Leading financial firms call on governments to step up action on climate risk reporting, boost adaptation finance

  • UNEP’s Adaptation Gap 2020 report released last week found that with annual adaptation costs in developing countries alone estimated to reach $130-300 billion per year by 2030, public and private finance for climate change adaptation must be stepped up urgently.
  • Financial institutions have the power to direct investment and project finance to help the world adapt to climate change but they need to first understand and measure the risks and opportunities for their businesses.
  • Ten financial institutions convened by UNEP FI are calling on governments to encourage adaptation finance by making climate risk disclosures mandatory, ensuring the availability of robust data, and developing standards to guide the finance industry.
  • The financial institutions are the European Bank for Reconstruction and Development, Rabobank, Rockefeller Asset Management, Standard Chartered Bank, Yes Bank, ABN Amro, Danske Bank, ING, AXA XL and LinkREIT.

Ten leading financial institutions from around the globe are today petitioning governments to step up action on climate risk reporting. At the Climate Adaptation Summit 2021 hosted by the Netherlands, they will release a statement calling for greater action on assessment, reporting and management of the physical risks of climate change, and asking policy makers to deliver mandatory disclosure requirements on climate risk. The firms have all committed to publish climate risk disclosures relating to their business within two years and are calling on other financial institutions to follow their lead.

UNEP’s 2020 Adaptation Gap report released last week paints a daunting picture of the scale of action required to adapt societies to the increasing impacts of climate change. The report states that public adaptation finance is slowly rising but remains well short of the required funding for adaptation, estimated to reach $130-300 billion per year by 2030 in developing countries alone. This funding gap can only be met by private finance but will require governments to level the playing field for financial institutions and encourage adaptation finance by making climate risk disclosures mandatory as well as increasing the availability of robust data.

“Financial firms will only be able to adapt their businesses to a hotter world by understanding the long-term risks of climate change,” said Eric Usher, UNEP FI Head.  “It is only with this data and analysis that they will be able to identify market vulnerabilities and discuss climate risks with their clients. Crucially, it may help financial institutions to identify opportunities in climate resilient innovation and technology.”

Global financial institutions have clients and portfolios across all sectors of the economy and can therefore have a powerful influence on the way that investments are made, and projects are financed. Responding to climate change impacts requires a systemic, risk-based approach to decision making. The recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) provide a framework for this, but uptake has been voluntary and piecemeal.

For this reason, these firms have made their commitment to publish climate risk disclosures within two years; are calling on the rest of the finance industry to follow their lead, and are appealing to governments to support their action with regulatory imperatives. In order to overcome the barriers to more widespread disclosure, they also call on governments to develop standards for disclosure, identify standard climate scenarios and ensure the availability of robust, preferably open-source, datasets. Most importantly, a roadmap towards mandatory climate risk reporting should underpin this work. The financial institutions are the European Bank for Reconstruction and Development, Rabobank, Rockefeller Asset Management, Standard Chartered Bank, Yes Bank, ABN Amro, Danske Bank, ING, AXA XL and LinkREIT.

Ways in which financial institutions are adapting their business and helping customers address climate change risk include action such as that taken by Netherlands-based Rabobank which has been assessing the impact of increasing droughts on wooden foundations in pre-1950s buildings. Potential financial risk estimates currently vary widely from €5bn to €54bn and Rabobank is currently developing a strategy to help its clients address this issue. In southern Africa, meanwhile, Standard Bank of South Africa is piloting climate risk assessment methods to estimate the potential impact of increasing wildfire risks due to climate change on its mortgage lending portfolio.

There are signs of greater ambition on climate risk reporting. As of late 2020, over 1,500 corporates had become supporters of the TCFD and initial climate disclosures have been released by the leading financial institutions over the past two years. In September, New Zealand became the first country to commit to signing climate-related risk disclosure into law, and a number of other countries are likely to follow, including the United Kingdom and Switzerland.

Despite these actions by pioneering governments and firms, much remains to be done. Measuring the magnitude of future physical climate hazards and their impact on financial assets is complex and subject to great uncertainty. Many firms are reluctant to publish climate-related risk assessments because of these barriers. To be fully effective, though, climate disclosures have to become the norm rather than the exception. In the run up to COP26 in Glasgow, action on the part of financial institutions must be supported by fresh policy from governments around the world.

Further Resources

Download the Physical Risks and Resilience Statement.

Link to additional information on the Physical Risks and Resilience initiative and quotes from financial institutions.

Link to register for UNEP FI’s side event at the Climate Adaptation Summit 2021.