The world's biggest banks are producing reams of data on the risks to their business from climate change. Everything, it seems, but what investors really want to know.

They can easily tell you, for instance, details of their own carbon footprint. Much harder to produce is a view of the climate risks inherent in the financial assets and liabilities on their books.

The data is important because without it financial institutions may struggle to measure how vulnerable the companies they lend to are to higher temperatures, rising sea levels and the increasing likelihood of extreme weather events.

"A lot of direct carbon reporting is not that relevant," said Christopher Greenwald, head of sustainable and impact investing research at UBS Asset Management. "How banks are exposed in terms of investments — that is important."

Physical assets

The paucity of relevant disclosures isn't necessarily a reflection of a lack of effort from the lenders; much of the information banks require to assess the green credentials of their portfolios doesn't yet exist, according to Richenda Connell, chief technical officer and co-founder of U.K.-based climate risk modeling firm Acclimatise.

"In order to evaluate physical climate risks, banks need to know a lot of information about the unit that is being affected: what are the borrowers’ physical assets, where are they located, how do they operate, where do they source their supply, where do they sell products," Connell said. "Generally speaking, bank data doesn’t have the level of granularity to make that assessment."

The banking sector has been one of the most active in engaging with recommendations outlined by the Taskforce on Climate-related Financial Disclosures, or TCFD, the organization set up by the Financial Stability Board in 2015 to provide a framework for companies to voluntarily divulge climate-related data. Out of the 11 disclosure categories recommended by TCFD, the banking sector had the highest percentage of disclosure in seven categories in 2018, according to a TCFD status report published in June 2019.

For instance, 52% of 104 banks tracked by TCFD had a climate change risk identification and assessment process, compared with 30% for the insurance sector, 23% for transportation and 22% for consumer goods.

However, it is the lower levels of disclosure from its customers that is the bigger challenge, because so much of the financial sector's climate change risk is bound up in the threats to its clients rather than the lenders themselves.

Stress tests

According to their latest sustainability reports, Wells Fargo & Co. does not yet allocate emissions to its customers, while Goldman Sachs Group Inc. is still developing a way to stress test climate related risk in the oil and gas sector.

JPMorgan Chase & Co. does not yet publish information on credit exposure to carbon intensive industries, while Bank of America Corp. said that it was in the early stages of evaluating and incorporating guidance from the TCFD.

Outside the U.S., Credit Suisse measures balance sheet and credit risk weighted assets across fossil fuel sectors, while Barclays is still exploring options to align reporting on carbon-related assets to TCFD guidance.

While TCFD is providing leadership in creating a broad framework for climate reporting, there are currently no standards in place for evaluating physical climate risks, but progress is being made.

Spatial assessments

Acclimatise partnered with UN Environment Finance Initiative to publish methodologies in 2018 to assess climate change risk to bank loan portfolios, based on a pilot comprising 16 banks looking at agriculture, energy and real estate sectors. Phase two launched in fall 2019 with an aim to better evaluate physical risks in bank portfolios, using a sample of 35 mostly commercial banks.

Complexities include banks’ inability to do so-called spatial assessments, which combine social-economic and environmental data to map climate change vulnerability hot spots, according to Acclimatise's Connell. Impacts can be hard to gauge because of the role of governments in combating climate risk, which can change suddenly from one administration to the next. The lack of borrower insurance for the effects of incremental climate change also complicate risk modelling.

"Climate change disclosure isn’t new within the banking sector," said Andrew Mason, senior ESG analyst at Aberdeen Standard Investments. "It’s been part of project finance for years and a lot of banks have already taken those standards and applied them beyond project finance."

While TCFD guidance remains in its early stages, some investors see the ultimate goal of developing a standardized metric to develop physical risk as a viable medium-term goal.

"Five years seems a realistic target" for a standardized metric for physical risk, said UBS Asset Management's Greenwald.