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EBRD clarifies targets for climate change impact on investments

The European Reconstruction and Development Bank (EBRD) has published its second annual report based on the voluntary reporting framework of the Task Force on Climate-Related Financial Disclosures (TCFD).

The enhanced report now includes details of the ERDB’s assessment methodologies for both carbon transition and physical climate risk. It also provides initial disclosures on the Bank’s performance against agreed climate risk indicators and metrics.

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Other disclosure highlights include a first heatmap of the EBRD portfolio which illustrates the inherent physical and carbon-transition risk, as well as the summary results of two pilot scenario- and stress-testing exercises. One of the pilot exercises modelled Network for Greening the Financial System (NGFS) scenarios for the EBRD’s oil and gas portfolio, a sector widely regarded as high carbon-transition risk.

EBRD stress testing investments for exposure to climate change risk

“The results of this mini-stress test show that for a small portfolio of clients exposed to transition risk, the introduction of stringent policy actions is likely to lead to a substantial increase in losses compared with a continuation of current policies. Were the Bank to maintain current proportions of lending to clients with high Carbon Transition (CT) risk, this would gradually raise overall Bank losses above typical levels,” reads the report.

“Considering the relatively rapid portfolio amortisation, excess losses due to climate risk can be materially contained by a gradual exit from lending to high transition-risk sectors. In this case, overall loss levels, as well as the Bank’s capital, are not expected to be materially impacted.

“Very high or high CT risk investments form only a small proportion of the Bank’s overall portfolio. These are expected to be replaced gradually by new business aligned with the Paris Agreement. Consequently, it is expected that other types of projects will replace almost all of the oil and gas exposures included in the sample portfolio for this exercise.”

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Creating momentum to move finance into low-carbon future

The results of the NGFS scenario analysis, while preliminary, were both revealing and reassuring. Applying the NGFS scenarios to a static balance sheet (unchanged for 30 years) showed significant risk, suggesting default on more than 60% of the portfolio. A dynamic balance-sheet approach, however, that took into account scheduled debt repayments, produced a far milder impact, very much in line with the Bank’s current provisioning levels.

The TCFD reporting framework aims to raise the profile of financial risks associated with climate change and to provide investors with transparent information on the risks and opportunities involved.

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One objective is to create momentum behind a migration of finance that will enable the transition to a low-carbon future. Risk assessment and reporting is a rapidly developing area and one that faces various challenges, including a lack of comprehensive, standardised data and common methodologies.

The TCFD was created in 2015 to foster reporting on the impact of organisations on the global climate. It seeks to make firms’ climate-related disclosures more consistent and, therefore, more comparable. 

The Network for Greening the Financial System is a coalition of central banks and supervisors sharing climate best practices.

The Task Force on Climate-Related Financial Disclosures report 2020 is available online.

The effect of decisions made around climate financing at COP26 will be discussed during the Enlit Africa digital event between 26 and 28 October. Book your front-row seat to find out more about the impact of COP26 on Africa’s utilities.

Theresa Smith
Theresa Smith is a Content Specialist for ESI Africa.