Our Climate-Related Financial Disclosures
We acknowledge the position of the Intergovernmental Panel on Climate Change (IPCC) that to achieve the full ambition of the Paris commitments the world needs to transition to net zero emissions by mid-century1. We are committed to providing investors and other stakeholders with transparent information enabling them to assess the adequacy of our approach to climate change and our ability to manage the associated risks and opportunities.
This is the second year our disclosures have been aligned with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). Our disclosure includes: 1) how we identify climate-related risks and opportunities; 2) who is accountable for managing the risks and opportunities; 3) how climate change informs our business strategy; and 4) the actions we are taking, including targets, to measure our progress.
Our 2017 disclosures were recently reviewed by the TCFD2. While the report confirmed we had taken up many of their recommendations, there were some suggestions for improvement. For example, it was suggested we provide information on a wider range of customers (beyond the thermal coal supply chain) and risks, particularly physical risks. We are considering the TCFD’s feedback on our disclosures and will continue to seek to improve their usefulness to stakeholders.
Our Board has the highest level of oversight for climate change. The Ethics, Environment, Social and Governance (EESG) Committee of the Board meets quarterly and is responsible for reviewing and approving our climate-related objectives and performance, including goals and targets to support action on climate change. The Board Risk Committee has responsibility for the overview of ANZ’s management of new and emerging risks, including climate-related risks.
At an executive level, the Ethics and Responsible Business Committee (ERBC) provides leadership on our sustainability risks and opportunities, monitoring progress against our targets, including those related to climate change. The ERBC is also responsible for:
- guiding which industry sectors, customers and transactions we bank, to align with our purpose, strategy and values, and our public statements on issues such as climate change;
- assessing current and emerging ethical, social, environmental and governance risks and opportunities.
- IPCC Special Report on Global Warming of 1.5
Identification and management of our material sustainability risks and opportunities, including those related to climate change, supports the achievement of our business strategy. Environmental sustainability is one of our key priorities and accordingly we are: establishing low carbon financial products and services; creating policies to guide which customers we bank; training staff on climate-related risk; and seeking to reduce our operational footprint in line with our targets.
Our business needs to be resilient under a range of climate-related scenarios. To improve our capacity to use scenario analysis as an input to our strategy, we joined with 15 other banks this year to develop methods to improve stress testing of our business lending portfolio for climate-related risk. This work sought to overcome some of the challenges facing banks in modelling climate-related risks, for example:
- identifying the potential economic impact of climate-related scenarios e.g. changes to commodity prices or production and impact on customer revenues; and
- assessing these potential impacts on a customer’s capacity to repay debt (i.e. credit risk) over a longer period than the usual 2–3 years.
The working group was coordinated by the United Nations Environment Programme Finance Initiative (UNEP FI). During the pilot we developed and tested approaches and methodologies to inform our risk management and identify opportunities to support our customers, considering both ‘transition risks’ and ‘physical risks’.
What are transition risks?: the technology, policy and regulatory changes that may affect our customers’ businesses as governments act on their pledges to reduce carbon emissions under the Paris Agreement. We have developed methodologies that enable us to examine a particular sector, e.g. metals and mining, and to conduct portfolio-wide analysis examining potential impacts on customers’ risk profiles.
Transition opportunities: while changes associated with a transition to a low carbon economy present potential risk, they also create potential opportunities for organisations focused on climate change mitigation and adaptation. This is why we have committed to fund and facilitate at least $15 billion by 2020 towards environmentally sustainable solutions for our customers, including initiatives that help lower carbon emissions, improve water stewardship and minimise waste.
What are physical risks?: risks associated with changing weather patterns, rainfall variability, extreme weather events such as cyclones or floods, and the impacts on our customers, e.g. change in production of agricultural commodities and price fluctuations resulting from global supply and demand.
We ‘stress tested’ customers within the mining and metals (transition risk) and agriculture (physical risk) sectors, and results were in line with our expectations. For example, in our agricultural portfolio the average customer credit rating remained stable in three out of four climate scenarios tested, with a downgrade of one level under a 4°C warming scenario.1 More significant impacts were identified for customers with weaker credit profiles. These results will inform discussions with our customers as we seek to support them to manage risk and identify business opportunities, such as investing in assets or commodities that are more resilient to climate change.
Building on work undertaken in 2017, we continued scenario testing a select group of customers in the thermal coal supply chain (encompassing extraction, coal rail transport, coal-associated ports and coal-fired power generation). We re-tested some customers to look for any significant changes since our earlier assessment, and included some new customers not tested in 2017. Our engagement this year with a number of these thermal coal customers supplemented our scenario testing and improved our understanding of how they are managing the potential impacts of climate change, including their ability to adapt their business strategy.
Our analysis revealed varying degrees of preparedness for thermal coal customers in managing transition risks. In the medium to long term, risks are higher for companies with higher revenue reliance on thermal coal and with business strategies less prepared for an early shift to a low carbon economy. In the short term, these customers have benefited from robust demand for high quality thermal coal in Asian markets.
We will continue to engage with our thermal coal and other customers to understand how they are preparing their businesses to manage potential transition risks. A number of our customers have begun releasing disclosures in line with the TCFD recommendations – this is informing our customer conversations.
In 2019, we will seek to enhance our understanding of climate-related risks associated with our residential mortgage portfolio by:
- undertaking a geospatial analysis of current flood related risks in a specific location; and
- developing indicators to test the financial capability of home loan customers to withstand the identified risks.
We have identified several other risks and opportunities associated with climate change that have the potential to generate substantive change in our business operations, revenue and expenditure. These include:
Energy policy/regulation: the introduction of energy policies and regulations, supporting lower prices, emissions and improved reliability, provide a more stable environment for investment, and subsequently revenue opportunities, with existing customers and in new markets.
Changes in precipitation extremes and droughts: we bank a large number of agribusinesses in rural and regional Australia and New Zealand. Many of these regions have been impacted in recent years by drought and high temperatures, adversely affecting production levels and reducing revenues. This may impact their ability to repay loans.
The importance of energy efficiency
Buildings represent around 30% of the world’s energy use, and more than 55% of global electricity demand – hence the importance of energy efficiency in meeting the goals of the Paris Agreement. In recognition of this, we will now only consider financing the construction of new large-scale office buildings which achieve or exceed a National Australian Built Environment Rating System (NABERS) 4.5 star standard (or equivalent international rating), ‘as designed’. Importantly, from a credit risk perspective, energy efficient buildings generally have lower tenancy vacancy rates and may attract higher rents.
Changing consumer behaviours: businesses’ response to climate change, including the adoption of new technologies and practices, presents a number of risks and opportunities, including the provision of funding and advisory services to customers involved in renewable energy generation; construction/retrofitting of ‘green buildings’ and less emissions intensive manufacturing and transport.
Liquidity risks: liquidity risk exists for customers exposed to climate-related risks. This may add risk to refinance events, something we have recently observed in relation to infrastructure dependent on the resources sector.
Reputation risks: damage to our reputation as a result of funding industries seen as contributing to climate change may have a range of impacts, including adverse effects on our profitability, funding costs, increased regulatory scrutiny and availability of new business opportunities. Our ability to attract and retain customers could also be adversely affected if our reputation is damaged, in turn impacting our business, operations and performance.
Our most material climate change risks and opportunities result from our lending to business and retail customers, including credit-related losses incurred as a result of a customer being unable or unwilling to repay debt.
Under our risk management framework, our material risk category of Credit Risk incorporates the risks associated with lending to customers that could be impacted by climate change or by changes to laws, regulations, or other policies such as carbon pricing and climate change adaptation or mitigation policies. It also includes changes to the cost and level of insurance cover available to our customers. Climate change risk has been added to the Group and Institutional Risk Appetite Statements to ensure the risk is appropriately identified and assessed.
We are developing an organisational culture that encourages regular discussion and consideration of emerging climate-related risks. Our Risk team is working with our bankers, encouraging them to talk to their customers about managing the risks and opportunities associated with climate change.
We are engaging with regulators that are taking steps to ensure their regulated entities are assessing and responding to the risks posed by climate change. This year we responded to the Australian Prudential Regulation Authority’s first survey on climate-related risks.
Renewing our support for Paris
The transition to a net-zero carbon economy require a ‘whole-of-economy’ approach, with all sectors having a role to play.
This year we reviewed our approach to climate change. Our focus is on ensuring an orderly and just transition that gives careful consideration to the impacts on communities and manages our climate-related risks, while increasing our ambition to lower emissions in the energy, transport, buildings and agricultural sectors.
Our revised Climate Change Statement commits us to the following actions:
- encouraging and supporting 100 of our largest emitting customers in the energy, transport, buildings and food, beverage and agricultural sectors to establish, and where appropriate, strengthen existing low carbon transition plans, by 2021
- encouraging customers that have coal-fired generation assets to work towards setting medium and long-term emission reduction targets up to 2050 that contribute towards achieving a ‘less than 2˚C target’
- no direct financing for the development of new coal-fired power stations that emit more than 0.8t CO2/MWh
- focusing on existing customers producing coal that when used for power generation results in lower emissions, and reducing our exposure to thermal coal mining
- providing incentives for customers to reduce emissions, such as facilitating, together with government, concessional loans for corporate and agribusiness customers to buy energy-efficient equipment; and
- only financing the construction of new large-scale office buildings which achieve or exceed a NABERS 4.5 star standard (or equivalent international rating) ‘as designed’.
METRICS AND TARGETS
We use a range of metrics to assess the impact of climate-related risks on our business activities and set targets in line with our strategy, in particular around engaging with customers to understand their plans to transition to a low carbon economy.
|Environmental sustainability target||Fund and facilitate at least $15 billion
by 2020 for our customers’ activities
|Average emissions intensity of financed electricity generation||Reduce over time||Financed emissions intensity has decreased by 14% in Australia and 68% outside of Australia since 2014|
|Emissions from energy use in our commercial offices, branches and data centres||Reduce scope 1 and 2 emissions by 24% by 2025 and 35% by 2030||Global scope 1 and 2 emissions have decreased by 18% since 2015|
|Sourcing more renewable power for our Australian operations||Increase by 13% by 2020||See case study|
We will also provide information on metrics relating to our credit exposure, broken down by industry and credit quality in our future disclosures.
Further detail on these disclosures, including the scenario testing, customer engagement and our revised approach to climate change, will be discussed in our 2018 Sustainability Review, available at anz.com/cs in December.