Three notes on the management of climate-related risks by financial actors

Description

I4CE has published a series of three Climate Briefs on the management of climate-related risks by financial actors. These special edition technical notes present the key stakes around this issue by focusing on three questions:

• Climate Brief n°44: Why should financial actors align their portfolios with a 2°C pathway to manage transition risks? Climate Brief 44 explores several reasons for prioritising the low-carbon alignment of portfolios to manage transition risks. The alignment of a portfolio with a low-carbon pathway can limit transition risks, arising from the nature of the low-carbon pathway and the methods for implementing it. Encouraging exposure to those counterparties who adopt a progressive and flexible strategy for aligning their activities can reduce exposure to assets that do not follow a sector-based decarbonisation pathway. Aligning a portfolio with a low-carbon pathway therefore means choosing – within a sector or category of financial assets – those counterparties who are progressively beginning to implement the required decarbonisation efforts on their business sectors. Aligning a portfolio with a low-carbon pathway (and a fortiori with a 2°C pathway) is a gradual process that will only be possible to fully put into place once a sufficient volume of financial assets begins to be aligned with such a pathway.
• Climate Brief n°45: How could financial actors manage their exposure to climate risks? Climate Brief 45 discuses how that in order to manage climate-related issues in their portfolios, financial actors will need in the long run to incorporate a forward-looking analysis for alignment of their portfolios with a 2°C pathway into their risk management and investment decision-making processes. Such analysis would need to be based on scenarios that represent different pathways for decarbonisation of the economy, and more specifically a 2°C pathway, broken down into quantitative variables of financial impact of the risks and opportunity for low-carbon transition. While, certain constraints currently restrict the possibility for financial institutions to carry out such analysis for all of their outstanding investment and financing amounts - financial players can start as of today to progressively roll out a certain number of preliminary actions.
• Climate Brief n°46: How should financial actors deal with climate-related issues in their portfolios today? Climate Brief 46 presents the most promising avenues of analysis for different financial business lines depending on their specificities. Broadly speaking, financial players should begin as of now to analyse their climate-related issues in a forward-looking manner based on semi-quantitative indicators. Climate” indicators can be grouped into five main categories: carbon footprint indicators; “ESG” type qualitative indicators; “green share / brown share” indicators; “physical” carbon footprint indicators; and indicators of alignment with a low-carbon or 2°C pathway. Each type of indicator presents advantages and drawbacks and their relevance depends on the business lines and on the specific objectives of the financial institution. Using one type or combination of such indicators is an initial step that will facilitate the integration into their processes of quantitative indicators of impact of the low-carbon transition on financial performance.

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