Climate accounting for financial portfolios has seen growing prominence in the past years, thanks to both private and public sector initiatives. Over 200 financial institutions have conducted some form of portfolio analysis. In the context of this growing prominence, the academic and practitioner's discussion of climate accounting has largely focused on questions of climate data quality and choices for estimation models. Missing in this debate is an analysis of the underlying accounting principles related to climate data. There is no overview of the climate accounting principles and the implications of choosing different principles and rules. This article provides a taxonomy of key accounting choices currently applied for climate accounting of financial portfolios, notably regarding units of accounting, boundaries of accounting, normalization rules, and allocation rules. Based on a review of data providers accounting approaches in practice, as well as sample applications of different accounting principles, it distills key accounting categories and highlights the potential sensitivity of the ultimate results to these choices. The article concludes that climate assessments of portfolios may be equally sensitive to accounting choices as to the quality of underlying data, suggesting more attention and standards are needed.
Purpose To comply with the adopted Paris Agreement, global finance flows must be measured against climate scenarios consistent with possible pathways towards limiting global warming to 2°C or less. For this, there must be proven and accepted accounting principles for assessing financial plans of climate relevant actors against climate models. As there are a variety of data sources describing the financial plans of relevant actors, these principles must accommodate a variety of reported information, while still yielding relevant metrics to different stakeholders. The paper aims to discuss these issues. Design/methodology/approach A set of accounting principles tested by governments, financial supervisory bodies and both institutional investors and mangers, covering global-listed equity and corporate bond investment is described. Findings The application illustrates that a common set of accounting principles can act across both asset classes and provide relevant metrics to multiple stakeholders. Research limitations/implications The principles require data of varying quality and are ultimately unverified. Thus, the definitive quality of the output metrics is uncertain and is yet to be characterized. The principles are yet to be applied to the credit market as the information is seldom publicly available, but it too plays an important role in the required market transition and therefore must be incorporated into these guiding principles of analysis. Practical implications The principles allow for standardised assessment of financial flows of equity and corporate debt with global climate scenarios. Originality/value It illustrates the acceptance of a common set of accounting principles that is relevant across different actors and asset classes and summarizes the principles underlying the first climate finance scenario analyses.
A debate has recently emerged as to whether climate risks may be material for financial stability, driven by a solid body of evidence that climate risks may create value destruction for key industrial sectors that are prominently represented in financial markets. As a result, financial supervisory authorities are starting to explore how these risks can be integrated into existing stress-testing frameworks. This paper proposes a methodology that financial supervisors could follow to build ‘late & sudden’ transition scenarios that could be used as input into either traditional or climate-specific stress-tests of regulated entities. It also proses that supervisors run multiple simulations of these scenarios across regulated entities to inform on systemic and idiosyncratic ‘impact tolerance’ and creation of ‘reverse stress-tests’ enable the setting of minimum capital thresholds. An illustrative application of the process is shown, focusing on listed equity and corporate bonds tied to climate sensitive sectors (fossil fuels, power, steel, cement, automotive and aviation).
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