Daily ESG Briefing: ‘We expect climate stress tests to feed into capital requirements’ says Fitch

The latest developments in sustainable finance

Credit ratings agency Fitch predicts that banks and insurers around the world will face climate stress tests within three years. Part of a growing trend, as supervisors move to tackle climate risk, the tests that have been announced so far in the UK and Europe “will not test capital adequacy but may lead companies to look more closely at whether they need to hold more capital to cover potential losses from climate-change risks”, Fitch noted. But “in the longer term, we expect climate stress tests to feed into prudential capital requirements”. French financial institutions will announce the results of their stress tests in April, while the UK will commence its biennial stress testing in June. The European Central Bank will test significant eurozone banks next year, and authorities in Australia, Brazil, Canada, Hong Kong and Singapore have also announced tests for 2021 and 2022.

The United Arab Emirates has reportedly introduced rules for listed companies, requiring them to have at least one female director on their boards. According to the regional newspaper National, the Securities and Commodities Authority met on the weekend and CEO Obaid Saif Al Zaabi told the paper: “We previously used to accept explanations if there wasn’t compliance, but now we are moving to make female representation compulsory.” 

The Bank of England, Banque de France, the European Central Bank and the US Federal Reserve System are among the central banks to have been warned that they must have an explicit strategy for helping countries achieve net-zero emissions. A report published today by academics at the London School of Economics and the University of London, states that central banks “need to ensure that their activities are coherent with net-zero government policy”, and recommends that they “consistently integrate climate change into models to adequately account for the impacts of climate change on macroeconomic outcomes and into monetary frameworks”. Elsewhere, a coalition of NGOs are calling on the European Central Bank (ECB) to decarbonise its collateral framework, warning that it disproportionately favours fossil fuel companies and implicitly encourages them to tap bond markets. In related news, the Bank of Japan will reportedly for the first time highlight climate change risks as among key themes in its bank examinations this year.

Nest, the UK’s largest automatic enrolment pension scheme, has committed £250m to clean energy this year, appointing Octopus Renewables as part of a mandate focused on investing in renewable energy projects and associated infrastructure, predominantly in the UK and Europe. Meanwhile, Newton Investment Management has been awarded a £50m mandate by the UK’s Open University to run a fund using “one of more of the following styles: index, ESG, Thematic, and Value”, according to a tender document.

Research from bfinance has found that asset managers in renewable energy infrastructure have retained their return expectations despite increased competition for investments in light of oil price volatility, increased appetite for green investment and demand for infrastructure opportunities. “Instead, the strategies available to investors have evolved substantially, with key trends including greater exposure to development risk, use of less conventional technologies, investing in new geographies and greater specialisation managers are evolving their strategies to central and eastern Europe and developed Asia and a trend of managers prepared to enter projects during the development phase,” it said.

The CFA Institute will roll out its Certificate in ESG Investing globally, it has said. The course was created by the CFA Society of the United Kingdom, but CFA’s CEO, Margaret Franklin, said the acceleration of interest in EG investing had upped demand internationally.