On March 26, 2021, the White House announced that President Biden had invited 40 world leaders to the Leaders Summit on Climate. The Summit will begin on Earth Day, April 22, 2021, and we expect the Biden administration to use this opportunity both to demonstrate the US’s commitment to tackling the climate crisis and to galvanize support from the global market. As part of this message, President Biden will likely address the role of US financial institutions in driving change, including by investing in clean energy and reducing overall emissions as the country works toward meeting its 2030 emissions target under the Paris Climate Agreement. In addition, ahead of the Summit, the administration will be announcing the revised Nationally Determined Contribution (NDC), which could have a significant impact on the financial industry.
President Biden’s swift actions to bring climate change to the forefront of his agenda is at least in part due to the fact that the administration is well aware of the risk that climate change could pose to the financial sector. Treasury Secretary Janet Yellen reinforced this sentiment last month at the Financial Stability Oversight Council, citing the “existential threat” climate change poses to the country’s financial stability. Other recent announcements, including Biden’s infrastructure bill, the American Jobs Plan, and actions taken by regulatory agencies have also included a focus on climate risk.All of this reinforces the fact that addressing the effects of climate change continues to be one of the administration’s top priorities. Given this and the explicit emphasis on the importance of climate throughout the administration, this Summit comes as no surprise, but exactly what this means for the financial industry is still unclear. The new NDC could have some answers.
Speculation is rife on what the proposed level of reduction of US emissions will be for the revised NDC, and the business community is weighing in. A group of large corporations released a public letter on April 13, 2021, that voiced their support for a proposed 50% carbon emission reduction by 2030 on the pathway to achieve a net-zero economy by 2050, in line with the Paris Climate Agreement. Whatever level of reduction is ultimately announced, the direction and intention is clear: carbon emissions and climate change are systemic risks to the US and the global economies, and should be publicly disclosed, assessed, and reduced.
It is unlikely that any immediate action items will come out of the summit. However, key themes of the summit highlighted in the president’s March 26 announcement included:
Galvanizing support from the world’s major economies in reducing emissions critical to keeping a limit on warming to 1.5 degrees Celsius,
Mobilizing public and private sector financial institutions to drive the transition to a net-zero economy.
Incentivizing transformational technologies that can help reduce emissions and adapt to climate change while fostering new economic opportunities.
Opportunities to strengthen capacity to protect lives and livelihoods from the impacts of climate change and address the global security challenges posed by climate change.
Given the stated goals of the summit, the new NDC will likely require significantly lower carbon investment. Financial institutions should start considering investing in new industries and changing how they do business to promote clean energy. In addition, to ensure financial institutions’ active participation in managing the risk of climate change, they will likely be subject to enhanced disclosures and increased climate risk oversight.
Call to Action
On the day after Biden announces the revised NDC, a debate on the carbon reduction target will begin. The debate will likely center around important questions, such as:
Will the revised NDC place an undue burden on the economy?
How do we remain globally competitive?
What will be the impact on jobs?
Without question, there will be strategic risks to navigate, but equally important, there will be tremendous opportunities for new investments in innovation and clean growth. Drawing on its years of experience helping commercial and public sector clients address their most important challenges with practical and innovative solutions, Guidehouse can provide key insights and solutions for our clients to help them thrive in this evolving environment. Specifically, Guidehouse can assist clients seeking to reduce their carbon footprint in the following ways:
Portfolio Review: Analyze or design the processes necessary to identify areas of exposure, decrease exposure, assist in rebalancing of a portfolio, or identify risk mitigation strategies (e.g., originations, securitization), leveraging in particular our expertise as the Secretariat for Partnership for Carbon Accounting Financials, the global, FI industry-led initiative to assess and report on financed emissions.
Stress-Testing: Carry out stress tests to ensure banks have appropriate capital allocation, monitoring, and response processes in place to prepare for, identify, and respond to high-impact climate events.
Periodic Asset Monitoring: Conduct periodic reviews to ensure risk is within appropriate parameters and develop ongoing monitoring reports to track portfolio risk.
Policy and Procedure Analysis: Define and document processes to identify risk, decrease exposure, and determine thresholds to offload/rebalance portfolios to support investor and regulatory inquiries.
Due Diligence: Leverage our broad due diligence capabilities to help companies evaluate the practices of the organizations with which they align themselves and the relevant risks and opportunities.
Transparency and Reporting: Draw on our deep corporate and governance expertise, to help clients implement the reporting structures necessary to ensure their stakeholders have the information they need, including TCFD reporting.
Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for response and remediation.
Special thanks to contributing author Eleanor Glas.