The banking industry is taking another step towards laying the groundwork to tackle the climate change threat with a new set of tools. The groundbreaking methodologies published today, aimed at helping the banking sector understand and manage the adverse effects and the opportunities of climate change in their loan portfolio. The methodologies are the result of a joint effort by sixteen leading global banking institutions – including BBVA – and Acclimatise, a UK-based climate change advisory.
The project has been coordinated by the United Nations Environment Programme-Finance Initiative. The publication of these new methodologies, which support the implementation of the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD), comes after the release in April of a preliminary methodology focused on the assessment of transition risks.
On the occasion of the publication of the methodologies, - Eric Usher, Head of UNEP Finance Initiative, spoke about the value of the initiative: “For financial institutions and other market actors, effectively managing and responding to climate change always means two things: understanding and responding to the intensifying physical impacts of unavoidable climate change; and also mitigating the risks and seizing the opportunities from the decarbonization of the economy. We are proud of our collaboration with these 16 leading banks and Acclimatise in the development of methods and tools that will help the global financial industry respond to climate change in a holistic manner, spanning both the physical and transition dimensions of the challenge.”
Using the methodologies, banks can begin to assess physical climate risks in their loan portfolios, evaluating the impacts on key credit risk metrics - Probability of Default (PD) and Loan-to-Value (LTV) ratios. The forward-looking assessments offer longer-term insights that go beyond the usual stress-testing horizon of 2-3 years.
The methodologies were first piloted across three climate-sensitive industry sectors: agriculture, energy and real estate. First piloting results demonstrate the need for a balanced approach to assessing the risks to banks’ clients and loan books from both incremental climate change and increasingly frequent and extreme weather events.
Extreme events often attract more attention as their impacts are more apparent, but incremental changes have the potential to gradually erode the financial performance of entire borrower segments. Understanding these phenomena and how they translate into financial risk and opportunity is fundamental to banks’ strategies to increase their resilience to a changing climate.
In this respect, Richenda Connell, CTO and cofounder of Acclimatise, the environmental advisory that took part in the project, noted the advantages of the initiative’s results at the time of assessing risks and opportunities: “The physical impacts of climate change may pose a risk to banks’ loan portfolios. The innovative methodologies published today provide foundations which can be built upon, as research and data analytics improve. Once banks understand the scale of the risks, this will be a milestone that will encourage other corporates to take climate risk management seriously. Building resilience to physical climate impacts also presents banks with investment opportunities. Those that understand this best will have a competitive advantage.”
The methodologies demonstrate that physical risks will worsen if the global economy continues on its current greenhouse gas emissions pathway. Future negative impacts could be reduced somewhat, but not avoided completely, if strenuous and rapid efforts are made globally to cut emissions.
Antoni Ballabriga, Head of Responsible Business at BBVA explained that “for BBVA, participating in this joint pilot developing and open methodology to assess the impact of physical risks on our real estate portfolios was very helpful. This entails another big step towards turning climate change into an increasingly pivotal element in our decision making processes.”
The guidance also aims to inform banks’ strategies to support clients in adapting to changing conditions. Clients who face physical risks may need to make investments to become more climate-resilient. What’s more, global markets are developing for providers of climate-related products and services, as companies such as engineering and technology providers are identifying opportunities to capitalize on shifting market trends Banks may have opportunities to support these investments.
These new methodologies are now available for public download at www.unepfi.org. The report also includes case studies from some of the banks that have conducted the pilot tests.
BBVA’s 2025 Pledge
Bearing witness to its commitment in the fight against climate change, BBVA announced in early 2018 its “Pledge 2025,” its strategy in line of the Paris Climate Agreement and to contribute to the achievement of the UN Sustainable Development Goals.
‘Pledge 2025’ establishes three lines of action: funding, managing, and engaging. BBVA pledged to mobilize €100 billion in green funding, sustainable infrastructures and social entrepreneurship and financial inclusion. The Group will also work to curb environmental and social risks and is committed to secure stakeholder involvement to jointly boost the financial sector’s contribution to sustainable development.
BBVA is already one of the most committed European institutions in terms of sustainable development. Through ‘Pledge 2025’ it expects to contribute to develop a more sustainable development while generating growth both for the Bank and its customers.