A new risk centre which provides tools to help financial institutions analyse nature-related risks has been launched by the UN Environment Programme Finance Initiative. But climate non-profit Reclaim Finance has questioned its ability to bring about “real change”.
The centre will provide UNEP FI members with access to a centralised resource hub for climate and nature risks, as well as addressing other sustainability risks such as pollution and social issues, challenges related to stress-testing, regulation and specific risks related to waste, pollution and resource use.
Guidance and examples about where risk analysis fits into members’ adoption of UNEP FI’s principles for responsible banking will also be provided. UNEP FI’s members include more than 330 global banks, as well as insurance and investment firms.
The centre builds on UNEP FI’s existing climate and nature risk-related work, including the support it provides to help financial institutions implement the Task Force on Climate-related Financial Disclosures framework, and its nature equivalent, the Taskforce on Nature-related Financial Disclosures.
Romie Goedicke, nature co-lead and risk centre senior advisor and co-founder at UNEP FI, said the centre will help financial institutions expand their horizon to focus on environmental risks beyond climate.
“In the past few years we have seen nature being mainstreamed in action within our members, for example with the [TNFD] early adopters, but the reality is that most of our members will start their nature journey based on their climate one,” she said. By combining UNEP FI’s climate and nature risk-related work, Goedicke said its members can broaden their risk assessment models, and adopt an integrated approach to sustainability issues. “This is the best way to deal with these new and interlinked risks and respond to their needs,” she said.
Tony Goldner, executive director of the TNFD, welcomed the new centre, saying that it will provide market participants with the data and tools to support their analysis of nature-related risks. “What’s clear is that the state of the planet and the acceleration of nature loss means that nature risks [are] in capital portfolios today,” he said. “The challenge is that financial institutions — from asset owners and managers as well as banks and insurers — have not had the tools to see those risks, figure [out] what’s material and start managing those risks like any other risk.”
Goldner said financial institutions might be able to decarbonise their portfolios but they can’t “de-nature” them. “[They] need a suite of analytic tools to start identifying and assessing nature risk in their portfolios so it can be actively managed. TNFD’s LEAP assessment approach and our guidance on nature risk scenarios provide two such tools but others are needed,” he said.
At the World Economic Forum's annual meeting in Davos in January, 320 organisations, representing $4tn in market capitalisation, committed to making nature-related disclosures just four months after the TNFD published its recommendations.
Not just standard data?
However, Paul Schreiber, senior policy analyst at Reclaim Finance, said that when it comes to identifying climate or sustainability risks, the UNEP FI's new centre risks perpetuating a “never-ending cycle of knowledge-building, skill-sharing and data-gathering”.
“There is already plenty of scientific evidence showing the impact that climate change is having and the risks that this represents. If the new risk centre can encourage financial institutions to recognise this reality and act on it, urgently, then this will be useful, and it should make it its mission to do so,” Schreiber said.
If, however, financial players treat climate change and its consequences “just like standard financial information”, they could risk failing to grasp the “radical uncertainty that it brings, or to transfer that to related risks”, he added.
With banks increasingly confronted by systemic risks that challenge traditional risk management frameworks, Goedicke said the centre is a “classic example of ‘form follows function’”.
The UNEP FI said the centre will host monthly webinars to facilitate engagement between risk professionals and wider stakeholders including central banks, supervisors and industry experts, and a knowledge hub will share resources on assessing and managing risks. The centre will also host technical skill-building workshops about evaluating and using customer transition plans, scenario use cases and applicability, risk management or emissions data.
“In this way the centre is a safe place for our members to place global developments in the risk space within their own organisations, speak and learn from their peers, and engage with international experts on these topics,” Goedicke said.
Still, financial institutions already have “real-world data” that they can use to change their operations and mitigate risks, Schreiber said: “For example, who today can still say providing funding or insurance coverage to companies developing new coal mines or oil and gas wells is safe? In this context, the new UNEP FI risk centre is unlikely to deliver real change.”
The risk centre could focus on driving financial institutions and regulators to adopt a precautionary approach to climate-related risks, where mitigating climate change becomes a tool for mitigating risks, Schreiber said. But “that would mean tackling the clearly identified high level of risk resulting from polluting activities, starting with fossil fuel expansion”, he added.
Where it could make a meaningful contribution, Schreiber said, is among companies looking to adopt transition plans, because these need to address both risk and impact.
