Our outlook

The outcome of various pilot initiatives indicated that climate models and methodologies might have limited application in assessing the strategy resilience and might therefore require further development and evolution to ensure adequate risk coverage and capture. However, we consider them highly useful in monitoring the evolution of the topic, identifying areas to focus on and planning our next steps. We are actively using the heat maps produced by the United Nations Environment Programme Finance Initiative (UNEP FI) and aim to continue UNEP FI participation in 2021, having signed up for phase III of the corresponding program. Furthermore, we decided to participate in the voluntary pilot stress testing exercise championed by the Hong Kong Monetary Authority.

We are planning to strengthen our capabilities to meet our ambitions. We will be working to develop metrics that allow us to consistently measure and monitor our portfolios and our alignment against our climate commitments. We aim to work with our clients and provide them with detailed information on our CETFs in order to encourage them to engage with us in helping them with their own energy transitions, as well as to provide us with the requisite data we will need to accurately assess our overall portfolio transition. In addition, we are actively considering metrics in our management of climate risk, such as the carbon intensity of financed activities, transition preparedness, point-in-time versus through-the-year exposures, and counterparty-level stress testing for material exposures.

For a selection of these exposures, we believe that climate sensitivity should be integrated into future cash-flow analyses in a consistent manner at the time of loan origination to ensure that pricing and risk appetite considerations are appropriately reflected. We are performing pilot stress testing for important counterparties with high exposure to climate risk, such as in the oil and gas sector. A cash-flow-based approach is being tested, including stresses related to volumes, prices and production mix. This stress testing will leverage industry scenarios and available committed transition trajectories by counterparties.

We will also continue to evaluate our CETF methodologies to improve accuracy, whether through enhanced data gathering or through improved modelling techniques, as well as liaising with other market stakeholders to define and deliver comparable standards and outputs. The development of our internal capabilities aims to incorporate the tools and methodologies needed to meet our commitment to develop science-based targets in 2021 and 2022, and we will work to expand the sectoral coverage in line with the SBTi.

To ensure that climate risk is embedded within our risk culture, we will be working to enhance the Risk Appetite Framework (RAF) from the top down. This will require us to define and measure climate risks within our businesses and incorporate these risks within the RAF so that they are controlled and limited appropriately. Through the RAF we aim to steer our future portfolio exposure to align with our commitments of supporting the goals of the Paris Agreement by setting limits that encourage investment and divestment where appropriate over the medium to long term. We thereby aim to align our science-based targets to our business strategy, and to ensure that climate risk is part of the daily business decision-making process. In addition, we will look to expand our stress scenarios to assess the short term resilience of our portfolios and operations to potential physical or transitional economic shocks and adjust our risk appetite accordingly.