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Climate Risk Disclosures of major UK Banks




Following on from the first ESG blog on the Clarus website, see ESG Investments, our second ESG blog takes a look at the Climate Risk Disclosures of major UK Banks.

Combining many factors into a single score or rating, which can then be optimized is a common approach in Finance. While we do not want to neglect the S & G from ESG, the E and in particular Climate change is a high profile area with a lot of current research and analysis.

However, as with Finance, standardisation is a vital consideration. Can one disclosure be accurately compared to another? Now that the disclosures themselves are being published, let’s try to make sense of them.


Banks are starting to evaluate assets and lending activity taking into account climate risk and it is likely that new risk factors covering climate risk will end up being incorporated into risk management and possibly even regulatory capital calculations.

Many Banks have started to publish voluntary disclosures on climate risk and in the future stress testing exercises may become standardized.

Climate stress testing and scenario analysis

Even if they will not be enforced by regulators, stress testing and scenario analysis may well be the only useful risk tools given the long time horizon of climate impact.

Climate change scenarios typically consider 2 different types of risk:

  • One is transition risk, the uncertainty due to events including energy related policies, new technologies, consumer preferences, all interacting with predictions of carbon prices and emissions.
  • The other one is physical risk e.g. the probability and impact of floods and hurricanes. This is difficult to model in a local, granular way and requires borrowing techniques from the insurance world.

The challenges compared to looking at the ESG ratings or current carbon emissions of companies should be obvious. These scenarios consider the evolution of an interconnected system, which involves modelling supply-demand curves, consumer behaviour and weather patterns well into the future.

Quite a leap from the analytics most bankers are familiar with.

A quick look at bank disclosures

UK regulators were quick to impose timelines for climate stress testing so this naturally led to more detailed disclosures from British banks.

To generalise a bit, here is what you can find in a typical disclosure:

  • Current metrics and ratings as well as exposures of the bank, with detailed plans to reduce emissions e.g. via reducing business with clients dependent on coal
  • Impact of climate change on individual assets, given the high-level scenarios by the Central Bank network NGFS which define carbon prices and global warming patterns

And what you can’t find:

  • A complete list of assumptions for the calculations – this is perhaps not fair to ask but would be extremely useful, as it is rare to imply anything from the market or historical data in the models
  • Sensitivity analysis – most banks integrate third party models via vendors and consultancies, so it is hard to guess the impact of parameter changes

Going too deep into each document is not practical, so let’s pick one theme from each bank.

Lloyds and NatWest

I found these two tables below at Lloyds and NatWest disclosures, not surprisingly they are not 100 percent comparable, but we can still get interesting insights.

NatWest very transparently explains that in their scenarios they assume every other bank has NatWest’s exposure profile. This kind of assumption is probably inevitable, one needs to consider the indirect impacts: what if your bank has an exposure to another bank specialised in climate sensitive sectors?

In this specific case NatWest has a higher exposure to transport, construction, oil & gas and utilities, so the above assumption could be a conservative one. Lloyds has more mortgage exposure, but as the physical risk like floods are local, it is not possible to say much looking at total numbers.


HSBC’s disclosure does not cover too much methodology detail, but it probably has the best visual to show exposures and scenario impact in one place.

Here Hot House refers to a business-as-usual scenario with low transition risk but high physical risk, whereas Disorderly and Orderly have low physical risk but high and low transition risk respectively. More info on these scenarios can be found in this NGFS publication.

HSBC has a high exposure to construction and chemicals, but the tail risk seems to be in oil & gas.

Figure 3: HSBC’s exposures vs relative impact for climate sensitive sectors. Source: HSBC TCFD Update 2020

Standard Chartered

Given Standard Chartered is a major player in emerging markets, their climate sensitive lending policy should be of interest to many analysts.

They also cover another important aspect better than most: how does climate change impact corporate default risk? The answer is, it depends.

In the graph on the left below, the transition risk impact on the client’s default probability is small, thanks to a reliance on nuclear and hydro energy sources.

The second graph shows that on average the impact is more dramatic with varying timings for different sectors. The thresholds causing the peaks are highly dependent on carbon prices.

Figure 4: Credit risk in an Orderly scenario, a favourable emissions profile (left) vs sector averages (right). Source: Standard Chartered TCFD 2020


I picked up an earlier publication from Barclays as it has a rare discussion of how different types of risk compare against each other with a proper P&L contribution breakdown.

The small contribution of physical risk in the below table may be surprising. This is a clear example of a mismatch between: a) long time horizon of global warming vs. b) Barclays’ current portfolio duration. UK regulatory stress testing will omit traded risk as per the latest update, so these contributions could change significantly.

Barclays also takes into account connected risk: the secondary impact of the physical and transition risk related losses causing a subsequent recession. It is interesting to see an attempt at modelling systemic risk and it does have a material impact, comparable to transition risk itself.

Final thoughts

A drilldown into ‘E’ in ESG opens the Pandora’s box. Standardisation is badly needed to allow for any meaningful comparisons. Similar to how BIS have helped cement standardised risk management models in finance, we need similar standards in the ESG space so that comparisons across firms can be made. Anyone want to suggest a standardised schema?

The good news is that we are starting to see more transparency from the banks on their climate risk methodologies. Bank disclosures may help in the collective modelling effort and could give increasingly valuable insights to outside observers.

One might even contemplate that banks will share the scenario analysis tools with the buy-side and perhaps everybody else one day. So we can all keep making our assumptions but at least with a common language.

This article is authored by Onur Cetin.

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Aite survey: Financial institutions will invest more to automate loan process




Financial institutions plan to increase their spend on automations and collections management solutions for their loan processes. Fresh results on consumer lending practice from research and advisory firm Aite Group indicate lenders plan to invest more heavily in their collections processes, said Leslie Parrish, senior analyst for the Aite Group’s consumer lending practice. Parrish shared […]

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Facial recognition, other ‘risky’ AI set for constraints in EU




Facial recognition and other high-risk artificial intelligence applications will face strict constraints under new rules unveiled by the European Union that threaten hefty fines for companies that don’t comply.

The European Commission, the bloc’s executive body, proposed measures on Wednesday that would ban certain AI applications in the EU, including those that exploit vulnerable groups, deploy subliminal techniques or score people’s social behavior.

The use of facial recognition and other real-time remote biometric identification systems by law enforcement would also be prohibited, unless used to prevent a terror attack, find missing children or tackle other public security emergencies.

Facial recognition is a particularly controversial form of AI. Civil liberties groups warn of the dangers of discrimination or mistaken identities when law enforcement uses the technology, which sometimes misidentifies women and people with darker skin tones. Digital rights group EDRI has warned against loopholes for public security exceptions use of the technology.

Other high-risk applications that could endanger people’s safety or legal status—such as self-driving cars, employment or asylum decisions — would have to undergo checks of their systems before deployment and face other strict obligations.

The measures are the latest attempt by the bloc to leverage the power of its vast, developed market to set global standards that companies around the world are forced to follow, much like with its General Data Protection Regulation.

The U.S. and China are home to the biggest commercial AI companies — Google and Microsoft Corp., Beijing-based Baidu, and Shenzhen-based Tencent — but if they want to sell to Europe’s consumers or businesses, they may be forced to overhaul operations.

Key Points:

  • Fines of 6% of revenue are foreseen for companies that don’t comply with bans or data requirements
  • Smaller fines are foreseen for companies that don’t comply with other requirements spelled out in the new rules
  • Legislation applies both to developers and users of high-risk AI systems
  • Providers of risky AI must subject it to a conformity assessment before deployment
  • Other obligations for high-risk AI includes use of high quality datasets, ensuring traceability of results, and human oversight to minimize risk
  • The criteria for ‘high-risk’ applications includes intended purpose, the number of potentially affected people, and the irreversibility of harm
  • AI applications with minimal risk such as AI-enabled video games or spam filters are not subject to the new rules
  • National market surveillance authorities will enforce the new rules
  • EU to establish European board of regulators to ensure harmonized enforcement of regulation across Europe
  • Rules would still need approval by the European Parliament and the bloc’s member states before becoming law, a process that can take years

—Natalia Drozdiak (Bloomberg Mercury)

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What banks are looking for after COVID-19




As the number of vaccinated adults in the United States grows and the average rates of COVID-19 infections drops, bankers and their customers are eager to move ahead. But what does “move ahead” look like, and how has consumer demand changed over the course of the past year?

To answer this question, we at MX surveyed 1,000 randomly selected U.S. consumers with results published in our ultimate guides. Among many insights, we found that 87% of consumers say they now visit their bank branch less often than they did before the COVID-19 pandemic, while 89% say they use mobile banking more often. We also found that a quarter of respondents said they’d currently feel insecure about their financial situation if they hadn’t received a third stimulus check, while half said that without the stimulus check they’d struggle to cover their monthly living expenses such as rent, mortgage, and recurring bills.

In other words, consumer demand for digital banking has surged at the same time that consumers have received an influx of stimulus cash — a shift that puts banks in a bit of a bind. As covered in an article from Bloomberg Opinion columnist Brian Chappatta, banks now face the largest gap in decades between a typical bank’s deposits at hand (which are high) and the demand for new loans (which is low). Given this gap, Chappatta writes, “In the near future, [banks] may need to rely even more heavily on revenue outside of their traditional business of making loans.”

Banks looking for these new revenue models in the wake of COVID-19 should know that the way forward must be digital first.

One possibility worth exploring is a subscription service, possibly in the vein of Amazon Prime. As Bradley Leimer, co-founder of Unconventional Ventures, says, “If banks can’t offer something more valuable than Amazon Prime, then we’re probably in the wrong business. I think we just need to retool our mindsets and put the customer at the heart of these decisions. What is at stake, in my opinion, is literally the future of the financial services model. The wolves are at the door.”

In light of this, financial institutions can ask themselves which benefits they offer could be packaged together for a monthly subscription. For example, Utah Community Credit Union (UCCU) has developed a product called UCCU Prime, which gives members services including $600 per claim in cell phone protection in the event their phone is broken or stolen, $80 in coverage for roadside assistance (4x a year), a $10,000 reimbursement in expenses in the event of stolen identity, $10,000 travel accidental death coverage, special deals for local businesses, travel discounts nationwide, debit card rewards, and more — all for $6 a month. As UCCU creates new offerings, they can add them to the bundle and increase this revenue stream.

This is just one of many possibilities that comes with looking at banking with a new pair of eyes as we work to put COVID-19 behind us and explore new revenue streams.

Learn more at

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The Impact of COVID-19 on Capital Markets Operations




The Depository Trust & Clearing Corporation (DTCC), the premier market infrastructure for the global financial services industry, today published a white paper examining how capital markets operations responded during the COVID-19 pandemic and where market participants are focused in a post-pandemic future.

In a new white paper, “Managing through a Pandemic: The Impact of COVID-19 on Capital Markets Operations”, buy and sell-side firms reported that, while their post-trade operations (Ops) and operations technology (OpsTech) proved largely resilient during the pandemic, several key challenges emerged as market volatility surged throughout 2020. The study was conducted with research assistance from McKinsey & Company, and was based on insights from Ops and OpsTech professionals at 35 buy and sell-side firms. The top areas of focus highlighted were:

  • Cash fixed income and cash equities were most impacted by the pandemic-induced market volatility, with 30-35% of firms across the buy-side and the sell-side reporting operational post-trade processing challenges in these asset classes.
  • From a processing perspective, settlements/payments and collateral/valuations were impacted the most, with 58% of sell-side firms reporting challenges in settlement and payments during the peak of the pandemic.
  • Buy-side firms typically experienced less disruption to post-trade processes than sell-side firms due to simpler operational models, with the sell-side reconciling breaks and settling trades across hundreds of counterparties.
  • The sudden transition to a work-from-home operating model was achieved almost seamlessly, and in most cases within a matter of days, due to the ability to implement tactical changes to operating models.

Respondents cited that efforts made in recent years to re-engineer and automate processes and upgrade technology platforms were the main reason for firms’ resilience during the pandemic and their ability to manage an unusually prolonged business-continuity planning (BCP) event. A significant majority of respondents stated that the pandemic validated their Ops priorities and investment plans.

Michael Bodson, President & CEO at DTCC, said, “During, and in the immediate aftermath of the COVID-19 pandemic, the industry remained resilient, with buy and sell-side firms working seamlessly to support unprecedented volumes and ensure uninterrupted trading for clients and underlying investors. However, opportunities remain for further optimizing post-trade processes across the capital markets.”

The survey highlighted that while the pandemic did not create an impetus for change in Ops and OpsTech due to largely resilient operations, a consensus emerged around where firms should focus next:

  • Sell-side and buy-side firms are aligned on the need to further simplify and standardize a sub-set of post-trade services which were hardest hit. For the sell-side, these include making enhancements to reconciliations and confirmations capabilities, while the buy-side prioritized an increased focus on fails and collateral management.
  • More than half of firms who responded to the survey plan to increase capacity, build new capabilities or re-engineer post-trade processes.
  • Respondents highlighted the need for a continued focus on shortening settlement cycles due to the impact of the unprecedented trading volumes and volatility on liquidity and margin. More than 50% of firms plan to increase capacity in support of these processes.
  • The stigma around working from home and productivity no longer exists, with many firms planning to retain part of the remote and flexible working model post-pandemic across post-trade operations.

Bodson added, “As the impact of the pandemic continues to unfold, firms must keep their focus on delivering continued improvements to efficiency, while reducing risk. At the same time, to unlock new sources of value and remain relevant to clients, a focus on innovation will be essential. The industry will need to embrace collaborative approaches, common processes, best practices and deploy operating models that continue to meet the evolving needs of market participants.”

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