Climate change and its related risks pose potential impacts on earnings and asset quality in the mid to long-term for �nancial institutions (Furrer et al., 2009).

Climate change poses a variety of risks towards �nancial institutions. De�nitions

Figure 1. Summary of current and potential climate change risks and opportunities

To re�ect the signi�cant relationship between climate change and �nancial institutions, voluntary international standards and commit-ments have emerged, such as the UN Principles for Responsible Investment (2006), Climate Principles (2008), UNEP FI Principles for Sustainable Insurance (2012), and the Natural Capital Declaration (2012). Together, these standards have encouraged the �nance sector to recognize their responsibility to consider their environmental impacts of projects they choose to �nance. Furthermore, the Equator Principles III (2012), IFC’s Performance Standards on Environmental and Social Sustainability (2012), and the OECD Common Approaches for Environmental and Social Due Diligence (2012) have been revised to incorporate GHG emissions reporting. Due in 2014, the GHG Protocol Financial Sector Guidance for Corporate Value Chain Accounting will provide a consistent framework for FIs to measure, manage and reduce their emissions associated with all major investment types.

Recommendations:1) ECAs should have an accessible policy framework for their stakeholders, which includes procedures and sector/issue guidelines. By disclosing their policy framework, ECAs demonstrate their accountability. 2) ECAs should commit to developing training programs to build their internal expertise for assessing climate risk. This would improve an ECA's decision making, and support the effectiveness of their climate risk governance.3) The ease of navigation and search for material transactional information demonstrates effective disclosure. Although ECAs collectively scored well for transparency, they can improve on the accessibility of this information.4) Disclosing the number of rejected projects due to the project proponent's failure to comply with the ECA's environmental policy, demonstrates the implementation and effectiveness of the policy itself.5) Measuring and managing GHG emissions associated with investments is an emerging practice. ECAs should apply the available methodologies to carbon-intensive projects, in order to develop emission thresholds for appropriate risk mitigation.6) An alternative analysis to evaluate less GHG-intensive options for projects should be conducted by ECAs. This would express an ECA's credibility in managing and assessing their risks.

Berne Union. (2011). $1.4 trillion of global trade and investment supported by Berne Union members in 2010. Retrieved from http://www.berneunion.org/pdf/Press%20Release%20April%202011.pdf

Conley, J.M., & Williams, C.A. (2011). Global banks as global sustainability regulators? The Equator Principles. Law & Policy, 33(4), 542-575.

Furrer, B., Hamprecht, J., Hoffmann, V. (2012). Much ado about nothing? How banks respond to climate change. Business & Society, 51(1), 62-88.

Jeucken, M. (2004). Sustainability in finance: Banking on the planet. Netherlands: Eburon Academic Publishers.

Knigge, M., Gorlach, B., Hamada, A., Nuffort, C., & Kramer, R.A. (2003). The use of environmental and social criteria in export credit agencies’ practices. Retrieved from http://www2.gtz.de/dokumente/bib/04-5728.pdf

Nelson, P. (2003). Multilateral development banks, transparency and corporate clients: Public-private partnerships and public access to information. Public Administration and Development, 23(3), 249-257.

van Putten, M. (2008). Policing the banks: Accountability mechanisms for the financial sector. Montreal: McGill-Queens University Press.

References

Introduction:

The global �nancial market is being challenged to rethink their risk management processes with the increased challenges posed from global climate change (see Figure 1). While the �nance sector itself does not produce a signi�cant amount of greenhouse gas (GHG) emissions, the projects it funds do (Conley & Williams, 2011). In addition, �nancial institutions (FIs) are facing increasing pressure from society and their peers to adopt sustainable business practices and to increase the disclosure of their project �nance and insurance transactions (van Putten, 2008). International standards are also being continuously revised to assist FIs in their pursuit of materializing and disclosing their impacts.

Further, FIs have a great capacity to in�uence future development projects and have the potential to aid in the transition towards a low carbon economy. The challenge to FIs is to ensure that climate change-related externalities are incorporated into risk assessments, �nancial accounts and reporting cycles.

Figure 3. Overall scorecard results

Figure 4. Theme 1 results Figure 5. Theme 2 results Figure 6. Theme 3 results

Through desktop research, the level of disclosure was also compared. High disclosure promotes engagement with stakeholders, which improves the design and implementation of projects and strengthens the project outcomes.

ECAs score average in integrating climate risk into their due diligence and decision-making processes (Figure 4). This suggests that climate risks are considered, but the level of commitment is not fully realized. As per their public mandate, ECAs outperform commercial banks in disclosure practices (Figure 5). The two MDBs are consistently leaders for all themes (Figure 3). GHG emissions reporting is rare (Figure 6). It is done for specific projects such as coal-fired power plants, and is reported as either “contributed emissions” or as “emission reductions”.The leaders of the scorecard are also the FIs who account for transactional GHG emissions.

Results:

TOTEMAlice BaoZachary Folger-LarondeJessica TraceyPaul Valenti Ethan Yang

Conclusion: Climate change and its inherent risks should be accounted for throughout an

ECA’s value chain, and disclosed publicly to enhance their reputation, legitimacy, and accountability. This includes the development of a comprehensive, yet flexible risk governance system. As the results suggest, the noted best practices within the benchmark study demonstrate the growing urgency and relevancy of climate risk management, and the business opportunities associated with it.

In the end, the business case is that the FIs who account for climate risks within their decision-making process have better management of their operations and bottom lines (Jeucken, 2004).

EXPORTING CLIMATE CHANGE STRATEGIES:What are the current practices for managing transaction-level climate change risk for export credit agencies and their peers?

Benchmark Study for a predetermined sample of 33 �nancial institutions was conducted to identify common and emerging practices for the following themes: THEME 1: Climate risk integration and due diligence practicesTHEME 2: Transparency of transactions associated with climate risk THEME 3: Transaction-level GHG emissions reporting

Export credit agencies (ECAs) are government-supported credit finance and insurance providers. The majority of their transactions are situated in regions that pose significant country, environmental, and social risks. The ECA will accept the greater risk that commercial banks cannot (Knigge et al., 2003). Multilateral development banks (MDBs) primarily focus on development assistance. MDBs have been pressured in the past to publicly provide information about their financing activities to allow for “full functioning of social and environmental safeguards” (Nelson, 2003, p. 251). Commercial banks typically seek the highest profitable project and are concerned with protecting their proprietary activities from competition (Jeucken, 2004).

Research Objectives: 1. Benchmark the sample group of �nancial institutions against a

scorecard of climate risk management best practices 2 . Identify the hesitators and leaders, as well as the common and

best practices, among the ECAs, commercial banks and multilateral development banks3. Provide a business case for ECAs to develop meaningful and appropriate strategies to climate change risk mitigation within their risk management decision-making process

Figure 2. The process for environmental climate change risk review