Policy-makers should take immediate action to harness banking prudential regulation to tackle the climate finance “doom-loop”, as existing measures focussed on transparency, risk modelling and stress tests would not be effective quickly enough, NGO Finance Watch has argued.

In a new report, the group said the most suitable tool for the EU to take preventative action were prudential measures aimed at banks with assets at risk of being stranded and that contribute to climate-related macro-prudential risk.

The tools to break the link between climate change and financial instability were already available in the form of the EU Capital Requirements Regulation (CRR), it argued, calling for higher risk weights for banks’ exposures to existing and new fossil fuel reserves.

Finance Watch called for policy-makers to calibrate the risk weight for existing bank exposures to fossil fuel reserves at 150%, consistent with a provision in the CRR for applying 150% risk weights to exposures associated with risks that are particularly high or difficult to assess.

New fossil fuel exposures, meanwhile, should carry a risk weight of 1250% under the standardised approach, with a similar floor for internal models, according to Finance Watch.

This was its suggestion for what it said should be a risk weight chosen qualitatively, “rather than attempting to measure the unquantifiable macro-prudential risks resulting from climate change”.

Applying a risk weight of 1250% as per its suggestion would make new fossil fuel lending by banks entirely equity-funded, according to Finance Watch, “an appropriate treatment” for the risks this activity carried.

The European Commission, Brussels

The European Commission in Brussels

The organisation considers that the CRR contains a provision that would allow the European Commission to take immediate action to implement the modified risk weights until banks’ prudential requirements for fossil fuel exposurs have been amended in the CRR.

Thierry Philipponnat, Finance Watch’s head of research and advocacy and author of the report, said: ”We know that climate change will have a significant impact on financial stability but no one can forecast with any accuracy how this risk will emerge.

”Given the short time available, there is a need for decisive and immediate regulatory action, using prudential tools already available. Policymakers must not wait to assess unquantifiable outcomes before acting to avert financial instability.” 

Insight rolls out new risk rating, assesses sustainable investment COVID-19 performance

Insight Investment has introduced a research rating system for assessing bond issuers against a set of proprietary environmental, social and corporate governance (ESG) risk metrics, it said today.

The £681bn (€752bn) asset manager described the rating as a quantitative risk-analysis tool providing “a fresh feed of data into Insight’s credit research hub, alongside non-ESG inputs”.

Joshua Kendall, senior ESG analyst at Insight, said: “Our credit analysts find many holes in externally-available information and poor agreement among data providers about what constitutes an ESG risk.

“Also, for many smaller issuers, particularly emerging market or high-yield companies, the availability of relevant non-financial data lags information from larger issuers.”

“We believe there is not compelling evidence that green bonds are inherently more or less defensive for investors than their brown equivalents”

Rob Sawbridge, senior portfolio manager, Insight Investment

Last week Insight published research showing that green bonds did not outperform conventional bonds during the COVID-19 volatility in March and April.

In a report, Rob Sawbridge, senior portfolio manager, said some recent third-party analysis has used index performance to conclude green bonds had outperformed in recent market turmoil, but that this did not consider the quality or sector differences between such indices.

Insight’s analysis, which considered maturity-matched pairs of bonds issued by the same company, indicated to the manager that there was little evidence that green bonds systematically outperformed brown equivalents over the period in question.

“We believe there is not compelling evidence that green bonds are inherently more or less defensive for investors than their brown equivalents,” wrote Sawbridge. “However, as investors switch to more impact-focused metrics in their strategies, we may see a clearer premium (the so-called ‘greenium’) offered by green bonds.”

The manager also said that companies with better ESG ratings were generally more resilient during the turmoil, and that sustainability-focussed portfolio tilts and allocations were likely to have helped investment performance.

EFRAG corporate Reporting Lab’s next project

The steering group of the European Corporate Reporting Lab at the European Financial Reporting Advisory Group (EFRAG) has appointed the members of the group working on a project on non-financial risks and opportunities, and linkage to the business model.

The members have expertise on reporting of non-financial information from a variety of perspectives, including as “preparers”, “users” – institutional investors and rating agencies – and standard setters.

User representatives on the group include Tegwen Le Berthe, head of ESG scoring and methodology at Amundi, Desmartin Jean-Philippe, head of responsible investment at Edmond de Rothschild Asset Management, and Ulrika Hasselgren, global head of sustainability and impact investment at Danske Bank.

The European Lab was established by EFRAG following a call by the European Commission in its 2018 sustainable finance action plan. Its first project was on climate-related reporting.

The aim of the second project is “to identify good reporting practices around the theme of the project from a sustainability perspective and addressing what is commonly known as ESG factors”.

Alain Deckers, head of unit on corporate reporting, audit and credit rating agencies at the European Commission and vice-chair of the European Lab steering group, said: “The output of the second project of the European Lab is expected to identify practical examples on how to present adequate information on sustainability-related risks and opportunities in corporate reports.”

Candriam-GRI join forces

Candriam is partnering with a research unit at the London School of Economics and political science (LSE) focussing on the social dimension of a shift to a low carbon economy.

As part of the three-year ’Sustainability, Investment, Inclusion and Impact’ (SI3) initiative Candriam and the Grantham Research Institute on Climate Change and the Environment (GRI) will “faciliate innovative research, strengthen dialogue, and promote the international exchange of ideas on ways to ensure that climate action delivers positive social impact”.

The partnership will be led by Nick Robins, GRI professor in practice for sustainable finance, with oversight from CEO of Candriam, Naïm Abou-Jaoudé.

Filtering a more effective ESG strategy?

Divestment and engagement are mutually reinforcing rather than the former precluding the latter, Scientific Beta has said in a new publication.

It said that those who deem ESG divesting strategies as incompatible with engagement sometimes see ESG mixing strategies – the term it uses to describe what elsewhere may be called ESG integration – as a good match with ESG engagement.

“However, contrary to common perception, ESG mixing strategies – such as over/underweighting based on ESG scores or using portfolio-average ESG scores as a constraint or objective in an optimiser – also lead to divesting based on ESG scores,” it said.

But divestment stemming from “straightforward ESG filtering” is more effective, the smart beta index provider argues, because it is concentrated on ESG laggards and “sends unambiguous and predictable – and therefore actionable – signals to all companies”.

“In combination with ESG engagement, in particular through collaborative ESG campaigns, we argue that ESG filtering sets the ground for an effective ESG investing policy,” it said.

WBA boost supervisory board

The World Benchmarking Alliance (WBA) has added six new members to its supervisory board to take it to 10 as it seeks to establish itself as ”an agent for systems change to build more resilient companies and a more sustainable future for all”.

The WBA’s main concrete output is benchmarks to highlight and compare companies’ performance in relation to the UN Sustainable Development Goals. The corporate human rights benchmark, for example, which is part of the WBA, is used by many investors to inform investment analysis and engagement.

The WBA is chaired by Paul Druckman, former chair of UK Accounting Standards, a former board member of the UK’s Financial Reporting Council and former founding CEO of the International Integrated Reporting Council (IIRC). The rest of the now larger supervisory board can be seen here.

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