Assessing and disclosing climate-related risks and opportunities
Sustainability matters to us, and we consider it a key lever for our future business strategies and an essential component of our bank's success. For this reason since November 2019, we have supported the recommendations of the TCFD, created by the Financial Stability Board (FSB), which aims to develop voluntary, consistent climate-related financial risk disclosures for companies to use in providing information to stakeholders.
The recommendations are built on four pillars: Governance, Strategy, Risk Management, and Metrics and Targets. Furthermore, one of the key recommendations focuses on the resilience of an organisation's strategy, taking into consideration different climate-related scenarios, including a 2° Celsius or lower scenario.
GovernanceGeneral ESG issues and climate change are dealt with by a dedicated Board Committee created in 2016. Climate-related issues are addressed in at least three of the CGNS Committee meetings, every year.
StrategyShifts in consumer preferences towards climate-friendly products could affect our strategy and have a financial impact on our customers, both in terms of turnover and additional costs to align their products with such shifts.
For this reason, we are partnering with our customers in the shift to a low-carbon, climate-resilient economy, in particular through:
- setting a more stringent framework for fossil fuel financing,
- increasing our exposure to the renewable energy sector,
- increasing energy efficiency loans to customers.
As a first step towards performing a proper scenario analysis, UniCredit is partnering with the global think tank 2° Investment Initiative (2°ii) to road-test their Paris Agreement Capital Transition Assessment (PACTA) methodology together with a pool of 17 international banks. Originally developed to assess the exposure of both equity and bond portfolios to transition technologies across key sectors, 2°ii has now also launched a research programme to expand the model to the banks' corporate lending portfolios.
Risk ManagementAs a bank, we are exposed both to physical and transition risks which can bring significant credit, market, operational, and reputational risks. We need to improve our understanding of the potential impact on liquidity. We are in the initial phase of the process to develop and test quantitative models to correctly measure climate risk and embed it within our wider financial risk assessment. These models call for the development of a Bank-wide climate risk management framework.
Metrics and TargetsUnderstanding the transmission mechanisms of potential misalignments to transition technology into financially measurable risk is still underway. Once this has been accomplished, we will set formal targets for our portfolio composition. However, as climate-related financial risk is a certainty, we have set preliminary targets based on our overall sustainability strategy. In future, TCFD reports we will track our progress in this field in line with best practice development and the industry standards.
UniCredit has worked with CDP since its inception, as one of the investors requiring companies to respond to the CDP questionnaire on climate change. UniCredit is also one of the respondent companies. Through the climate change questionnaire, CDP requests information on climate risks and low carbon opportunities from the world's largest companies on behalf of 529 institutional investor signatories with a combined US$108 trillion in assets and 147 major purchasers with over US$4 trillion in procurement spend.
This makes CDP climate change the largest and most complete data set on climate risk and low carbon opportunities. We play our role both by contributing data and engaging with companies, as we believe that quality data is a key element to build a low carbon and climate resilient future. The TCFD recommendations have been developed on top of existing disclosure frameworks like CDP and, as soon as they were published by the Financial Stability Board, the CDP harmonised its questionnaire in order to fully integrate the recommendations. As of 2020 a dedicated section for financial services has been prepared which makes the questionnaire more usable and sector-specific for a continuously improved disclosure.
Support the transition to a low carbon economy
We continue to invest in renewable energy sources and in 2020 our exposure to this sector was €6.1 bilion.
In Team 23, our strategic plan, we have committed to increasing our exposure to the renewable energy sector by 25% by 2023 (to greater than €9 billion).
UniCredit has committed to fully exiting thermal coal mining projects by 2023. Our updated Coal Sector Policy prohibits lending to new projects in thermal coal mining and coal fired power generation. We have also set strong commitments in terms of reducing reliance on coal for corporate finance customers.
We developed a new Oil and Gas (O&G) policy which covers the Arctic area, prohibiting the financing of new projects in Arctic oil and offshore Arctic gas. It also prohibits shale oil and gas and related fracking, tar sands oil, and deep-sea mining O&G. Corporate financing for clients active in these areas will only be allowed if their share of revenues from non-supported activities is under 25%.
We will not support companies involved in the deforestation of rainforests. We aim to ensure that our activity does not favour deforestation or forest degradation, unless properly mitigated.
Energy efficiency loans to customers will increase in Western Europe by 34% for SMEs and by 25% for individuals. The new origination of energy efficiency loans in CEE will represent over 6% of total loans.
UniCredit has been active in sustainable finance since 2007 and is currently among the Top 10 banks in ESG-linked loans. We aim to achieve Top 5 league table position in EMEA combined Green Bonds and ESG-linked loans through the support of the Sustainable Finance Advisory Team.