Financial institutions prepare for climate-related stress tests
JONATHAN WATSON, IBA FINANCE CORRESPONDENT
Stress tests that focus on the impact of the climate crisis are moving up every financial regulator’s agenda. These tests – which show what would happen in various hypothetical situations – are used by regulators to reveal whether financial institutions hold enough capital to meet sudden and unexpected losses.
In recent years, the financial sector has realised that the climate crisis is likely to play a major part in these disruptive scenarios.
According to a November report from the international Financial Stability Board (FSB), ‘three-quarters of financial authorities are now considering climate risks in their financial stability monitoring and some are starting to quantify those risks’.
The FSB set up the Task Force on Climate-Related Financial Disclosures (TCFD) in 2015 to develop consistent climate-related financial risk disclosures for use by companies, banks and investors when they provide information to stakeholders.
The European Central Bank (ECB) plans to conduct a stress test in 2022 on climate-related risks. In late November, it published a guide to climate-related and environmental risks that explains how it expects banks to manage and disclose these risks under current prudential rules. Further details are due in 2021.
Meanwhile, in February’s Strategy on Sustainable Finance, the European Securities and Markets Authority said that ‘more analysis will be done to analyse financial risks from climate change, including potentially climate-related stress testing in different market segments’.
The Bank of England plans to launch its climate stress tests for commercial lenders in June 2021. According to its Governor, Andrew Bailey, the exercise will consider three different scenarios over a 30-year period.
“You need to prepare, or you will be caught out at a stage where you will not be able to react, both at micro and macro level
Klaus Löber
Senior Vice-Chair, IBA Banking Law Committee
‘Despite all this work, we are still only in the initial stages,’ says Klaus Löber, Senior Vice- Chair of the IBA Banking Law Committee and Head of Division at the ECB. ‘That requires significant shifts, reallocations and a change of emphasis. All provisioning for climate risk will affect your baseline, unless you are in the fortunate situation of offering highly specialised insurance products that other financial institutions need to buy.’
There needs to be a degree of global convergence when assessing the challenges posed by the climate crisis, Löber says. ‘Institutions need to act globally, because you want to have some similarity of approaches to avoid having a very fragmented reaction from individual national regulators.’
The Covid-19 pandemic has served to sharpen banks’ focus on climate-related challenges. And more pandemics are probably on the way. For example, some 90 per cent of bats living in Southeast Asia are predicted to migrate elsewhere by 2050 due to their changing habitat. Scientists believe there are some 3,000 types of coronavirus circulating among these bats.
‘There is a good deal of research drawing a connection between the threat to biodiversity and pandemics,’ says Jeff Twentyman, a partner at Slaughter and May and Co-Chair of UK Stakeholders for Sustainable Development, a multilateral association that works to deliver the UN Sustainable Development Goals in the UK. ‘The interaction between humans and wild animals increases the likelihood of pathogens transmitting to humans.’
Beatriz Paulo de Frontin is an environmental lawyer with Brazilian firm BMA. ‘It is still too early to say how financial institutions are preparing to respond to further pandemics,’ she says. ‘Brazil has issued rules focusing [in particular] on ensuring liquidity in Brazil’s financial system and stimulating credit, by relaxing certain prudential requirements. These have proved to be successful so far.’
‘As a tropical country, Brazil may suffer profound physical impacts due to climate change,’ de Frontin adds. ‘Perhaps this physical risk is what motivates a very concentrated financial market to take initiatives that deal with climate change.’
Many of the discussions about climate-related stress tests focus on the scenarios used. ‘Is it a more immediate disruptive event or is it a slow but increasing scenario?’ says Löber. ‘Different scenarios can produce very different results. Depending on how you model the stress test, the results might be very difficult to compare.’
Researchers working on TCFD’s 2020 status report used artificial intelligence to analyse reporting from 1,700 companies and found that ‘disclosure of climate-related financial information aligned with the TCFD recommendations has steadily increased’ since 2017, with the biggest growth seen in how companies ‘identify, assess and manage climate-related risk’.
Despite this, the collective willingness among heads of banks to take the necessary measures may not be quite there yet. ‘From a Brazilian point of view, financial institutions are still catching up with the TCFD’s 2017 recommendations,’ says de Frontin.
About half of the banks surveyed by PwC for a recent report said they had not yet conducted scenario analysis on their current portfolios – something that could help them track what their risk profiles would look like under varying degrees of global warming.
This is why there is a need for the public sector to continue to provide incentives for financial institutions to change their ways.
‘You can’t ignore this,’ says Löber. ‘You need to prepare, or you will be caught out at a stage where you will not be able to react, both at micro and macro level.’
A message from the IBA President
Dear colleague,
This is a brief note of gratitude to all who contributed to the success of the IBA 2020 - Virtually Together Conference. And, if you did not participate, to let you know that some of the sessions that were open to paying and non-paying delegates alike are available to watch on the IBA website at www.ibanet.org. Please do visit.
With the Covid-19 pandemic thwarting travel plans, and bringing about the postponement of 2020’s Miami, Florida location, the IBA brainstormed the possibility of holding its Annual Conference solely online. It had never been done before in the history of the IBA. With the complexity of planning sessions and creating a networking environment, was it even possible?
Well, not only did we do it, it exceeded all expectations! The more than 300 working and networking sessions attracted record registrations, doubling to 12,000 from the previous high. This full-scale month-long virtual conference brought together delegates from 160 countries who could participate from wherever they were located in the world. It is probably our most diverse audience ever. Through this virtual medium, we have expanded the reach of the IBA.
The IBA’s committees embraced the challenge presented by these unprecedented times and, together with dedicated IBA staff, created a wonderfully varied conference. IBA committees produced more than 250 sessions of the highest quality covering a huge range of specialist subjects and practice areas for the event spread over four weeks, from 2-27 November. Committee officers attracted more than 1,000 speakers who imparted knowledge and wisdom. I am so grateful for the efforts of officers and speakers who enriched our event.
As I reminisce, I think about the Conference’s Opening Ceremony, and the United Nations former Secretary General, Ban Ki-moon, talking about ‘justice, equality and the rule of law’ and being ‘deeply concerned by attacks on lawyers around the world’. On the same day, I think about the frank and inspiring interview with the former United States Secretary of State John Kerry. Later that week we heard from Martin Luther King III who reminded us of the importance of human rights and how much work is still needed, as did Kerry Kennedy carrying on the work of her late father Robert F Kennedy, but a fully established human rights activist in her own right. And Mary Robinson of the renowned group ‘The Elders’ talked with us about climate justice and hope for our world. It was wonderful to learn so much, and all from the comfort of home!
As always, networking was a large part of the Conference experience, and I was delighted to ‘meet’ so many newcomers, as well as old friends through some 100 networking sessions. Initially, I wondered whether networking in this virtual world would be effective, but I was so pleasantly surprised as to how simple a process it was and how enjoyable the encounters were – the closest thing to in-person meetings.
With the end of my presidency drawing close on 31 December, all that remains for me to say is that it has been an honour and privilege to have been at the helm of this wonderful organisation for the past two years and to thank all IBA members for the many wonderful experiences I have had as IBA President. I wish my successor, Sternford Moyo, every success in his presidency.
I hope we all have the opportunity to meet again in-person before too long.
Horacio Bernardes Neto
President, International Bar Association
Virtually Together conference presents over 250 IBA committee sessions
The Virtually Together conference featured over 250 sessions run by the IBA’s committees and fora, covering a diverse range of topics and interests.
As might be expected, many sessions gave substantial focus to the significant impact of the Covid-19 pandemic, with one session examining, for example, the pandemic’s impact on the restructuring of private debt, while another explored how lawyers can keep themselves mentally fit during these uncertain times.
Key developments in international affairs – and how they affect the work of lawyers – were also at the forefront. Example sessions included discussions of foreign direct investment in the Americas; cyber-crime and how international law can adapt; and emerging trends in 2020 and their impact on diversity in the corporate world.
Appropriately, various sessions assessed how developments in technology are changing the legal landscape. Highlights here included ‘Artificial intelligence, digital innovation and access to justice’, which considered the benefits of innovation within legal frameworks, and ‘Art Market 4.0 –computers and creative process: between AI and the law’, which explored the role of the virtual realm in the creation, exhibition and sale of art, from artificial intelligence to blockchain.
As the conference continued through November, some sessions reacted to the results of the US presidential election, which took place early in the month. One, for instance, looked at the impact of the election on general counsel and their companies.
Other sessions continued work from previous years. The session ‘Bullying and sexual harassment in the legal profession –can we change the culture?’ followed the IBA Legal Policy and Research Unit’s 2019 report on the same themes. Meanwhile, ‘Presidential Task Force continuation: the emergency evacuation visa and protocol for migrant children’, looked to further develop the initiatives achieved through this task force.
Podcast: Larry Summers on economic agenda for the US
The latest podcast from Global Insight features Larry Summers, the US economist who among other prestigious roles was director of the National Economic Council for President Obama, Treasury Secretary under President Clinton and Chief Economist of the World Bank.
He assesses the US’ economic situation, including the recession and how it differs from previous recessions, severe inequality and the actions he believes are necessary for Joe Biden to take to address these issues as he becomes US president at such a pivotal moment for the country, including tax reform and business regulation.
Widening the conversation beyond the US, he discusses the importance of shifting globalisation’s focus from being in service to multinational corporations to providing genuine, valuable global cooperation, especially during, and in the wake of, a pandemic
New e-book: Contested Histories in Public Spaces
Contested Histories in Public Spaces is due to be published in January 2021 and includes ten in-depth case studies of controversial legacies in public spaces around the world. A joint effort by global experts from the Institute for Historical Justice and Reconciliation, the IBA and the Salzburg Global Seminar, this book will not only analyse contestations happening worldwide, but also identify best practices that will enable decision-makers to respond to future cases in a sensitive but effective manner.
The book looks at controversies surrounding statues, such as that of Edward Colston in Bristol, UK, and Cecil Rhodes in Cape Town, South Africa, but also names of streets and buildings in France and Canada, among other contestations.
Contested Histories in Public Spaces highlights the importance of looking at cases individually to understand the social and cultural contexts that differ from case to case, and hopefully by providing contextual information alongside best practices and remedies, it will be easier to intervene at early stages to avoid future conflict regarding contested legacies, and easier to take early and decisive action.
The e-book will be available to purchase from the IBA website
IBA partners with Jus Mundi on arbitration awards database
Today, the great majority of complex disputes regarding M&A transactions, infrastructure projects, insurance and reinsurance, the oil and gas and the mining sector are decided in international commercial arbitrations.
Access to published awards, which until now has been limited, can contribute to the development of the common law as well as civil law, which –while not bound by precedent –also develops in part by reference to cases.
Over the past two years, the Arbitration Committee’s Subcommittee on International Commercial Arbitration Case Law has been collecting publicly available non-confidential international arbitration decisions and awards.
To make these decisions available to the public at large, the IBA has entered into an exclusive partnership with Jus Mundi, a leading search engine provider for international law and arbitration.
Jus Mundi will make the arbitration awards available on their website at no cost and without the need for a subscription. The awards will also be searchable in various languages. Subscribers of Jus Mundi will enjoy additional features, such as Jus Mundi’s CiteMap, Arbitrator Analytics and Conflict Checker.
This project is a collaborative partnership for arbitration practitioners to increase accessibility in commercial arbitration. Contributions will help to make international arbitration case law more accessible to the legal community worldwide.
Find out more about the project and how you can get involved here
IBA Taxes Committee updates country reports for 2020
The IBA Taxes Committee has published its annual update on international taxation developments by jurisdiction for 2020. The Committee’s tax report page has been revised with documents from 31 jurisdictions, including Argentina, Bulgaria, Germany, India, Mexico and the United Kingdom.
Each jurisdiction’s report highlights key developments in that country as they relate to international taxation. These include domestic matters such as new tax regimes and initiatives, as well as updates on agreements between countries. Example topics include discussion of the taxation of digital services; tax reporting; new treaties to avoid double taxation; transfer pricing regulations; inheritance and gift tax; and non-resident income tax.
Given the advent of the Covid-19 pandemic in 2020, some jurisdiction reports comment on the implications of the pandemic on international taxation. Where possible, authors have also provided outlooks for 2021.
New book: Managing Talent for Success
Managing Talent for Success: Talent Development in Law Firms, Second Edition, a co-publication between Globe Law and Business and the International Bar Association published in November 2020. The book explores successful management strategies law firms can adopt to enable lawyers to thrive and succeed. The second edition of this book, edited by Rebecca Normand-Hochman on behalf of the IBA, reveals various strategies that law firms can take to maintain and develop their lawyers’ naturally high level of motivation so that they can reach their full potential and be fit to constantly adapt to change. It explores various ways that law firms of all sizes can ‘manage talent’ in the most effective way and overcome challenges.
Topics covered in this edition include setting the foundations of a successful talent management strategy, new approaches to managing performance, leading lawyers through change, effective teamwork and collaboration, cultural intelligence and how to develop innovative mindsets for future challenges. With chapters filled with practical guidance from international experts, law firm leaders and partners can use this new co-publication to create conditions for their teams and themselves to develop the highest level of success.
In Memoriam: Klaus Böhlhoff
The IBA was greatly saddened to learn that Klaus Böhlhoff, former IBA President and Honorary Life Member, passed away on 3 December 2020 at the age of 86.
Klaus was admitted to the Bar in 1965. In 1966 he was made a partner in the German law firm Hengeler Mueller Weitzel Wirtz (now Hengeler Mueller) in Dusseldorf. Among his many accolades, he was awarded the Walter Oppenhoff Medal from the German Bar Association in 2001.
Klaus joined the IBA as a young lawyer and was a member for nearly 50 years. He became Chair of the Section on Business Law (SBL) from 1991–1992 and went on to become IBA President from 1998–2000. He was very actively involved in setting up the IBA’s Human Rights Institute with Ross Harper from 1995.
Read Klaus Böhlhoff’s obituary in full
Rising African debt causes Belt and Road dilemma for China
STEPHEN MULRENAN
In late November, Zambia became the first African nation to default on its sovereign debt when it missed a $42.5m eurobond repayment. Although the country had been struggling with its $12bn external debt load for some time, Covid-19 aggravated pre-existing financial pressures.
Zambia last issued a eurobond in 2015, after which its debt started spiralling out of control. Much of that was down to Chinese loans used to finance the country’s infrastructure projects as part of Beijing’s Belt and Road Initiative (BRI). Eurobond investors have now sought greater clarity from Zambia’s government over its Chinese debt obligations.
Joyce Karanja, Website Officer of the IBA African Regional Forum and a partner at Bowmans – Coulson Harney in Nairobi, says that ‘analysts have raised concerns with the debt renegotiations by China, considering that debt arrangements with African countries are shrouded in secrecy and it is not clear what China will want in return’.
Covid-19 has had a detrimental impact on BRI activity in general. According to China’s Ministry of Commerce, in the first eight months of 2020, the business turnovers of Chinese overseas contractors fell by 12.6 per cent year-on-year while the number of new contracts signed by those contractors among BRI countries fell by 24.4 per cent.
Many other African countries are identified by the International Monetary Fund and the World Bank as having a high risk of ‘debt distress’, which could lead to default.
For example, in September, the Kenyan Parliament’s Transport Committee recommended that the country’s government renegotiate the terms of its loan from China Exim Bank, which was used to fund the $4.7bn Mombasa-Naivasha Standard Gauge Railway.
‘No one is actively talking about African governments’ own culpability in all of this,’ says Nankunda Katangaza, Vice-Chair of the IBA African Regional Forum and co-founder of Hook Tangaza. ‘It’s almost as if they are incidental to this vicious cycle of lending and borrowing which led to them becoming highly indebted countries again, a few short years after previous debt was partly forgiven, largely forgiven or restructured.’
She points to Zambia, which had its debt written off in the mid-2000s under the Heavily Indebted Poor Country Initiative, only to immediately pursue additional debt.
In April, the G20 leading economies announced a debt service suspension initiative (DSSI) to help poor countries cope with the fallout of Covid-19. However, it does not apply to private sector creditors, to whom Africa’s debt is significant.
China signed up to the DSSI pledge but initially excluded hundreds of large loans made through its BRI. Some observers have suggested that its subsequent support for debt relief in those African countries that request it – including relief on Angola’s $20bn debt to various Chinese entities over and above what was promised under the DSSI – reflects a growing sensitivity around concerns over its so-called ‘debt-trap diplomacy’ with BRI projects.
In 2019, Moody’s warned that African countries rich in natural resources or with strategically important infrastructure, such as ports, could lose control over important assets in negotiations with Chinese creditors in the event of default.
‘Chinese loans have been vital in funding several important African infrastructure and other projects including via the BRI,’ says Pieter Steyn, Co-Chair of the IBA African Regional Forum and a partner at Werksmans in Johannesburg.
Steyn notes criticism that the terms of these loans are not disclosed publicly, but adds that, to date, there hasn’t been an incident in Africa similar to that of Hambantota port, which was leased to China for 99 years by agreement with the Sri Lankan government.
African governments are not powerless when it comes to renegotiating loan terms. For example, Tanzania suspended the construction of the China-funded $10bn Bagamoyo port project in July 2019.
China’s approach, meanwhile, has been to deal with commercial loan repayment issues on a case-by-case basis while forgiving interest-free loans. For example, it allowed Ethiopia to defer repayments on the loan provided for the Addis Ababa–Djibouti railway.
‘China faces the same dilemma as any other creditor when it comes to the risks of default and whether to agree to debt cancellation or renegotiation,’ says Steyn. ‘However, unlike private creditors, loans by state actors like China play an important role in their foreign policy strategies.’
Although China is Africa’s largest single creditor, 2020 has presented the country with a choice between furthering its own international and commercial interests and cultivating its image as a good actor on the world stage.
‘The effort and goodwill that has been provided by China has been criticised, which is an indicator of the dilemma that the country finds itself in,’ says Karanja.
China’s economy grew at 4.9 per cent in Q3 2020 compared to Q3 2019. But its predicted growth for the year is only 1.9 per cent, leading to increased pressure at home to allocate more resources domestically rather than on risky foreign investments.
China’s policy banks are now more cautious in their lending while the county’s fragmented development financing system now places far greater emphasis on improving due diligence and risk assessments with BRI projects.