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RI News in Brief, April 26: Sixteen of the world’s biggest banks tackle TCFD recommendations

The bite-sized round up of the latest ESG news you need to know.

Environmental

Sixteen of the world’s biggest banks have fed into a rolling project by UNEPFI examining how they can follow the recommendations of the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD), particularly on climate change business scenario analysis. Notably, the advisory report has been produced in conjunction with risk and investment management experts and climate scientists from the International Institute for Applied Systems Analysis, the Potsdam Institute for Climate Impact Research and the International Energy Agency. UNEPFI said the guidance is designed to help banks manage and be transparent about the risks a transition to the low-carbon economy presents to their business, and help them take up related business opportunities. Oliver Wyman and Mercer, the management and investment consultancy firms helped develop the methodology, which builds on existing bank risk processes to enable examination of climate risk and opportunities across a range of geographies and sectors beyond the usual stress-testing horizon of 2-3 years. A complementary framework on the assessment of risks and opportunities from the physical impacts of climate change is planned for release in late June. The banks in the pilot project are: ANZ, Barclays, BBVA, BNP Paribas, Bradesco, Citi, DNB, Itaú Unibanco, National Australia Bank, Rabobank, Royal Bank of Canada, Santander, Société Générale, Standard Chartered, TD Bank Group and UBS.
Actiam, the €58bn Dutch fund manager, has added its name to the investors that will vote for the Follow This climate resolution at the upcoming Shell shareholders’ meeting on May 22. Click the Link to RI’s recent coverage of the other investors voting for the Follow This resolution.
Connecting Finance and Natural Capital: A Supplement to the Natural Capital Protocol has been launched in Hong Kong, providing a framework for financial institutions (FIs) to assess the natural capital impacts and dependencies of their investments and portfolios. This framework has been developed by the Natural Capital Coalition, Natural Capital Finance Alliance (NCFA) and the Dutch SIF VBDO. Much of the current understanding of FIs centres on on the impacts that their portfolios are having on the health of natural capital stocks, rather than their dependency on natural capital and ecosystem service flows, which are more directly material to investment risk and returns, the coalition says.
Although global decarbonisation agreements are anticipated to lead to increased costs within the passenger airline sector, the credit risk will be defined by the the extent of airlines’ international networks and their ability to pass on carbon-offset costs to their customers, says Moody’s in a report. ‘Route mix’ will be the single most important factor, according to author Swami Venkataraman, who said: “The higher the proportion of an airline’s flights that are international, the greater its exposure will be to carbon costs.” While domestic flights emissions are regulated by the Paris Agreement, international flights fall under the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which caps emissions at 2020 levels and requires airlines to buy carbon offsets above this level.h6. Social

A new platform has been launched by seven Multilateral Development Banks (MDBs) to enhance collaboration on economic migration and forced displacement. The platform was formed in response to a request by the G7 under the 2017 Italian leadership, and a strategic framework was presented to the G7 last year. Among the priority areas which are the focus of the platform are deploying better-targeted instruments and products; and ensuring strategic coordination. The MDBs are the African Development Bank, Asian Development Bank, World Bank Group, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank, Islamic Development Bank, and World Bank Group.
The Development Bank of Nigeria has been created by the Federal Government of Nigeria to address financing challenges hindering private investment in the country by providing funding and risk sharing facilities. At present, access to capital is very limited in the country with only 5% of the 37 million entrepreneurs and small businesses that contribute to 50% of GDP can access credit in the financial system. The new bank is supported by the European Investment Bank and the African Development Bank, which own $20m and $50m worth of equity respectively.
Investors in cobalt may be exposed to material reputational, operational and regulatory risks as a result of human rights violation including child labour and exposure to health hazards, according to a recent report by the PRI. Cobalt, a commodity used in electronics, is not categorised as a conflict mineral yet, however, it is likely that policymakers, particularly in the EU, will soon fill the regulatory gap. Investors are expected to play a key role in pushing for responsible sourcing of cobalt, especially institutional investors who are expected to determine their exposure to human rights risk and conduct appropriate due diligence under the OECD Guidelines for Multinational Enterprise.
ESG factors drive outperformance, according to a recent Deutsche Bank report. More than a decade’s worth of data, a period including booms and recessions, has reportedly shown that stocks with “a high ESG grade” did not demonstrate any loss of performance compared with their peers, while low-rated stocks did have a performance-penalty. Analysts believe ESG-focused investors pay more attention to the companies in which they invest.

Governance

Legal & General Investment Management (LGIM), one of the largest investors in the UK stock market, increased its votes against management in 2017, opposing the reappointment of 2,807 company directors (2,362 in 2016) and voting against at least one resolution at 59% of companies (56% in 2016) according to its Corporate Governance report released today. In the US, it voted in favour of 95% of climate change resolutions in 2017. Along with the report, LGIM has also written to CEOs outlining the key areas in which they are expecting more action including diversity, climate change and shareholder rights.