Newsletters

Newsletter 11:

*|MC:SUBJECT|*

Joint analysis with Oxford Sustainable Finance Group highlights dramatic differences in model outcomes depending on which climate scenario is used

Check out the results

Today we are pre-releasing key findings from a joint research project between Theia Finance Labs and Oxford Sustainable Finance Group under the 1in1000 umbrella reviewing the impact of differerent scenarios on climate stress-test outcomes.

We ran 5 stress-test scenarios across valuation and probability of default impacts across 3,646 power companies around the world. The 5 scenarios by different providers (GCAM, REMIND, Inevitable Policy Response, IEA, Institute for New Economic Thinking / Oxford) all provide for similar levels of climate ambition, but the results demonstrate very different financial impacts.

The exercise is unique in applying and comparing scenario choice while keeping everything else constant - the model calibration, the input data, the company universe.

The analysis involves four key findings:

Scenarios with similar ambition level may yield significantly different financial impacts
At firm level, there is limited comparability between different scenarios in terms of financial impacts
Even when filtering those companies that have a negative shock across scenarios,the overall shock levels can be dramatically different
Similar to other providers, the NGFS scenarios also show large differences, suggesting only limited comparability between NGFS scenarios and thus the limited ability for NGFS scenarios to provide harmonized or standardized results.

The research will be published in a detailed report in Q4 this year as part of the UK CGFI and 1in1000 programmes. You can find the results and findings as a slide deck here.

WE ARE ALSO RERELEASING OUR ANALYSIS OF CHOICES FOR IMPLEMENTING "DYNAMIC PORTFOLIO ASSUMPTIONS IN CLIMATE STRESS-TESTS

The analysis compares the pros and cons of different "dynamic portfolio" assumptions in climate stress-tests and scenario analysis exercises and the potential impacts of introducing dynamic assumptions in stress-test results. You can find the report here

IMPORTANT NOTE: As part of Theia FInance Labs rebrand process, we have consolidated our GDPR-compliant mailing lists across both current and historical research projects. You are receiving this newsletter because you previously registered to receive our correspondence either through our website, through registering your interest as part of your participation in a previous project or program (e.g. PACTA), or as a media contact. We hate spam and we know you do too! We have only consolidated historical mailing lists marked as GDPR compliant as part of this process and so we assume you want to read about our work, but we recognize that you may no longer be interested in receiving our correspondence. We value our research, but we also value your time working on sustainability issues, so if this work is no longer relevant to you, don't waste your important work on sustainability by reading research that you don't feel contributes to it. Unsubscribe now! And please accept our apologies in advance if our attempt at consolidating mailing lists as part of our rebrand means you are receiving content that is not of interest for you. You can find the unsubscribe button at the bottom of this email. We hate to see you go of course and promise to be thoughtful and judicious about our communications!

FUNDING:

The report forms part of the LIFE PACTA 2.0 project. The LIFE PACTA 2.0 project has received funding from the LIFE Programme of the European Union.‘ The contents of this publication are the sole responsibility of Theia Finance Labs and do not necessarily reflect the opinion of the European Union.

Newsletter 10:

*|MC:SUBJECT|*

View this email in your browser

1in1000 climate models featured in JFSA banking sector analysis

The Financial Research Centre (FSA Institute) of the Japanese Financial Services Agency has released a new report measuring climate transition risk under a delayed transition for the Japanese banking sector. The exploratory analysis, authored by 2DII Germany Executive Director Jakob Thomä with the support of the 2DII Germany team, integrates both the 1in1000 model suite and the RMI PACTA methodology and analyzes a sample of Japanese loan books.

The analysis shows that Japanese loan books tend to be aligned with ambitious climate scenario targets only for a few sub-sectors (gas-fired power generation and hybrid vehicle manufacturing), whereas misalignment is identified for the remaining sectors covered in PACTA. This translates to some adverse changes in probabilities of default under late action scenarios. The sectors that need to decarbonize fastest and are currently most misaligned, tend to be most at risk of deteriorating profitability. This includes especially the coal mining and upstream oil & gas sectors, but also segments of the automotive and power generation sectors that rely on fossil fuels can be affected.

Download the report

In other news:

The SOAS Centre for Sustainable Finance has appointed 2DII Germany Executive Director Dr. Jakob Thomä as Professor in Practice for Sustainable Finance.

MSCI has announced it will make changes to its ITR score after engagement by the 1in1000 programme on the need for metrics to better reflect uncertainty. Full story here (behind paywall).

Read our recent blog on the monthly anonymous satisfaction surveys at 2DII Germany and how we use them to support staff welfare.

About our funder
The report forms part of the LIFE PACTA 2.0 project. The LIFE PACTA 2.0 project has received funding from the LIFE Programme of the European Union.

Disclaimer: The contents of this publication are the sole responsibility of 2° Investing Initiative and do not necessarily reflect the opinion of the European Union.

Visit our website

Copyright © 2022 2° Investing Initiative, All rights reserved.

Our mailing address is:

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 9:

*|MC:SUBJECT|*

View this email in your browser

4 strategies for integrating dynamic assumptions into long-term stress-tests

Addressing the question of whether portfolios should be 'static' or 'dynamic' in the context of long-term stress-tests and scenario analysis is a key question for the NGFS members and financial institutions. To date, there is limited research on the options and implications of how to address this issue. The 1in1000 programme is releasing a new report that explores 4 different avenues to adjusting assumptions around portfolio exposures, their pros and cons, and the potential impacts of dynamic portfolios on the results of stress-tests using a sample portfolio.

The report identifies four approaches to dynamic portfolio design: the static approach, macro approach, ex-ante approach,a and ex-post approach, further outlined below. Each come with their own pros and cons and different dynamics in terms of their impacts on the outcomes of regulatory stress-tests.

Download the report

Visit our website

Copyright © 2022 2° Investing Initiative, All rights reserved.

Our mailing address is:

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 8:

*|MC:SUBJECT|*

View this email in your browser

First-ever countrywide assessment sees Luxembourg financial institutions analyze their alignment with the Paris Agreement

The Luxembourg Sustainable Finance Initiative (LSFI), in collaboration with the non-profit think tank 2º Investing Initiative (2DII), has undertaken the first-ever countrywide climate scenario analysis of Luxembourg financial institutions. The analysis, which ran from June 2021 to February 2022, used the Paris Agreement Capital Transition Assessment (PACTA) methodology to assess the alignment of their loan books and investment portfolios with the Paris Agreement objectives.

Altogether, the analysis covered 52 financial institutions representing the investment fund, insurance, and bank industries with a total of approximately USD 4.9 trillion assets under management. Over the past two years, this brings the total number of analyzed portfolios to more than 30,000.

Read the overview

The main goals of the exercise were to help participating institutions better understand climate scenario methodologies, raise awareness of climate-related risks, and help them prepare for upcoming regulations. Following the exercise, 25% of participants reported that upskilling their staff on sustainable finance was the biggest added value, followed by “better understanding the sectors we are contributing to” and “raising awareness within the company about the need to transition” (21% each). 32% of participants also reported that their organization was now considering integrating sustainable finance in its strategy.

Next steps

LSFI and 2DII hope this is only the first step in efforts by Luxembourg financial institutions to align with the Paris Agreement goals. Building on this analysis, in 2022 the LSFI will launch a Climate Measurement and Reporting Working Group to lead future efforts on this issue. The working group will be mandated with developing new climate-related initiatives for the Luxembourg financial sector.

Meanwhile, 2DII will continue to conduct cutting-edge research on alignment considerations and implement new features and analytics into the open-source PACTA tool. This will help ensure users can better understand their alignment results and take direct action: for instance, by tracking performance over time against their own targets and independent net-zero targets, and linking alignment to real world impact by integrating more information on the tracking of physical fossil assets on the ground over time.

This study is the latest in PACTA Coordinated Projects, in which 2DII has worked with over 15 governments, supervisors, and industry associations to assess national financial sector alignment with climate goals. So far, countries across four continents have conducted coordinated climate alignment exercises, covering more than €11 trillion in assets and over 2,600 financial institutions. Learn more here.

Nicoletta Centofanti, LSFI Sustainability Adviser, said: “Action to combat climate change is urgently needed and it is now clear the financial sector has a pivotal role to play. To act, it is fundamental to understand the level of implication with respect to the Paris Agreement goals, have the know-how and include sustainability at the heart of each organisation. The Luxembourg 2021 Climate Scenario Analysis has been an important step in this direction: PACTA provided an actionable tool to measure the Paris Agreement alignment and upskill the staff.”

Catarina Braga, 2DII Luxembourg Project Leader, said: “The PACTA methodology seeks to help individual financial institutions measure the climate alignment of their portfolios by using a free and open-source climate-scenario analysis tool. However, when it comes to the climate crisis, no financial institution is an island - cooperation among actors in the financial sector and countries is needed. By running a climate scenario analysis at the country level, Luxembourg reaffirms its commitment as a leader in the sustainable finance debate. Jointly with the Luxembourg Sustainable Finance Initiative and the Luxembourgish financial institutions, we are ready to keep working to make finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.”

About our funders

The development of the PACTA methodology and software infrastructure has received funding from the European Union’s Life program under grant agreement LIFE19/NGO/SGA/DE/00040, as well as from the Government of Luxembourg.

Learn more about the analysis

Visit our website!

Copyright © 2022 2° Investing Initiative, All rights reserved.

Our mailing address is:

Paris | 21 Rue de Cléry, 75002 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 7:

*|MC:SUBJECT|*

View this email in your browser

What is the definition of a long-term investor?

It’s one of the most ubiquitous terms in finance: “long-term investor,” used over 3,000 times on the websites of the world’s 20 largest asset managers. It is considered a universal good in driving better sustainability and financial performance within the finance sector. From a regulatory perspective, long-term financial stability is a core feature of the EU Renewed Sustainable Finance strategy and more long-term assets enjoy preferential tax treatments in the United Kingdom. But what really is a long-term investor?

To address this seemingly simple question, 2° Investing Initiative’s long-term risks research program, 1in1000, conducted 60 in-depth interviews with asset managers and asset owners. We sought to find out how they define the term, the extent to which they see value in long-termism for financial and sustainability performance, and the mechanisms to orient financial markets towards the long-term.

Read the report

Key takeaways from the interviews

Everyone thinks being a long-term investor is a “good thing.”
Asset managers and asset owners think they’re long-term investors, but they don’t agree with each other on what that means.
Ironically, most investors are not long-term investors, according to their own definitions.

Above: The cascade effect of survey respondents to actual investment horizon

This means that despite the societal consensus around the benefits of being a long-term investor, there’s no consensus over what it means in practice. Critically, this confusion results in little to no accountability, regulation, or control as to the criteria that need to be met to qualify as a long-term investor.
In response, 2DII recommends 3 key steps to improve financial sector long-termism to ensure both financial and societal returns:

A common definition and criteria a financial institution must meet to qualify as a long-term investor
A regulatory standard around the term to protect it and set incentives to drive long-termism forward
Development of incentives linked to long-term criteria that relate to driving financial and societal outcomes

About our funders

This project is part of the International Climate Initiative (IKI). The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) supports this initiative on the basis of a decision adopted by the German Bundestag. This report also received funding from EIT Climate-KIC. This report reflects the authors’ views only, and the funders are not responsible for any use that may be made of the information it contains.

Learn more about our research on long-term investing

Copyright © 2022 2° Investing Initiative, All rights reserved.

Our mailing address is:

Paris | 21 Rue de Cléry, 75002 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 6:

*|MC:SUBJECT|*

View this email in your browser

Heading north?

Assessing the alignment of Norway’s financial sector with the Paris Agreement

With more and more financial institutions setting 2050 net zero targets through the Glasgow Financial Alliance for Net Zero, the next question is how to measure near-term progress towards those targets. After all, the IPCCC has calculated that it’s increasingly important to not only assess progress on aligning with climate goals in the long-term, but also in the next decade.

This is why non-profit think tank 2° Investing Initiative (2DII), together with the Norwegian Ministry of Finance and the Ministry of Climate and the Environment, assessed the 5-year forward looking alignment of the Norwegian financial sector. The report is the latest results of the PACTA Coordinated Projects (PACTA COP), in which 2DII works with governments, supervisors, and industry associations around the globe to measure the alignment of financial flows with climate objectives.

Read the report

This study covered 41 Norwegian financial institutions with approximately NOK 1,880.60 ($220.50 billion) in assets, representing 70-90% of the overall financial sector. We found that many of the participating institutions haven’t aligned their investments with the Paris Agreement goals, though some are beginning to head in the right direction. Below is a snapshot of their current exposures as well the 5-year forward looking alignment assessment.

The analysis of current exposures shows that:

Norwegian financial institutions are less exposed to climate-relevant sectors than financial institutions in countries like Switzerland, Liechtenstein, and Austria, where PACTA Coordinated Projects also took place.
Norwegian institutions have a higher share of their investments (exposure) in the power sector allocated to low-carbon technologies (hydropower and other renewables) when compared to the global market and other countries like Switzerland, Liechtenstein, and Austria. The exposure to oil and gas extraction is lower than the other countries mentioned and the exposure to coal mining is very small.
While Norway has established strong incentives for electric vehicle purchases, the financial sector is still overinvested in internal combustion engine (ICE) vehicles.

The analysis of the 5-year forward looking production plans of investee companies reveals that:

Investee oil companies are not set to meet the Sustainable Development Scenario (SDS, 1.65C Implied Temperature Rating) of the International Energy Agency, although investments in gas production by investee companies will decrease considerably in the next five years – in line with the SDS and better than global market projections.
The build-out of renewable and hydropower capacity by investee companies is largely insufficient to meet the IEA’s Sustainable Development Scenario.
Investee auto manufacturers are scaling up electric car production in line with the Paris Agreement, but are not scaling down ICE car production quickly enough, with significant misalignment on that front.

More on PACTA Coordinated Projects

PACTA COP is a dedicated program in which 2DII works with governments, supervisors, and industry associations to assess national financial sector alignment with climate goals. Results can be used by governments, supervisors, and participating financial institutions to understand their alignment with climate objectives; to measure their exposure to climate-related risks; and to inform their climate action strategies.

Since the Paris Agreement, nationally coordinated assessments have taken place or are ongoing in more than a dozen countries as well as at EU level. As of the end of 2021, 2DII has studied over 20,000 financial institutions across 15+ countries and assets worth more than €10 trillion in total. Learn more here.

About our funders

This project has received funding from the European Union’s Life NGO Program under grant numbers LIFE19/NGO/SGA/DE/100040 and the LIFE20/NGO/SGA/DE/200040. Further development of the methodology as well as the application of the model to the Norwegian financial market was funded by the Royal Norwegian Ministry of Climate and Environment and the Ministry of Finance. Disclaimer: This report only reflects the views of the authors, and the funders are not responsible for any use that may be made of the information it contains.

Learn more about the results at today's webinar

Featuring speakers from 2DII and the Norwegian government

Copyright © 2021 2° Investing Initiative, All rights reserved.

Our mailing address is:

Paris | 21 Rue de Cléry, 75002 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 5:

*|MC:SUBJECT|*

View this email in your browser

2DII’s litigation, physical, and transition risk models featured in EIOPA’s latest ORSA guidance

New risk models by the non-profit think tank 2° Investing Initiative have contributed to the European Insurance and Occupational Pension Authority (EIOPA’s) latest application guidance on Own Risk and Solvency Assessment (ORSA), published on 10 December. The ORSA outlines expectations on running climate change materiality assessment and using climate change scenarios, building in part on tools, methodologies, and data developed by 2DII, the Network for Greening the Financial System (NGFS), and RMS, among others.

2DII offers a number of solutions to help insurance companies meet these guidelines:

1. A new litigation risk model

2DII’s litigation risk model is the first to quantify potential future litigation risks for financial portfolios under a range of different litigation scenarios. Recognizing the uncertainty of future litigation outcomes, the model is based on the principle of scenario analysis, taking into account different potential ‘litigation events’ and the potential costs to companies and financial portfolios linked to these events. Operationally, it models the delta of a company’s CO₂ emissions against a scenario benchmark and prices each excess ton that the company is projected to produce until the litigation event, with the social cost of carbon and a ‘litigation factor’ that considers the extent to which a company may be held liable for that ton.

Learn more about the model and alternative simulation approaches for quantifying potential litigation risk in our thought experiment paper.

2. A new physical risk tool

This tool assesses how portfolio company production capacities are exposed to various climate change-related hazards for the auto, power, and fossil fuel sectors. Based on risk maps provided by the Climate Data Factory and Climate Analytics, the model enables users to evaluate changes in risk levels for acute hazards, such as floods or droughts, for various scenarios. The tool also considers the geolocation of real economy production assets. As a result, the risk distribution for each individual investee company as well as for the full portfolio can be assessed at technology and sector level.

2DII will soon release the tool for public use.

3. The PACTA scenario analysis and transition risk tool

EIOPA’s new guidance also builds on the PACTA scenario analysis tool. This free, open-source tool enables investors and banks to analyze their portfolios’ alignment with various climate scenarios consistent with the Paris Agreement. Among other features, it includes a stress testing module that helps users measure their exposure to transition risks.

Access the tool here.

Learn more about our litigation risk model

About our funder

This work has received funding from the European Union’s Life programme under LIFE Action grant No. LIFE19 GIC/DE/001294. This work reflects only the authors’ view and the Agency and the Commission are not responsible for any use that may be made of the information it contains.

Find out more about our work with EIOPA and other supervisors

On climate risk, stress testing, and other topics

Visit our website

Copyright © 2021 2° Investing Initiative, All rights reserved.

Our mailing address is:

Paris | 21 Rue de Cléry, 75002 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 4:

*|MC:SUBJECT|*

View this email in your browser

US$150 billion per year: Tallying the cost of delayed climate action

US$150 billion per year. That’s the expected additional loss that the financial sector could face when climate action by companies is delayed, according to the launch report of a joint initiative by the Oxford Sustainable Finance Group at the University of Oxford and the non-profit think tank 2° Investing Initiative.

According to the study, part of a new initiative called the Climate Stress-Testing and Scenarios Project (CSTS), analyzed publicly listed companies in four of the most climate-critical sectors (power generation, oil & gas, coal production and the automotive industry) are insufficiently aligned with the net-zero transition. This means that even an early transition in 2026 is likely to be disorderly, with the overall estimated cost to the financial sector amounting to US$2.2 trillion. On top of that, for every year the transition is delayed, financial institutions could rack up additional costs of US$150 billion annually due to climate transition-related changes in market and credit risk. Since this initial analysis did not capture every sector, these costs represent a lower-bound estimate and could be considerably higher when factoring in both broader economy and non-public companies.

Read the report

Critically, this annual additional cost increases non-linearly the more the transition is delayed – stressing the need for even more rapid action in order to minimize losses. However, this cost is not carried equally across the financial sector: the greatest cost is borne by financial institutions that have the highest portfolio exposure to firms most at risk from the transition. This also underlines the need for bottom-up stress tests with sufficient granularity to distinguish amongst financial institutions with exposure to the worst-performing firms.

Newsletter 3:

*|MC:SUBJECT|*

View this email in your browser

1in1000: A new research program to help financial institutions and supervisors address future risks and challenges

Today, the 2° Investing Initiative (2DII) launched a new research program that aims to integrate future risks and challenges, notably those related to climate change, ecosystem service loss, and social resilience, into financial processes and regulations. The program will act as host to 2DII’s research and partnerships with financial institutions, central banks, NGOs, academia, and financial policymakers on three key areas:

Developing performance standards and metrics to define what is a ‘long-term investor’ and a ‘long-term bank’;
Designing risk management tools and frameworks to quantify climate change-related risks and related issues, notably ecosystem service and biodiversity loss, and threats to social cohesion & resilience;
Building capacity, policies, and incentives to help financial institutions and supervisors mitigate and adapt to future risks and challenges.

The program has a research budget of more than €1 million supported by the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE), the German government, the ClimateWorks Foundation, and the European Commission, among others. 1in1000 will operate as a distinct research brand under the aegis of 2DII, similar to the PACTA / Climate Scenario Analysis Program and the Retail Investing Program’s MeinFairMögen / MyFairMoney resource site.

The program will continue to reflect 2DII’s independent, evidence-based research ethos, with a special focus on mobilizing technology and tools to reduce the transaction costs of “doing the right thing.” 1in1000’s upcoming research pipeline includes developing new approaches to allocating corporate climate costs to companies; the “fossil fuel subsidy” inherent in financial sector taxes; performance metrics to define the concept of a “long-term investor;” a framework for ex ante impact assessments of financial policies; and the first fully integrated climate stress-test scenarios covering physical, litigation, and transition risks.

Read the launch report

Visit the website

More on the program

1in1000 brings together several new and existing research initiatives, including 2DII’s stress-testing work with financial supervisors, its “Tragedy of the Horizons” publication series on long-termism, and its policy analysis on incorporating future risks into private and government practices.

The program aims to address a critical gap in the financial and policy sectors, where short time horizons have prevented the integration of long-term risks into investment metrics, processes, and regulations. Its name represents three concepts: first, the challenge of dealing with improbable but potentially high-impact events, which are not incorporated into the 3–5-year time horizons that dominate financial decision-making. Second, the inevitability that these risks will materialize at some point in the future. And third, financial markets’ lack of capacity and resilience, which prevents them from delivering an adequate response when these events do occur.

Jakob Thomae, Managing Director (2DII Germany), said: “The impact of COVID-19 has shown us the substantial risks posed to global financial systems and society by failing to prepare for what we call ‘1in1000’ events. If anything, these risks will only proliferate in the future due to increasingly severe effects of climate change, biodiversity loss, and weakening democratic institutions. The 1in1000 program will thus fill a critical vacuum, developing metrics, tools, and capacity so that financial institutions and supervisors will be better prepared for challenges ahead.”

Funders' information

The program is part of the International Climate Initiative (IKI). The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) supports this initiative on the basis of a decision adopted by the German Bundestag. This project has received funding from the European Union’s Life NGO program under Grant Numbers LIFE20 NGO/SGA/DE/200040 and LIFE19/NGO/SGA/DE/100040. This research has also been funded by the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE). INSPIRE is a global research stakeholder of the Network for Greening the Financial System (NGFS); it is philanthropically funded through the ClimateWorks Foundation and co-hosted by ClimateWorks and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. This program has also received funding from EIT Climate-KIC.

Disclaimer: This work reflects only the authors’ views and the funders are not responsible for any use that may be made of the information it contains.

Learn more about the program

Questions, comments or interested in getting involved? Please email us at risk@2degrees-investing.org.

Paris | 2 rue Dieu, 75010 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

Newsletter 2:

*|MC:SUBJECT|*

View this email in your browser

Financial supervision beyond the business cycle: towards a new paradigm

New working paper in partnership with the Oxford Sustainable Finance Program and INSPIRE

At the turn of the decade, a specific class of risks are coming increasingly into focus - long-term risks (LTRs). Pandemic, climate change, and social resilience represent major threats both to economies and sound and stable financial markets. This paper explores both the extent to which these types of risks are on the radar of financial supervisors and central banks, and mechanisms to drive financial supervision “beyond the business cycle”.

Key findings

To this end, the paper reviews over 2,000 speeches, reports, and press releases as well as other public documentation such as Financial Stability Reports across eight major central banks (CBs) in the Global North & South. It presents an audit of the risk management activities of the eight central banks – categorized into measuring, monitoring and mitigation activities – and comes to the following conclusions:

Most quantitative measuring activities – in the form of stress testing – do not extend beyond the business cycle. The focus of those CBs that include LTRs is limited to climate change, and the regulatory use of climate stress tests remains unclear.
Monitoring of LTRs – tracked through Financial Stability Reports – is mostly backward and not forward-looking. The most monitored risks are those LTRs that recently materialized, such as Covid-19.
Mitigation policies, such as decarbonizing monetary policy, or setting green capital requirements rarely consider LTRs. Even though we argue that mitigation policies are the most important step of risk management, CBs – in particular CBs of the Global North – do not have mitigation policies in place that included LTRs.

The way forward

Having identified long-term risk management gaps, the paper takes a step back and discusses a required shift in thinking needed to address these gaps.
As for the required shift, the paper calls for capacity-building – such as implementing precautionary measures and supporting effective policy coordination – in order to better prepare for long-term risks.

Call for feedback

Please note that we have contacted a number of central banks as part of the publication process and included their feedback. However, this is still a working paper and we very much welcome feedback. If you have any comments, please feel free to email Anne Schoenauer, co-author and Deputy Research Head at 2DII.

Upcoming webinar: Hear more from the co-authors on March 18th (3-3:45pm CET)

Moderated by Yahsmin Malik (Investor Relations Manager, 2DII) and featuring:

Ben Caldecott (Founding Director, Oxford Sustainable Finance Program)
Jakob Thomae (Managing Director, 2DII Germany)
Anne Schoenauer (Deputy Research Head, 2DII)

Join our podcast-style webinar to learn more about the path to a new paradigm in central banking and financial supervision. The conversation will bring together the most comprehensive analysis of long-term risk management by central banks ever, coupled with the panelists’ extensive experience in co-designing long-term risk strategies with financial supervisors and central banks. It will be followed by a Q&A session.

About this program and our funders

This report is part of 2DII’s long-term risk management research program, which aims to integrate long-term risks, especially those related to climate change, into financial markets and supervisory practices.

The program is part of the International Climate Initiative (IKI). The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) supports this initiative on the basis of a decision adopted by the German Bundestag. This research has been funded by the International Network for Sustainable Financial Policy Insights, Research and Exchange (INSPIRE). INSPIRE is a global research stakeholder of the Network for Greening the Financial System (NGFS); it is philanthropically funded through the ClimateWorks Foundation and co-hosted by ClimateWorks and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics. This report also received funding from EIT Climate-KIC.

Paris | 2 rue Dieu, 75010 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

*|MC:SUBJECT|*

To view this email in your browser, click here.

Insights
Issue: Trimester 3, 2020

Editorial

We’re delighted to send you the new edition of our members’ newsletter, 'Insights', reviving a practice that had previously fallen into disuse.

Since our general assembly last June, our association has undergone a number of reforms, to better equip ourselves to face the upcoming changes in our sector in 2021: the implementation of the first European legislation on sustainable finance; the European Central Bank’s new requirement for all banks to conduct climate stress tests by 2022; SASB and IICR’s plans to merge into the Value Reporting Foundation; and calls from the former governor of the Bank of England, Mark Carney, for COP26 (Glasgow, November 1-12) to lead to a common climate reporting standard for the international financial community.

Since its creation seven years ago, our association has made impressive progress and is now a key player on issues related to the alignment of financial markets with international climate objectives. We intend to remain so, especially since we’re convinced that we have contributed to 'moving the needle’ over the years. We owe this to our staff and founders, and we would like to extend our warm thanks.

Many among you have supported our think tank for close to ten years, and we are grateful for your loyalty. This drives us to push ourselves even further in our fight against climate change and for a sustainable transition; and as we all know, financial players have a major role and responsibility to play in these efforts. Of course, we need you to help us in this fight.

In this highly unusual year, we have made efforts to further strengthen our association, aiming for ever-greater development, influence and ambition in the service of our objectives (less than +2°C, or even +1.5°C or +1°C). This Newsletter aims to present you with an overview of this new organization, which was presented to all of our teams in early November.

Naturally, as members, we have reserved the first glance for you.

We’d like to take this opportunity to thank you once again for your trust and support, and we look forward to seeing you soon for the next issue of this Newsletter, which will be published at least every trimester in 2021. In spite of the uncertain health context, we wish you a very happy holiday season, and we hope you’ll be able to see your family and friends again, while of course respecting the necessary distancing measures...

With best wishes,

On behalf of the Board of Directors,

Robin Edme, Président
robin@2degrees-investing.org

A new organization around 6 strategic research divisions, to better respond to changes in our sector

Since its founding, 2° Investing Initiative has constantly explored new topics while strengthening its expertise in order to better fulfill its mission: aligning financial market practices with international climate objectives. In order to achieve these objectives more effectively and efficiently, we have undergone an internal reorganization.

The 2DII network now manages its research projects and programs under six strategic divisions, each led by a Research Director: Retail Investment, Impact, Long-term supervision & Stress-testing, Emerging Markets, PACTA and New Developments. This new organization will help us ensure that all of our programs are based on the most recent scientific advances in the field. Each of these divisions will be presented in more detail in future editions of this newsletter.

Thibaut Ghirardi, Acting Deputy Director, 2DII France
thibaut@2degrees-investing.org

A cross-functional operational structure to support the 6 newly created research divisions

The network's community of directors will ensure that the research divisions’ work is properly coordinated and integrated into our overall strategy. Directors and research directors will be supported in these efforts by a set of functional managers covering various cross-functional topics: Product Development, Public Policy, Data, Strategic Intelligence, Communications, and IT & Cyber-security. This new structure will enable us to maintain our lead, while improving the efficiency of our day-to-day operations and management.

Once again, we will present our cross-functional structure in more detail in future editions.

Thibaut Ghirardi, Acting Deputy Director, 2DII France
thibaut@2degrees-investing.org

In 2021, 2DII will have around 40 staff, in line with the largest European think tanks

In consultation with the boards of directors of the three entities, in early October the 2DII network launched a large-scale recruitment campaign, divided into several phases. As part of this campaign, we are recruiting five expert profiles by the end of 2020 or beginning of 2021, including the head of the Retail Investment division, and analysts for the new Long-term supervision & Stress-Testing division. We will trigger a second recruitment phase in early 2021, allowing 2DII to meet its objectives in the context of several new proposals and grant awards.

Yoni Attali-Dujon, Acting Director, 2DII France
yoni@2degrees-investing.org

New joiners

Maarten Vleeschhouwer
Head of PACTA (Brussels)

A graduate of Rijksuniversiteit Groningen as well as the Johns Hopkins University, Maarten Vleeschhouwer joined 2DII as Head of PACTA in August 2020. Previously, he worked as a seconded national expert at the European Commission’s DG FISMA, where he assisted in the implementation of the Commission Action Plan on Financing Sustainable Growth. Prior to that, he worked at the Dutch National Bank, which was one of the first central banks to use the PACTA scenario analysis tool. At DNB, Maarten served as special adviser to Frank Elderson on sustainable finance, and he helped launch the Network for Greening the Financial System.

Daisy Pacheco

Analyst (Berlin)

Daisy joined the Berlin team as an analyst in June 2020. She focuses on the implementation of PACTA scenario analysis projects in emerging markets.

Prior to joining 2DII, Daisy worked at the Central Bank of Colombia as a senior analyst on financial stability issues. In this role, she analyzed and monitored the credit risk of Colombian households and conducted research projects related to financial inclusion, microcredit, and household financial vulnerabilities in Colombia. She was also responsible for monitoring the development and growth of Colombian financial conglomerates in other emerging economies and calculating a systemic risk index. Daisy holds a master's degree in public policy from the Hertie School in Berlin.

Latest news

Find below 2DII’s latest developments, as well as recent and upcoming reports:

An unprecedented study published in partnership with the Swiss Ministry of the Environment, in which 2DII evaluated the alignment of national financial players with the Paris Agreement goals. We plan to replicate this study in France and other European countries in the coming months.
The launch of MeinFairMögen.de, the first online platform of its kind on responsible investing, with the next edition planned for France in 2021. In the same vein, 2DII has also entered into a partnership with More Impact, a subsidiary of Lita & Co that just launched the RIFT responsible investing app.
The extension of PACTA, our flagship climate scenario analysis methodology, to the banking sector.

Coming soon: Several reports at the end of the year will shed light on the financial sector's role in achieving the Paris objectives. Coming up next: a note on financial institutions’ implementation of the Paris Agreement goals, and the transition from portfolio analysis to the analysis of impact in the real economy. In addition, we’ll be publishing a market analysis of the financial sector’s climate commitments and their likelihood of contributing to international objectives. Then, a technical response to the 3^rd Ecolabel report published by the JRC (Joint Research Centre of the European Commission), with a special focus on impact issues. Finally, we plan to launch our new risk-focused research program in early 2021.

Catherine McNally, Communications Manager
catherine@2degrees-investing.org

Our recent successes...

Currently, we’re focused on responding to the European Commission's Green Deal calls for projects, which are due by January 26^th. Afterwards, from Q2 2021 onwards, we’ll turn our attention to the first Horizon European requests for proposals.

Among the calls for tender we won this year:

ESIP: A project financed by Climate-KIC, aimed at expanding our work on the consideration of retail investors’ non-financial preferences by banking and financial advisors at the European level (already underway in France and Germany);
EUKI SFC: Financed by EUKI, with the objective of improving the consideration of non-financial issues by banking and financial advisors in the Czech Republic and Greece in order to ensure regulatory compliance with MIFID at the national level;
EEI Level: A project financed by the European Commission with the objective of clarifying the fiduciary duty of investors in the field of energy efficiency financing;
PACTA 2020: New financing for the deployment of the PACTA 2020 Project (national-level climate assessments) in Norway and Luxembourg;
CW CA100+: Action co-funded by ClimateWorks to support the CA100+ initiative in integrating portfolio alignment indicators into their analytical framework;
CW Inspire: Action funded by ClimateWorks to strengthen our involvement in the Inspire initiative, to use geospatial data to support European policies;
CW PACTA Supervisors: Project funded by ClimateWorks to continue the deployment of our portfolio alignment and stress testing tools with supervisors;
South Korea/British Embassy: Project funded by the British FCO to develop stress testing scenarios for the South Korean Supervisor;
IKI Top-up: Additional funding provided by IKI to finance our research on green recovery and long-term risk management.

By way of (temporary) conclusion…

We hope you’ve enjoyed this newsletter, which is why we’ll soon be sending you a questionnaire to collect your comments for future editions. Thanks in advance for your cooperation!

For any questions, please contact comms@2degrees-investing.org.

2° Investing Initiative (2DII) is an international non-profit think tank working to align financial market practices with international climate objectives, in particular those of the Paris agreement. With offices in Paris, New York, Berlin, Brussels, and London, 2DII coordinates the largest research projects on the consideration of climate and other “unconventional” topics by financial markets.

Website

Twitter

Copyright © 2020 2° Investing Initiative, All Rights Reserved.

Our mailing address is:

Paris | 2 rue Dieu, 75010 Paris, France
Tel: +33 1 42 81 19 97

New York | 110 Wall St. New York, NY 10005 USA
Tel: +1 (412) 726-6650

Berlin | Schönhauser Allee 188, 10119 Berlin, Germany
Tel: +49 30 44318588

London | 40 Bermondsey Street, London, SE1 3UD, UK

You can reach us at: comms@2degrees-investing.org

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.

This email was sent to *|EMAIL|*
why did I get this? unsubscribe from this list update subscription preferences
*|LIST:ADDRESSLINE|*

Newsletters

Newsletter 11:

Newsletter 10:

Newsletter 9:

Newsletter 8:

Newsletter 7:

Newsletter 6:

Newsletter 5:

Newsletter 4:

Newsletter 3:

Newsletter 2:

Newsletter 1: