On December 4, 2023, the Central Bank of the Russian Federation (CBR) published Recommendations for accounting climate risks within financial organizations. This document marks the first step towards establishing principles for climate risk management in Russian financial institutions. The scope of these Recommendations applies to:
In these Recommendations, climate risks are defined as the probability of losses due to human activities affected by climate change, as well as measures to adapt to these changes and minimize human environmental impact. Climate risks are divided into physical and transition risks, depending on the factors influencing them.
Physical Risks: These involve an increased likelihood of hazardous natural events and resulting damage due to long-term climate changes. Physical risks are further divided into acute risks (linked to immediate hazardous natural events caused by climate change) and chronic risks (due to long-term climate changes).
An example of a realized physical risk is the 2010 drought, which caused significant wildfires and reduced crop yields, leading to a ban on grain exports in Russia and a more than 50% increase in grain prices over the year.
Transition Risks: These arise from the shift toward a low-carbon economy, including government measures aimed at preventing climate change.
An example of a realized transition risk is the European Union’s implementation of the Carbon Border Adjustment Mechanism (CBAM), which places additional obligations on certain producers supplying goods to the EU to calculate and report greenhouse gas emissions.
The unique aspect of climate risk impacts on financial institutions is that they are primarily indirect, realized through their impact on borrowers and the portfolio as a whole. The Recommendations outline potential consequences for the financial sector resulting from climate risks, including:
| Impact on Non-Financial Sector | Financial Sector Consequences |
|---|---|
| Decreased profits | Higher operational expenses |
| Increased capital expenditures | Increased borrowing costs |
| Potential rise in debt load | Elevated risk of credit default |
| Decrease in asset value of high-emission companies | Lower national budget revenues and financial policy stability |
Given the indirect nature of climate risks, financial institutions are encouraged to monitor the following climate metrics:
The metric for assets and activities exposed to physical climate risks is based on analyzing the vulnerability of client and counterparty assets to climate-related natural events and gradual climate changes.
Similarly, the metric for assets and activities exposed to transition risks involves analyzing client and counterparty assets’ sensitivity to regulatory shifts towards a low-carbon economy, as well as technological and market preference changes.
For reporting on climate risks, financial institutions are advised to follow the guidance of the CBR’s June 13, 2023, Information Letter No. IN-02-28/44 “On Recommendations for Disclosing Sustainable Development Information by Financial Institutions,” particularly concerning timelines and procedures. If climate risks are deemed material, it is recommended to emphasize disclosure related to them.
Assessing the greenhouse gas emissions of financed assets is crucial for financial institutions and stakeholders as it helps gauge the institution’s climate impact. Emissions assessment also provides a basis for identifying and managing transition climate risks.
Currently, three international guides offer methodologies for assessing financed companies’ emissions, which financial institutions can adopt:
The PCAF methodology is highlighted in the Recommendations due to its versatility. Below is an alignment of asset types with methodologies from GHG Protocol, PCAF, and TCFD for calculating greenhouse gas emissions:
| Asset Type | GHG Protocol | PCAF | TCFD |
|---|---|---|---|
| Public Equity | + | + | + |
| Corporate Bonds | + | + | + |
| Commercial Loans | + | + | + |
| Private Equity | + | + | |
| Project Finance | + | + | + |
| Commercial Real Estate | + | ||
| Mortgages | + | ||
| Auto Loans | + | ||
| Sovereign Debt | + |
ESG reporting practices are expanding in Russia, with an increasing number of organizations, including financial entities, publishing non-financial reports. Following the Recommendations, it is expected that financial institutions will integrate climate risk assessment into risk management systems for financed and company-owned assets.
For example, in its 2022 sustainability report, Moscow Credit Bank identified primary physical risks linked to climate change and provided an assessment of the carbon footprint for some financed assets, calculated per PCAF and TCFD standards.
Although climate risk accounting in Russia is recommended, international practices increasingly mandate the disclosure of climate risk management structures, particularly in the UK and Hong Kong, where TCFD-aligned disclosures are required.
Consequently, global disclosure of climate risk management in companies, including financial organizations, is becoming mandatory and must adhere to international standards. The Central Bank’s Recommendations encourage financial organizations in Russia to disclose climate risk information using GHG Protocol, PCAF, or TCFD methodologies. Preparing such reports helps build a more transparent and responsible climate risk accounting practice, supporting a clearer understanding and assessment of their impact on financial performance and business resilience.
Author: Marina Kupriyanova
Published: May 3, 2024