CDP: Three-quarters of finance giants not disclosing climate impacts of portfolios

Of the businesses that do report on financed emissions

That is according to a major new analysis from CDP today (28 April). The analysis, entitled ‘The Time To Green Finance’, looks at the climate disclosures of the 332 financial institutions that used CDP’s platform in 2020, including banks and insurers.

Of this cohort, just 84 firms disclosed their financed emissions – those generated by the projects in their portfolios – in some way. But more than one-half of these firms disclosed information relating to less than half of their overall portfolios.

This poor disclosure could hinder companies from meeting their net-zero targets, CDP is warning. Moreover, even if firms do meet such targets, they will not be trusted by shareholders or the general public without strong and credible proof.

Most firms are not already operating, or financing, in a manner consistent with the Paris Agreement. But CDP found that most firms are also poorly prepared to make the transition. Less than half of banks (45%), asset owners (48%) and asset managers (46%) have outlined plans for aligning investments with a 2C trajectory. The proportion was even lower – 27% – for insurers with underwriting portfolios.

Alignment methods recognised by the CDP include science-based targets. Just 21% of all of the businesses analysed have developed approved targets in line with either 2C or 1.5C.

CDP did note a major trend towards recognising the low-carbon transition as a financial opportunity. Collectively, businesses surveyed are planning to issue up to $2.9trn of sustainability-linked loans, green and transition bonds, sustainable investment funds and insurance solutions. However, it is warning that issuing specific products will not be enough to deliver a meaningful response to climate change, without an effort to decarbonise all financed projects.

Climate risk is financial risk

CDP’s analysis outlines how the trends detailed above are leaving many firms unaware of the extent of their climate risks.

Measurement and disclosure are stronger, the body claims, on direct risks to operations than to credit risks and market across the portfolio, caused by asset price devaluation and stranded assets. Almost three-quarters (74%) of firms assessed are not disclosing market risks.

CDP is warning that this could result in unexpected, multi-billion-dollar costs for businesses in the coming years. It estimates that the potential financial impact of all climate risk for the 332 firms is $1trn this decade, dwarfing the $334bn that businesses have already assessed in risks to operations specifically.

CDP’s global director of capital markets Emily Kreps said regulators are increasingly moving towards mandatory climate risk disclosure, often in line with the recommendations of the Task Force on Climate-Related Disclosures (TCFD).

The UK Government, for example, will require all publicly listed companies with a premium listing to comply or explain with TCFD requirements by 2023. An earlier deadline of 2022 is also being considered. In either case, rules will be extended in 2025.

Sarah George

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