The United Nations Framework Convention on Climate Change’s (UNFCCC) new Finance Climate Action Pathway 2021 provides an ambitious and detailed roadmap for the financial markets to support the transition to a net-zero future.
Launched in 2019, the Climate Action Pathways set out sectoral visions for achieving a 1.5° C resilient world by 2050, with transformational milestones and key actions that need to be achieved to realise them.
For the financial sector, the goal is that by 2050, markets are placed to fund a zero-carbon world. The pathway’s targets, proposed transition process, and deadlines are outlined in this global insight report.
As wide-ranging as it is far-reaching, the UN’s action plan envisages the following by 2050:
The pathway provides a comprehensive timeline in order for the 2050 deadline to be met. Here are some of the targets.
In the first phase, insurers are urged to integrate the Taskforce on Climate Related Financial Disclosure (TCFD) recommendations. As the transition gets underway, they are called upon to engage insureds to assess and report all climate-related risk. By 2040, the aspiration is to have insurers’ underwriting and investment portfolios aligned with achieving net-zero emissions, while supporting resilience to climate-related impacts.
Underwriters will ultimately seek more information from insureds on both their current status regarding net-zero objectives and transition commitments.
Not all markets are moving at the same speed to achieve these non-binding goals but a number of European bodies are already working on the pathway’s objectives, including ClimateWise, the Sustainable Markets Initiative, and the Net-Zero Insurance Alliance.
The UNFCCC also advocates for continued and increased mandating of climate reporting (for example, via the TCFD’s recommendations) as key to realising the ambition of net-zero underwriting in the timeframes the pathway has laid out.
Governments around the world (notably the UK and EU) are looking to adopt their own, more tailored, versions of the proposed TCFD reporting frameworks endorsed in phase one of the UN Climate Action Pathway (above) and have set various deadlines for when reporting will become mandatory for business ranging from 2025 to 2050.
However it is arguably in New Zealand, where things are moving the fastest.
New Zealand has just become the first country in the world to make climate risk reporting mandatory for banks, asset managers and insurers, thanks to new legislation that was passed on 1 December 2021.
The new laws will apply to about 200 institutions (incl. banks and insurers with over $NZ1bn in asset under management). These institutions will be required, by law, to report their climate related financial risks in 2023. The preamble to the NZ legislation states that “the goal of mandatory climate-related disclosures is to:
While Australia is yet to mandate specific climate risk reporting by law, the Australian Prudential Regulation Authority (APRA) has endorsed the use of the TCFD framework and it has told financial institutions that it expects them to report on the risks under existing prudential rules.
In November 2021 APRA released its Final Prudential Practice Guide on Climate Change Financial Risks (CPG 229). The Guide is designed to assist banks, insurers and superannuation trustees to manage the financial risks of climate change. It imposes no new regulatory requirements or obligations, but will instead assist APRA-regulated entities to manage climate-related risks and opportunities within their existing risk management and governance practices.
The Guide covers APRA’s view of sound practice in areas such as governance, risk management, scenario analysis and disclosure of climate-related financial risks. It is designed to be flexible in allowing each institution to adopt an approach that is appropriate for its size, customer base and business strategy.
Some Australian businesses have welcomed the regulatory guidance and are effectively embarking on a similar (albeit it voluntary) TCFD trajectory as their neighbours in NZ.
What’s next? In 2022, APRA says it intends undertaking a survey to help gauge the alignment between institutions’ management of climate change financial risks, the guidance set out in CPG 229, and the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures. In addition, APRA says it continues to advance its climate-related program of activities, including the climate vulnerability assessment that is underway with Australia’s five largest banks.
For more information, please contact Marsh Advisory.
This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. LCP 22/016.