The TCFD Recommendations can help banks understand their risks
Voluntary disclosures under the TCFD Recommendations encourage banks to assess the concentration of carbon-related assets in their portfolios and to take steps to reduce risk exposure by implementing strategies to maintain operations and profitability while safeguarding people, assets, and reputation. Banks are better able to assess the risks if they are aware of the risks of their borrowers.
Understand risks through borrowers’ disclosures
Banks that are aware of the extent of exposure to risk and adapt their businesses to avoid impact are more resilient.
Banks should require clients in high-risk sectors to report on their own strategies to reduce the impacts of climate change under the TCFD, as a prerequisite to extending credit. This will enable banks to assess the extent of their exposure to carbon-related assets and to take steps to mitigate exposure.
Mitigate the risks of high concentration of carbon-assets in loan portfolios and ensure resilience
Banks should disclose how they will change their business strategies to mitigate physical and transitional risks that affect their borrowers.
Once banks are aware of the concentration of carbon-related assets in their portfolios and have assessed the extent of risk to borrowers, banks should use scenario analysis to set strategies to mitigate the impacts of a low carbon transition on the bank’s activities.
The TCFD Recommendations can help us make wiser decisions
Voluntary disclosures under the TCFD Recommendations allow institutional investors, such as pension funds, to price in the risk of investing in banks that have high concentrations of carbon-related assets. It also allows banking clients to make a conscious choice about where to place their money.
Reducing exposure to long-term physical and transitional risks enables long-term trust
Although corporate loan portfolios tend to be short term, a bank that discloses a strategy for reducing exposure to transitional and physical risks demonstrates that it has a decades-long commitment to ensure its stability.
Enable institutional investors to price in risk and clients to make more informed decisions
Banks should publicly disclose the concentrations of credit exposure to carbon-related assets or the amount and percentage of carbon-related assets relative to their total assets, in line with the TCFD Supplemental Guide. Out of the five banks assessed in Full Disclosure 5, only Nedbank reports on the concentration of credit exposure to carbon-related assets.