Below trend growth to continue
Financial market approaches to understanding the resilience of assets to climate change are fast evolving and ensuring customers and clients are ready to act to limit climate change is a key focus at NAB.
NAB is engaging with and learning lessons from the broader investment and business community and taking actions to demonstrate the conscionable approaches adopted by the bank.
Australia’s domestic institutional investors, as the stewards of assets on behalf of their clients, are bolstering their efforts to understand the resilience of these assets to climate-change impacts. This includes undertaking climate-related risk assessments to get an understanding of the various potential impacts of climate change.
IFM Investors (IFM) has undertaken a risk-assessment process across a number of its assets, IFM’s Executive Director, Responsible Investment, Chris Newton, reveals. IFM targeted specific assets in its portfolio with material adaptation or resilience risk, for example ports, airports and, to a lesser extent, toll roads, with the objective of identifying the risks for current and future planning and development, as well as to isolate ways to address these risks.
IFM’s studies incorporated weather forecasts from 2012 which predicted increases in temperature by one degree by 2030 and three degrees by 2070. “Using these forecasts, we began to stress test changes in severe rainfall, wind profiles and the number of days of temperature above 35 degrees,” Newton says. “In this scenario in a port, high winds will impede the use of cranes – and our scenario analysis helped us to calculate the financial implications of these kinds of operations having to cease.”
On the asset-owner side, scenario analysis is being implemented at the earliest possible moment. For example, Chris Nunn, Head of Sustainability, Real Estate at AMP Capital, says AMP Capital incorporates future climate scenarios in predicting energy models for its retail and office buildings in the construction phase.
“For buildings under development now, we challenged our engineers to carry out predicted climate-scenario analysis for 2023, 2030 and 2050. It’s crucial to stress test energy performance at the design stage. If an asset is having to adapt to situations it isn’t designed for down the track, it’s more challenging and costly to execute.”
Mr Nunn says that asset owners need to be able to demonstrate a response to climate change to their customers and investors. This is just one of the important drivers around climate change that has propelled AMP Capital to focus on resilience and adaption across the entire portfolio. “Investors and customers are looking to us to demonstrate comprehensive approaches to mitigation and adaptation. At minimum, this means delivering on our disclosure and reporting obligations and building assets that are resilient and adaptable to ensure business continuity and success.”
Mr Nunn believes that as a sector, we have the opportunity to implement global initiatives that address climate change without waiting for regulation. AMP Capital’s Wholesale Office Fund is a great example of this, having set an ambitious target to become carbon neutral across its portfolio by 2030.
NAB’s global responsibility to assess and prepare for climate change as a risk is evident through its work on the Task Force on Climate-related Financial Disclosures (TCFD) as well as ways in which the bank is providing opportunities to clients to invest in clean-energy projects.
Established by the Financial Stability Board, in 2017 the TCFD issued recommendations aimed at helping companies disclose decision-useful information to enable financial markets to better understand the potential impacts of climate change. With an expectation levered on businesses, including corporates and financial institutions, to make climate-related risk disclosures, NAB is invested in smoothing the path for others.
Rosemary Bissett, NAB’s Head of Sustainability Governance and Risk, explains the bank is participating in a United Nations Environment Programme Finance Initiative pilot project to undertake climate scenario development and use it for lending book stress testing to better understand the risks its lending books may be exposed to as a result of climate change. The 16 global banks participating in the project are using integrated assessment models provided by the Potsdam Institute to align on representative concentration pathways to 4-degree, 2-degree and 1.5-degree scenarios.
Bissett believes this is where science – in the form of climate data – is meeting bank data for the first time. There are significant challenges, though. “There’s a general assumption you can plug bank customer information into a web-based climate models and tools – but this isn’t possible because of data protection requirements of the banks. We also learned very early on that we can’t use the typical high-level macroeconomic factors to stress our lending book from a climate change perspective as each sector responds differently to both physical and transition risks.”
She continues: “We’ve found using climate-related data to be challenging, partly because of a mismatch between the format in which banks hold customer data and the format in which climate-related data is typically made available. We’ve also identified gaps where the information we need to understand climate impacts on certain sectors doesn’t appear to be available.”
What is important and still a work in progress, Bissett continues, is to create standardised ways of providing this information for use by companies, financial institutions and regulators.
As well as the work the bank is doing around financial disclosures, NAB is engaging with its investor client base to channel investment funds into climate-related projects. Andrew Smith, Global Head of Energy, NAB, says during the last 15 years a considerable focus of NAB’s power business has been on renewable energy.
“Globally we’re seeing around A$300 billion of investment going into this sector per annum. Over the last 15 years our business has closed more than 100 deals. As a bank we’ve committed A$7 billion of our own capital, and we’ve also arranged close to A$30 billion of transactional volume.”
Through financing renewable energy NAB aims to help to support the low carbon transition and help address the problem of climate change.
In Australia, the project-finance market is dominated by large commercial banks. But a growing investor base seeking to invest for purpose is emerging, Smith explains. These are investors not only seeking a financial return but a societal return as well.
“Renewable energy debt investments fit this bill,” he continues. “However, many investors don’t have access to deal flow, they may not have the expertise and this is a market which is traditionally dominated by banks. So what we’re doing is packaging up a range of investments which give investors access to deal flow and to the benefits of co-investing alongside NAB.”
NAB’s challenge – and opportunity – is to continue to develop products to meet the markedly growing demand from investors wanting that societal return. “There’s no doubt this is important to us as an organisation,” Smith says. “It’s also critically important to investors as well.”
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