Climate Performance Metrics: Exploring Options for Banks Lightning round presentation, UNEP FI GRT Rosemary Bissett, National Australia Bank www.2degrees-investing.org

UNEP FI delivers technical work on carbon management for portfolios via the Portfolio Carbon Initiative (PCI) There are 2 objectives/views for portfolio carbon management and disclosure INVESTMENT ROADMAPS The climate performance objective – what are the impacts of an FI on cc? (focus of the Paris Agreement/transition to a low-carbon economy) The carbon risk objective – what are the impacts of cc on an FI/exposure to potential losses arising from transition away from traditional economy? (focus of TCFD) The first, commercial perspective will be focused on the question of how environmental problems, in this case climate change, put the creation of economic / financial value at risk.   This view is sequenced as follows: we have an environmental problem (climate change), caused by economic, and hence financial activity, and there is an expectation that governments and policy-makers will start to address, in this case by making sure the global economy decarbonizes. That will lead to a re-routing of economic roadmaps, and economic development. There will be economic winners and economic losers from that re-routing, and that will put financial portfolios at risk of being too heavily exposed to those losers. That is the ‘carbon risk view’. This carbon risk can be managed in a bottom up approach – where the FI looks at every constituent part of each portfolio separately, using a variety of different indicators and metrics; AND, it can be done, in an approximated way, in a top-down fashion at portfolios, for instance through risk models at portfolio level, value-at-risk models, and portfolio, or even finance-sector wide stress-testing. The climate performance view works the other way around. It doesn’t look at the financial risk implications of a societal agenda to the finance sector; it asks how can the finance sector, or institutional investors, increase their contribution to the realization of that societal agenda, in this case, the financing of the transition to the low-carbon economy. There is, to date, no clear business case as to why financial institutions / institutional investors should care too much about contributing to the transition. The most immediate drivers, at the moment, are civil society pressures, such as from NGOs, and, in the case of public development banks, or public-sector pension funds, public mandates. France is a case in point here because what, the recent French regulation on investor disclosure wants to achieve is not only investor disclosure on the exposure to carbon risks, but also, the extent to which investors are contributing to financing the transition to the low-carbon economy. So, the two concepts are fairly different from each other – and at times the two might have some common ground – but they don’t have to. In fact, at times, improving a portfolio’s resilience to carbon-risks and the low-carbon economic transition might be contrary to what, actually, is best from the perspective of climate stability or ‘climate-sustainability’. 2° C CLIMATE GOALS CARBON BUDGET ECONOMIC ROADMAPS INVESTMENT ROADMAPS FINANCING ROADMAPS INVESTOR PORTFOLIOS

Performance metrics currently in use by banks Metric type Financed emissions Sector-specific energy and carbon metrics Green-brown metrics Assessment criteria Practicality Meaningfulness Two primary types of metrics have been proposed and utilized for tracking the climate friendliness of banks: financed emissions, carbon and energy intensity metrics at portfolio level, as well as a variety of “green/brown” metrics tracking exposure to technologies. An effective performance tracking metric must be practical to track with existing or easily acquired data, as well as meaningful for the bank’s business goal (whether business opportunity planning, reputational risk management, or a broader societal goal). 2 objectives that are often interchanged but should not, given that response strategies + metrics for measurement, for each, differ FIs protecting portfolios from the risks of climate change (TCFD) FIs supporting the transition to the climate economy (COP21/PA) For instance, FIs can effectively reduce exposures to transition risk while not at all increasing support for climate economic transitions

Financed emissions What? GHG emissions attributed to exposure to a GHG-emitting asset Practicality Depends on the desired level of accuracy. ´Bottom-up´ - highly resource-intensive. ´High-level level top-down´ estimates lose meaningfulness. Practical for project finance and corporate lending. Meaningfulness Is of less value for risk or performance assessments given: backward-looking nature amalgamation of regulated and unregulated emissions blindness to other key risk factors such as policy and technology contexts, cost pass-through and adaptive capacity, and performance factors such as corporate innovation and R&D

Green-brown metrics What? Categorizing activities into ´climate problems´ and ‘solutions´ Examples (here: power sector) Green % renewables in power generation portfolio Brown % fossil-fuel based generation power generation portfolio Practicality High for certain sectors and transaction types: only monetary and technological data needed. However, only possible in sectors where taxonomies/industry codes exist. Where have known use of proceeds – can segment some lending at company level. Meaningfulness Depends on usage, notably on contextualization, need disclosure of both ‘green’ and ‘brown’. More meaningful if forward-looking

Example: Australia, Netherlands, potentially others Common principles General agreement emerging in a series of common principles: Completeness: report financing of both “green” and “brown” activities Context: include both climate problems and solutions for context. Fair Share: When banking activities occur in syndicates, reporting should be based on “relevant share” of the activity, for both: climate problems (full lifetime emissions of a coal plant shouldn’t be attributed to a bank if they were only part of an underwriting syndicate) solutions (don’t claim $10 million of “green” if you 20% of a $10 million syndicate) Note: Disclosure of ‘climate friendliness of lending’ has strong regional context – debate on whether timing too early for a global standard Example: Australia, Netherlands, potentially others