Since 2012, SHARE has engaged with Canada’s five largest banks on behalf of shareholders to discuss how they are measuring and managing the physical and transition risks associated with climate change. While calls from investors for improved climate-related disclosure have continued to escalate, the banks raised the concern that effective scenario planning tools that would help them determine the impacts on their businesses of different climate change scenarios are still not well developed and tested. Given the central role banks play in Canada’s economy, overcoming the challenges of incorporating climate change risks into bank decision-making is essential, and SHARE saw that it was not going to be solved in isolation.
In December of 2016 the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) released their recommendations on climate-related financial disclosures applicable to organizations across sectors and jurisdictions, including the financial sector. The TCFD further focused the international financial sector’s attention on the need for disclosure of the potential impacts of climate-related risks and opportunities on an organization’s businesses, strategies, and financial planning under different potential future states (scenarios), and brought together significant technical expertise to guide its thinking.
Using the TFCD’s recommendations as a stepping-off point, last week SHARE and the Global Risk Institute (GRI) convened a collaborative roundtable with Canadian financial institutions on using scenario analysis to address climate-related risk and opportunities.
The workshop brought together 25 senior risk management personnel from Canada’s major banks, insurance companies and asset owners as well as representatives from the TCFD, the 2° Investing Initiative, the United Nations Environment Programme Finance Initiative (UNEP FI), Mercer and JP Morgan Chase, to identify tools, data and methods to understand and incorporate climate-related scenario analysis and stress testing into business planning and risk mitigation practices.
Speakers and participants discussed some of the key challenges associated with using scenario analysis, including:
- Identifying which scenarios are most relevant (i.e. event-based scenarios, temperature-based scenarios, regulatory scenarios);
- Addressing the discrepancy in time horizons between climate change-related risks and traditional financial risk models;
- Determining the extent to which scenarios can address risk interdependencies;
- Identifying the most relevant metrics and addressing the gaps in data availability.
In addition, participants considered opportunities to collaborate with other financial institutions to continue to build capacity around implementing the TCFD recommendations.
SHARE is committed to supporting this ongoing dialogue with Canadian financial institutions, which we view as a critical step in developing practical and meaningful planning for a 2-degree transition.