrics to measure the ‘starting point’ and the
outcomes. Based on the existing body of guidance and practices, this work will involve guidance on how to define
and estimate the ‘value at risk’ related to climate risks, and how to design and use the related climate scenarios.
3.4.2. LINK WITH CLIMATE CONTRIBUTION
These actions can contribute to climate goals in three ways:
• Limiting the exposure to activities perceived as ‘misaligned with climate goals’ (e.g. high cost oil extraction, coal
power), which can – under certain circumstances– reduce the availability and increase the cost of capital for
investees and thus limit their development, accelerate their decline or influence the nature of their investment
plans.
• Similarly, increasing the exposure to activities that need to further expand under a climate scenario (e.g.
renewable power, electric vehicles) that can contribute to improve the availability and cost of capital for the
related companies and thus support their expansion.
• Finally shareholder engagement (e.g. use of voting rights to push climate-‐related resolutions), climate-‐related
conditionality for lending or direct investments, and the signal sent by investment and divestment decisions can
influence the investment plans and operational decisions of the investees, in a way that saves GHG emissions.
When reviewing both the guidance and the narrative of financial institutions, it is to be noted that there is a lot of
confusion regarding the actual impact of investors’ ‘climate actions’ on GHG emission reductions in the real
economy. In many cases changes in portfolio allocation (reweighting, divestment, additional exposure, etc.) on
liquid assets such as large cap stocks and investment grade bonds are presented as a way to reduce GHG
emissions, even though the impact of such actions on the cost of capital and the influence on the issuers’ decisions
are likely to be nonexistent, or at best very marginal.
41
In this context, a key task of the ISO 14097 working group will involve defining the ‘pathways to impact’ on GHG
emissions associated with different actions, and provide guidance on how to track the impact and influence on
investees’ climate-‐related decisions. This work will involve defining metrics to assess the ‘starting point’, set
targets, and estimate the outcomes of actions.
In doing so, the working group will need to find the right level of sophistication of metrics and assessment
processes to avoid greenwashing on the one hand and a burdensome assessment process on the other hand. The
existing discussion of impacts (e.g. report from Oxford on fossil-‐fuel divestment1) shows indeed that in many cases,
the actual outcomes of an action (e.g. divesting from stocks) will depend on many ‘unknown’ factors, such as the
reaction of other market players, the other factors in the investee companies’ investment decisions, etc. The way
forward will probably involve pre-‐defining the order of magnitude associated with different types of actions, and
the conditions for potential success, in order to create categories of actions, with more or less ‘climate impact
potential.’
3.5. DEFINE METRICS THAT SERVE THE OBJECTIVE
The review of practices reveals that, as a direct consequence of the confusion regarding the objectives pursued,
the availability of data drives the definition of performance metrics, which in turn drives the design of many
actions. In other words, many investors primarily define their approach to improve the indicator they
communicate externally (example in fig 1), rather than defining an indicator relevant to the goal they are trying to
achieve (example in fig 2).
Fig 1. Fig 2.
CO2 /$ of sales
2 defined as a KPI
Identify relevant ‘actions’:
2 engage with investees on their climate targets
Target set:
3 reduce by 20%
CO2 emissions Define KPIs:
1 available for stocks 3 sector-‐specific
Define the objective:
1 contribute to climate goals
Action: sub-‐sector
4 reallocation
Set targets &
4 track progress
No impact on GHG emissions
✔
Influence
on
investees’
in
the
real
economy
decisions
tracked,
related
Not
directly
relevant
for
contribution
to
GHG
financial
risk
management emissions
estimated
Building on the recommendations of PCI (WRI/UNEP FI 2015, 2ii 2015c, 2ii 2013) and the work done by the French
government in the context of the Article 173 (2ii/MEEM 2016), the ISO 14097 project will define measurement
frameworks and metrics in relation to one of the two objectives listed above. The ‘soft’ impact of actions on
reputation and awareness raising (e.g. the signal sent by the decision of a large investor to divest from coal mining)
will be discussed, but will not constitute a core focus of the recommendations regarding impact measurement and
risk metrics.
42
3.5.1. DEFINE GENUINE CLIMATE IMPACT METRICS
The review of practices show that most investors use ‘exposure metrics’ in association with a narrative on their
climate contribution, confusing changes in exposure with changes in the real economy.
One of the main reason for that, illustrated in figure 1 below, is the confusion between:
•Changes due to the sale or acquisition of securities (see 1 in the figure 1)
•Changes due to an evolution of the scope of the issuer (see 2 in figure 1), and
•Changes due to actual evolution of assets and activities in the real economy (see 3 in figure 1).
In this example, changes at all levels (1, 2 and 3) contribute to the evolution of the indicator (e.g. green share,
carbon footprint, etc.) at portfolio level, but only changes at level 3 are actually linked with emission
reductions/increases in the real economy. Level 1 and 2 contribute to an evolution of the indicator but only due to
‘accounting effects’.
A second reason, illustrated in figure 2 relates to the use of different consolidation rules by reporting companies,
and the existence of gaps in reporting that generate additional accounting effects. Another frequent bias relates to
the use of volatile denominators in the calculation of ratios (e.g. CO2/$ of sales that can be exposed to fluctuations
of prices) that ‘pollute’ the performance indicator.
When it comes to setting climate targets and assessing the impact of investors’ ‘actions’ on the decisions of
investee companies and the related GHG emissions, these flaws become a major hurdle given their weight
compared to the impact of actions. To address these flaws, the main solution explored to date by practitioners is
tracking the evolutions of indicators at the ‘physical asset-‐level’: i.e. at the level of the power plant, the oil field,
the production of vehicles…
Following this path, the standardization work will notably involve:
•Defining the relevant assets in each key industry, and the relevant indicators associated (production, CO2
intensity, etc.),
•The timeframe (past or forward-‐looking, number of years, etc.) of the consolidation rules,
•The way to estimate and track how the ‘action’ of an investor can influence the decisions of an investee
•The way to measure the baseline, a 2° target, the achievements and to compare them.
Figure 1: MISLEADING EFFECT OF TURNOVER Figure 2: MISLEADING EFFECT OF CONSOLIDATION RULES
1. INVESTMENT PORTFOLIO TURNOVER
2. CHANGE IN THE PORTFOLIO OF ACTIVITIES DUE TO M&A
3. ACTUAL CHANGES ‘ON THE GROUND’ (CAPEX, RETIREMENTS…)
43
3.5.2. DEFINE GENUINE RISK METRICS
Similarly, most investors use indicators of exposure to climate-‐relevant activities (e.g. green technologies or
business segments, carbon intensity of activities, etc.) as a proxy for exposure to carbon-‐related risks such as
public policy risks, litigation, and other constraints on high-‐carbon activities. Research shows that these proxies are
largely irrelevant when it comes to assessing the financial value-‐at-‐risk related to climate factors (policy risks,
litigation risks, technology risks, physical risks, etc.) (2ii 2017c). Indeed, the risk faced by a physical asset in the real
economy (e.g. power plant) is not necessarily transferred to the investor exposed to this asset. As a consequence
many other factors than the consistency of the activity with decarbonisation pathways enter into the risk equation
for investors.
The table below presents an overview of the different economic players that can be impacted by climate-‐related
risks (column 1), of the way the risk is transferred across the investment and lending chain (column 2) and provides
examples of obstacles to this transfer. It illustrates how a risk can be material at the ‘bottom’ of the chain without
necessarily being material at the ‘top’. The main obstacles to the risk transfer include:
• The investment horizon that might be shorter than the window of materialization (see 3.1),
• The speed of materialization that might led time to adapt (discussed in 3.2)
• The ‘buffers’ (pricing power, insurance, etc.),
Who ? Nature
of
risk
transfer Example
of
obstacle
to
the
risk
transfer
Society
A
power
producer
emits
large
amounts
of
CO2 associated
with
a
cost
for
society:
the
damages
related
to
future
physical
impacts
of
climate
change
(social
cost
of
carbon)
Physical
assets If
the
country
is
likely
to
introduce
climate
In
the
absence
of
foreseeable
policy
that
constraints
(e.g.
taxes,
caps)
at
some
point
likely
to
be
implemented
in
the
remaining
in
time,
the
power
plants
located
there
lifetime
of
the
asset,
the
risk
remains
an
might
be
shut
down
or
face
extra
costs.
‘externality’
impacting
Society
only.
The
owner
of
the
The
owner
of
the
plant
then
faces
However,
if
the
regulation
allows
it
to
physical
asset
impairments
and
higher
costs, impacting
its
transfer
the
cost
to
consumers,
the
impact
P&L
and
balance
sheet can
be
partly
or
fully
offset
The
security
issued
The
credit
rating
of
the
producer
can
be
But
the
company
may
also
have
a
financial
by
the
owner
downgraded,
thus
leading
to
a
drop
in
the
cushion
big
enough
to
absorb
the
losses
(e.g.
bond)
market
value
of
the
bond
and
maintain
its
credit
rating.
The
owner
of
the
The
investor’s
portfolio
will
lose
value
But
if
the
bond
comes
to
maturity
before
security when
the
bond
is
downgraded the
risk
of
downgrade
materializes,
the
portfolio
will
not
lose
value
The
financial
The
climate
constraints
apply
to
other
But
if
the
risk
materializes
more
gradually,
system
as
a
whole
power
producers
and
other
sectors
and
the
or
that
the
portfolio
of
financial
institutions
/
Financial
stability materialization
and
transmission
of
risk
is
not
exposed
enough
to
the
sectors
at
occur
quickly,
some
large
financial
risk,
the
risk
might
not
affect
the
finance
institution
might
default
and
create
a
system
as
a
whole.
domino
effect
As a consequence, the potential standardization work on this topic will involve the development of genuine ‘value-‐
at-‐risk’ metrics based on the sensitivity of valuation and credit worthiness assessment to adverse climate
scenarios. To perform this work, the ISO 14097 working group will be able to build on a growing body of
methodological work from analysts (S&P, Moody’s, Kepler, HSBC, Barclays’) and non-‐for-‐profit research (Carbon
Tracker, Oxford, 2Dii, etc.). This work would involve the development of guidance on how to adapt risk models to
integrate climate-‐related parameters, which parameters are necessary in climate scenarios, which times can be
applied, how to account for the adaptive capacity of companies over time, how to present the results and the
assumptions.
44
4. CONCLUSIONS
OF
ISO
14097
Building on the landscape review and the recommendations provided the by ISO 14097 conveners, the ISO 14097 WG
discussed the advantages and disadvantages of addressing a series of topics in the standard. The discussion led to the
definition of the the priorities of the standard.
At a first stage the standard will focus on developing a framework to assess the contribution of investments to the
Paris Agreement, this will include the process to set targets, climate actions and the metrics to measure progress on
targets and the impact of actions. Standardization avenues around scenarios will be as well be considered. At a second
stage the group will focus on developing a framework for the management of climate-‐related risks however the
granularity of the standard on this topic will be discussed at a further stage. The main points to be addressed during
the development of the standard are summarized below.
TOPIC
Sub-‐topics
and
associated
Pros Cons
work
for
the
ISO
group
MANAGEMENT
AND
DISCLOSURE
OF...
Management
processes
GHG
emissions
Description
of
a
standard
-‐ Need
for
guidance
given
the
-‐ We
are
at
a
stage
in
which
reduction
climate
impact
management
lack
of
finance-‐sector
specific
FIs
are
still
defining
practices,
induced
by
the
framework
based
on
best
guidance. thus
there
is
a
chance
for
a
activities practices
and
exiting
guidance -‐ Confusion/
inconsistencies
possible
pushback
from
List
a
description
of
actions
found
in
investors
narrative
(i.e.
investors,
specially
regarding
that
can
lead
to
impacts,
actions
for
risk
and
contribution
the
process
to
set
targets
description
of
the
‘impact
are
being
used
interchangeably).
(see
page
42).
pathways’
and
protocol
to
-‐ Required
by
NAZCA
and
Art.
estimate
the
outcomes
ex-‐ 173.
ante
and
ex-‐post. -‐ FIs
uptake
is
driven
by
the
need
Process
to
set
relevant
and
to
communicate
on
this
topic
actionable
climate-‐related
and
the
lack
of
internal
targets
and
manage
them resources
to
work
on
it.
Results
of
portfolio
assessment
Consistency
Guidance
on
how
to
-‐ External
pressure
from
-‐ FIs
are
currently
exploring
with
climate
‘translate’
the
well
below
2°C international
organisations
(e.g.
their
options
and
thus
goals
(e.g.
2D
macro-‐economic
target
from
a
UNFCCC)
and
NGO’s
requiring
practices
are
still
being
benchmark) scenario
into
an
indicative
investors
to
be
accountable
for
defined.
benchmark/target
for
their
actions.
financial
assets,
including:
-‐ Private
sector
can
get
involved
burden
sharing
rules,
time
to
set
the
bar.
frames,
etc.
Guidance
on
how
-‐ No
guidance
on
the
topic
to
compare
a
portfolio
with
(except
for
disclosure)
due
in
this
benchmark
building
on
part
to
the
limited
availability
of
exposure
indicators methodologies.
Outcomes
of
‘actions’
Impact
on
GHG
Guidance
on
how
to
track,
-‐ This
will
signal
to
customers,
-‐ Risk
of
push
back
from
FIs
emissions
and
estimate
and
report
on
the
beneficiaries,
governments
and
doing
greenwashing
as
resilience
impact
of
a
range
of
‘actions’
regulators
which
FIs
are
doing
actions
will
not
result
in
(reallocation
of
portfolio,
something
meaningful
against
impact.
shareholder
engagement,
climate
change
and
distinguish
-‐ FIs
that
are
“honest”
in
etc.)
on
the
decisions
of
them
from
other
organizations
their
approach
may
investees,
their
investment
marketing
misleading
pushback
due
to
the
plans
and
the
related
information.
difficulties
around
impact
committed
emissions
or
measurement
(e.g.
in
the
emission
reductions.
Guidance
case
of
collective
actions).
on
how
to
compare
the
The
WG
might
opt
for
results
with
voluntary
targets
developing
different
and
2D
benchmarks “shades”
of
metrics.
45
TOPIC
Sub-‐topics
and
associated
Pros Cons
work
for
the
ISO
group
MANAGEMENT
AND
DISCLOSURE
OF…
Management
processes
Climate-‐related
Description
of
a
standard
risk
-‐ Perception
that
the
sector
-‐ Financial
risks
are
currently
financial
risks management
process
based
on
might
be
more
motivated
by
managed
in
the
short
term.
best
practices
and
exiting
this
topic
(latent
demand),
Thus,
there
is
limited
use
of
guidance but
needs
to
be
tested
as
FIs
scenarios
in
this
context
Listing
and
description
of
risk
seems
to
communicate
more
(other
than
a
2°C
scenario)
mitigation
‘actions’
and
the
on
impact -‐ Addressing
this
topic
could
process
to
measure
their
-‐ There
is
no
standard
overlap
with
the
next
steps
of
impact process
developed,
however
the
TCFD
and
partners,
there
is
high
level
guidance
however,
this
scenario
is
not
suggesting
how
do
it.
The
considered
as
plausible
at
this
guidance
needs
to
be
stage.
complemented
by
a
-‐ Traditional
risk
management
technical
one. processes
play
a
role
in
the
-‐ Financial
regulators
may
be
investor’s
competitiveness,
interested
to
assess
long
even
though
there
is
some
term
systemic
financial
risk
guidance
from
regulatory
even
if
it
is
considered
authorities
on
risk
irrelevant
by
individual
management
there
is
not
an
investors
that
have
shorter
urge
for
standardization
on
term
investment
horizon.
risk
management.
This
is
because
if
an
given
investor
can
always
say
I
will
take
action
before
the
risk
materialize
(say
by
selling
the
stocks
that
are
associated
to
asset
exposed
to
the
risk
of
being
stranded
or
through
hedging),
the
system
as
a
whole
will
not
be
able
to
mitigate
the
risk.
MEASUREMENT
AND
DISCLOSURE
OF…
Results
of
portfolio
assessment
Value-‐at-‐risk Guidance
on
how
to
calculate
-‐ It
could
be
potentially
-‐ FIs
are
currently
exploring
and
disclose
the
value-‐at-‐risk
beneficial
for
financial
their
options
and
thus
for
various
types
of
assets
in
a
supervisory
authorities
but
practices
are
still
being
given
climate
scenario,
building
not
necessarily
to
investors
defined.
Taking
that
direction
on
exposure
indicators due
to
the
commercial
gains
may
disincentive
innovation.
associated
to
the
investment
-‐ Limited
availability
of
strategy.
relevant
methodologies
at
portfolio
level.
Thus
requiring
the
development
of
metrics,
thus
going
beyond
standardization.
Outcomes
of
‘actions’
Impact
on
Guidance
on
how
to
assess
the
-‐ Signal
to
customers,
-‐ FIs
are
currently
exploring
financial
risk
impact
of
various
‘actions’
on
beneficiaries,
governments
their
options
and
thus
exposure the
value
at
risk
in
a
climate
and
regulators
the
FIs
that
practices
are
still
being
scenario,
backtest
the
are
taking
action
on
climate-‐ defined.
Taking
that
direction
performance,
and
calculate
related
risk
(and
the
financial
may
disincentive
innovation.
standard
risk
indicators
in
a
benefits
associated)
and
-‐ Additional
complexities
may
business
as
usual
scenario. distinguish
them
from
other
arise
due
to
the
lack
of
a
organizations
with
poor
risk
framework
to
calculate
value
management
processes.
at
risk.
46
TOPIC
Sub-‐topics
and
associated
Pros Cons
work
for
the
ISO
group
MANAGEMENT
AND
DISCLOSURE
OF...
Scenario
design
Scenario
design
General
guidance
design
well
-‐ Required
by
all
approaches -‐ Risk
to
duplicate
TCFD
work,
process below
two
degrees that
can
be
-‐ Response
to
the
TCFD however
at
this
stage
the
used
by
financial
institutions
-‐ In
the
context
of
intention,
timeline
and
level
and
communicate
on
their
key
contribution,
there
is
no
of
granularity
is
unclear.
assumptions,
including
scope,
need
to
develop
4°C,3°C.
-‐ The
scientific
community
has
timeframe,
ambition,
Only
2°C
is
useful.
the
leadership
on
the
scenario
uncertainty,
etc. design
process,
while
the
Scenario
Guidance
on
the
outputs
finance
community
has
to
‘translation’
necessary
to
inform
risk
develop
the
expertise
needed
process assessment
or/and
consistency
for
the
‘translation’
process.
of
financial
assets
with
climate
goals,
and
guidance
on
the
associated
steps
to
‘translate’
climate
scenarios
and
technology
roadmaps.
Standard
Production
of
‘standard
-‐ It
is
unclear
the
extend
at
scenarios
scenarios’
(2°C
or
a
range)
that
which
standardising
scenarios
can
be
directly
used
by
financial
at
this
stage
is
worthwhile
if
institutions.1 the
convergence
of
practices
from
the
industry
or
from
government
pressure
may
lead
to
some
form
of
standardization
-‐ There
is
an
ongoing
debate
on
the
financial
community
around
the
advantages
and
disadvantages
of
using
the
same
scenarios.
MEASUREMENT
AND
DISCLOSURE
OF…
Results
of
portfolio
assessment
Exposure
to
Description
of
how
to
assess
-‐ There
are
different
-‐There
are
already
several
climate-‐relevant
the
exposure
of
a
portfolio
to
taxonomies
and
metrics
used
taxonomies
and
activities climate-‐relevant
business
that
prevent
comparison,
methodologies
developed
activities
or/and
technologies
thus
there
is
a
need
for
these
however
do
not
connect
including: convergence.
The
the
dots
with
climate
targets.
-‐ The
relevant
indicator(s)
per
standardization
of
the
The
working
group
would
activity
(carbon
intensity,
process
to
assess
exposure
eventually
need
to
develop
production
units,
production
will
help
to
disentangle
the
metrics,
which
goes
beyond
capacity,
cost
curves,
sales,
caveats
presented
when
standardization
work
(with
etc.). disclosing
about
risk
and
some
exceptions).
-‐The
rules
to
allocate
volume
of
contribution
actions2.
activities
to
securities
and
their
owners
-‐Templates
to
report
results.
1.
Long
term
global
scenario
makes
sense
only
for
well
below
2
degrees.
Otherwise,
specific
local
and
short
term
environment
should
be
used.
2.
e.g.
investing
is
shale
oil
goes
against
the
Paris
Agreement
goals
but
if
the
investor’s
goal
is
to
manage
risks,
shale
oil
might
be
a
good
option
due
to
the
lower
sunk
costs
compared
to
conventional
oil).
47
The 2° Investing Initiative (2°ii) is a non-‐profit company set-‐up to produce research on pathways for aligning the
financial sector with climate goals. Its research is provided free of charge and 2°ii does not seek any direct or
indirect financial compensation for its research. 2°ii is not an investment adviser, and makes no representation
regarding the advisability of investing in any particular company or investment fund or other vehicle. A decision
to invest in any such investment fund or other entity should not be made in reliance on any of the statements
set forth in this publication. The information & analysis contained in this research report does not constitute an
offer to sell securities or the solicitation of an offer to buy, or recommendation for investment, in any securities
within the United States or any other jurisdiction. The information is not intended as financial advice. The
research report provides general information only. The information and opinions constitute a judgment as at
the date indicated and are subject to change without notice. The information may therefore not be accurate or
current. No representation or warranty, express or implied, is made by 2°ii as to their accuracy, completeness or
correctness. 2°ii does not warrant that the information is up to date.
Contact:
Email:
contact@2degrees-‐investing.org
Website:
www.2degrees-‐investing.org
Telephone:
+331
428
119
97
•
+1
516
418
3156
Paris
(France):
47
rue
de
la
Victoire,
75009
Paris,
France
New
York
(United
States):
205
E
42nd
Street,
10017
NY,
USA
London
(United
Kingdom):
40
Bermondsey
Street,
SE1
3UD
London,
UK
Supported by:
This
work
received
financial
support
from
European
Commission
LIFE
NGO
Operating
grant.
This
document
reflects
only
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view.
The
Commission
is
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48
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