Hello, everyone, and welcome to today's webinar, Demystifying Climate Risk Reporting for U.S. Commercial Banks. My name is Maureen McKenna, U.S. Commercial Bank Solutions Lead here at S&P Global Market Intelligence, and I will be your moderator for today's discussion. Before we get started, I wanted to cover just a few housekeeping items. First, feel free to submit questions throughout the presentation or during the Q&A session toward the end of the webcast. You can submit questions through the Q&A widget at the bottom of your screen. I also wanted to point out the related content widget, which includes information regarding our sustainability solutions for commercial banks and case studies of banks that have utilized our tools. There is a survey widget. We kindly ask that you take just a few minutes to complete the short evaluation at the end. We value your feedback. Thank you in advance for filling out the survey. 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During today's webinar, we're going to cover the following topics: best practices for measurement and disclosure of Scope 1, 2, and 3 GHG emissions, how to overcome potential challenges with that measurement and disclosure, material risks for U.S. banks, physical and transition risk, and how to comply with TCFD and other voluntary frameworks in preparation for future regulatory requirements here in the U.S. With me to discuss these topics, I have three industry leaders who are actively working to address these issues today for themselves and with their clients. As an industry, this is a new and rapidly evolving topic. I think it's important to acknowledge that we may not have all the answers given how new a lot of these endeavors are here for the majority of banks in the U.S. But hearing the advice of these industry leaders, what challenges they're facing, and how they're addressing those challenges is very insightful. I'm thankful to have the speakers sharing their time and insights with us today. First, I'll introduce Drew Barker, who's the Senior Vice President and Head of Climate Risk Management at Truist Bank. In this role, Drew has established an integrated climate risk management framework for Truist, and his team identifies and assesses the potential impacts from climate change and calculates finance emissions and develops interim emissions reductions targets in conjunction with the company's goal to achieve net zero emissions by 2050. Next, we have Danielle Reyes, Partner at Goodwin, in the firm's financial industry group. Danielle provides broad regulatory compliance advice with a focus on responsible investment, financial regulatory matters, corporate social responsibility programs, non-financial reporting, and human rights, she's also the co-chair of the firm's ESG practice. Finally, Jessica Bennett, Head of Sustainability Services Management at S&P Sustainable1. This division within S&P Global focuses on sustainability data and analytics used across public and private sectors. This group specifically offers portfolio analytics and corporate reporting solutions for things like carbon footprinting, TCFD, ESG materiality, and science-based target alignment. Jessica joined S&P in 2007, prior to joining Sustainable1, she worked closely with our banking and financial services customers to develop financial data solutions. She's been working with our banking clients for many years now. To kick things off, I wanted to send out our first polling question just to get a sense for who we have in the audience. The question is: Where is your bank in a climate risk assessment journey? We haven't started the process. It's early days, meaning we're two years or less into developing a climate risk strategy. It's in progress. We've been working on our climate strategy for two-five years. Old hat, we've been working on this initiative for five years or more, or not applicable, I don't work for a bank. I'm going to give you all a minute to answer that question, and while you're answering it, I wanted to take just a moment to discuss kind of why we're here today. As I'm sure most of you are aware, the SEC proposal that is being finalized, reflects a global momentum toward transparency in disclosures on climate, governance, and other material ESG topics, and is drawn heavily from the TCFD framework. Data from the 2021 S&P Global Corporate Sustainability Assessment suggests that roughly one-third of companies with climate disclosures in the U.S. and globally are already using the TCFD as a framework. While this alignment is a positive step, it also presents challenges for many companies who are in early stages of adoption. With that as a backdrop, I wanted to kick off our first question from Drew. Drew, could you start with talking about how and when you started developing your climate risk framework at Truist? Yeah, happy to. Looking at the polling question, I would say we are in progress. We've recently crossed the two-year mark of both my role being in existence and really some of the work that preceded that. A couple of years in, we are beginning to move from more of a foundational state where we were really trying to better understand what it was that a bank should be doing to evaluate climate risk, where those drivers of climate risk may impact our business, and how to go about thinking about assessing this new type of risk given some of the unique characteristics of it. You know, being a couple of years in, we feel like we're moving a little bit more towards a maturity phase. We're working across, integrating that process into all of our existing ERM frameworks, into our credit risk management frameworks, and really beginning to think of it more as a BAU process at this time, even though recognizing we still have a lot to develop and figure out. Awesome. Could you talk a little bit about the impetus for developing this climate risk framework, whether it was in response to feedback from stakeholders or the investment community? Any comments on that? Sure. It was, you know, broad-based across a variety of stakeholders. Regulatory agencies have all taken an interest in the potential systemic risks of climate change. We've seen that in some of the draft guidance that has come out from the Fed, FDIC and OCC, draft principles for climate risk management. We're also, you know, seeing the Fed do their pilot of a climate scenario analysis right now, which, you know, we're not a part of, but are closely monitoring. Then, you know, on the investment community side, certainly there's a number of investors who are concerned about the potential long-term impacts of climate change on financial institutions. Others that are, you know, more interested in how we are approaching climate change and the potential mitigation of the worst potential impacts there, and how we are working with our clients to facilitate their transition planning and decarbonization efforts. You know, it was a variety of stakeholders, including internal interest and push as well, that has, you know, gotten us to where we are today and really kicked off the journey that we began a couple of years ago. Could you elaborate on how your climate risk assessment is part of your overall governance, risk governance strategy? Absolutely. That's been an evolution as many new constructs are. You know, really, to begin with, we started off with a more select group of our executive leadership sponsoring some of the work that we felt needed to be done and helping guide the development of thinking through how we wanted to approach climate risk management. As we've, as I mentioned, gonna transition more to a BAU state or kind of beyond the foundational state, that process has been elevated into more of a mature committee structure that feeds up through our enterprise risk committee and our board risk committee. Our board continues to be extremely engaged on everything that we are doing and evaluating and identifying. That's primarily from a risk perspective done through the risk committee, but certainly from a broader sustainability initiative, the full board is involved as well. It's reached a little bit more of a mature state that certainly involves leadership at all levels of management and board involvement. Great. Thank you for sharing that. Danielle, I want to move to you. I know your background includes focusing on creating ESG disclosure programs and reviewing individual ESG reports. How has the legal market on climate disclosure evolved kind of over your career? First of all, thank you for having me. I'm really happy to be here. I would say that the legal markets, majority of respondents who do work for a bank are two years, between zero and two years into this process, and I think that's consistent with how the market has evolved. I think it has largely followed the regulatory requirements, which are fairly new. Although there certainly are particularly mission-focused companies that have been making voluntary environmental disclosures for a long time, when it comes to actual hard data on climate, it's a very new practice and still in the early days. I think part of that is because the tools to measure all of the different scopes are still very, at a very nascent stage. As you know, currently, public companies in the U.S. are required to disclose climate risk information if it's material to the company. There's technically, current today, a fair amount of flexibility in whether and how to disclose that information. The proposed rule that you mentioned earlier is an example of an erosion of that flexibility. I think the SEC has determined that it's material for everyone. There are also pressures from outside of the U.S. that have motivated some companies to be further along in their climate disclosure journey than others. Yeah, absolutely. You know, even though there aren't any regulatory mandates in the U.S. yet, as you mentioned, if a bank has large operations in the EU or even closer to home in the U.S., I know the California Climate Corporate Data Accountability Act, which was released in January, requires all large corporations earning a billion in revenue operating in California to publicly disclose their Scope 1, 2, and 3 emissions. The regulation is coming. Outside of that, for those... I know you mentioned some people are voluntarily doing this. Why should banks care about this and be working towards this framework and disclosures? Well, as Drew mentioned already, the bank regulators are very focused on it. Of course, the regulators are a major stakeholder for the banks. It's not really optional anymore not to consider climate risk as part of the overall risk management framework. When it comes to disclosure of those risks or information related to those risks, there are other stakeholders that are also in a position to demand climate disclosures, including investors, customers, and potential customers, insurance companies, especially, and employees. Do you have any thoughts about how banks should build climate risk into their existing risk management framework? Yeah. How this might be different for climate risk versus ESG as a whole? Yeah, I think that what Drew described is spot on, treating it like any other risk in the risk governance framework, such as credit risk, operational risk, strategic risk, reputational risk. Arguably, climate is a component of all of those risks, so the requirement to include them in the risk analysis is already there. I think what we're waiting on and what would be really helpful is the specific guidelines on exactly how to do it. That again, will be helpful, but arguably it's already required today. That work includes making sure there is the right climate expertise within the independent risk management frame, function, as well as making sure that the board is involved and properly educated on the topic. As far as ESG as a whole, I think it can encompass a lot of things that are not climate-related. It doesn't necessarily make sense to address all of ESG, the way that banks should address climate-related matters. It is important to make sure that all of the ESG activities are aligned to a singular overarching strategy, so that you're not doing something in one part of ESG or ESG program that conflicts with something else that you're doing as part of the ESG program. Ideally, those things are being done in concert so that synergies can create more impact. Do you anticipate a rise in shareholder lawsuits based on climate and other ESG risk readiness? I know we've seen some of that already, but your thoughts on- Yeah how that might progress. Yeah, we have seen some of that already. I do think it will become more prevalent, especially for banks that are operating globally. I think the timing is still unknown. It will be easier to prove damages if something terrible happens. The preparation was not done correctly. To have a suit based on the fact that there was the readiness was not sufficient when nothing has happened yet, I think that would be hard. Got it. Jessica, moving to you. When working, what are our banking customers saying are their biggest challenges with, moving towards complying with some voluntary frameworks or getting ready for, future regulatory mandates that are coming? Talk about that. Certainly. Yes, I'd be happy to. It's a pleasure to be here today. I just want to say hello to everyone. What we do is at S&P and within Sustainable1, is we work with banks in a variety of different ways, including the delivery and implementation of data solutions, as well as company-specific analytics. We work with banks globally as well as in the U.S., also on thought leadership and market events. From those engagements, one of the biggest challenges that I regularly hear is data. Both data availability from within the firm and then also when the bank is trying to understand how sustainable their own customers are. We're, of course, hearing it's incredibly challenging to procure that type of information, especially in a very consistent way. Then when we're talking or thinking about the internal data challenge, what we regularly encounter, even in early-stage disclosure journeys, is that it can require a lot of investment to procure the data required to do things like calculate greenhouse gas emissions. Ideally, this data is, would be, you know, collected from first-hand sources at branches, energy invoices, fuel usage equivalents. That kind of level of detail can take a lot of time, and building something like a carbon accounting inventory management plan, which goes beyond just gathering the data, but actually managing it across all the different functions that we've been talking about that actually need to engage in climate risk assessment, measurement, and reporting. Everything, you know, strategy, accounting, risk committees, that can take quite a bit of time and investment. That's really one of the biggest things that we're hearing from customers is that data challenge. In addition, as we've already mentioned, that evolving regulatory environment and the unknowns associated both with the regulatory environment, but also with the associated change in investor perspectives, is another challenge. Sure. How are our clients overcoming some of those challenges, particularly as it relates to the data issue? Can you comment on any thoughts around that? Yeah, when we're working with customers, you know, that are having some difficulty in procuring and/or managing data, we've got some fairly standard ways that we would collect that data to engage with any kind of Scope 1, Scope 2 assessments. There's also modeling opportunities. If you're not able to get down to that level of granular detail, there's sector averages and a variety of other methods that can be used to still get you to a place where you can have a directional greenhouse gas emissions calculation that can then be used in baseline decision making. Drew, going back to you, talking a little bit about the challenges that you faced, you know, kind of overall with this process, can you talk about that a little bit and how you all are approaching or how you might suggest, the banking industry as a whole addresses some of these challenges that we're facing? Yeah, I mean, the comments on data are probably the most important. Data continues to be just an incredible challenge as we think through some of the reporting that needs to be done, some of the risk assessments that we would like to do. You know, one piece of it is, you know, just acquiring the internal data that may be available. A lot of it involves data elements that, you know, we maybe not have had a purpose for putting into a system previously or maintaining with the same data quality that we would need for other financial reporting. Better understanding what data is out there within our internal ecosystems was kind of the initial challenge. Moving beyond that, where the data, you know, what data do we need to acquire externally, either about our clients or about physical climate hazards, and going through the process to source that data, to be able to bring it in and start using it in our own risk assessments and calculations. You know, there's a lot of providers out there that are offering it from different views, and, you know, it's sometimes a challenge to evaluate the value in each of those for the different physical hazards and different, you know, elements that are needed. It's a key challenge that we are all dealing with and, you know, is critical to being able to, you know, stand behind some of the assessments and reporting that's necessary in this space. Awesome. I know another challenge can be internal expertise, and just getting everyone in the organization up to speed on why this is important and why they should be focusing on this. I was intrigued to see in your background that you previously, at Truist Bank, were the Director of Liquidity Management and Funding, and Head of Capital Adequacy and Resolution. How did you personally transition to focus on sustainability and climate change, and what insights might you would you be able to share for banks who may not have internal expertise in this area and how they might be able to redeploy internal resources towards this endeavor? Yeah, absolutely. You know, I am not an environmental scientist by training or background, but even going further back in my career, I did some work at the Federal Reserve during you know, the post-financial crisis Dodd-Frank Act implementation. I have a little bit of experience to fall back on as far as how regulators think about putting together new guidance, new regulation, and expectations around financial risk management. My time spent leading our capital team here involved in running the CCAR stress testing process. I've been able to rely pretty heavily on both those experiences to both think through how regulators might be, you know, considering regulating or providing guidance on this space, how to think through, you know, evaluating a new risk, setting up a new risk framework, and integrating it into existing processes. You know, with the scenario analysis component of this, we are expecting to, you know, largely build out, you know, an integrated process that somewhat replicates, somewhat leverages our existing capital stress testing frameworks, but with the purpose of evaluating climate scenarios. You know, very few banks probably have environmental scientists on their teams at this point, and I don't think they necessarily should be running out to hire them. There's great external resources and data available to fill those specific needs and gaps. But really, you know, it's a matter of understanding sound risk management frameworks and being able to develop those in conjunction with some of the more quantitative scenario analysis elements that will be required down the road. Yeah, I want to get to that, in a little more detail a little bit later. Jessica, going back to you, could you talk about any trends you're seeing in banks who are disclosing, are already reporting some, climate risk, GHG emissions? Anything, you can share there? Certainly, yeah. Actually building on some of your comments from the opening section, S&P has analyzed financial institutions globally from that population that's participated in the Corporate Sustainability Assessment, which is the survey that we use to generate ESG scores. As, of course, as you mentioned, and as we would expect, climate-related disclosure is increasing. For the financial sector, the rate of increase is not as fast as some of the other sectors that we see. In the U.S., in particular, the alignment to Task Force on Climate-related Financial Disclosures, or TCFD, is a little bit slower or less aligned. Even with that comparison and those two trends, you know, we are definitely seeing a lot of disclosure from global and regional banks, like Truist, and they're certainly generating both ESG and TCFD reports. Typically in those reports, what we'll see is statements about sustainability strategy, community initiatives, diversity and inclusion efforts. There's oftentimes a lot of thematic work that goes into these reports, in addition to some of the more quantified things like Scope 1, 2, 3 greenhouse gas emissions, the physical and transition risks that are often associated with the TCFD. We also see some net zero and other science-based target reporting becoming a little bit more prevalent, but we also see that as being included in more aspirational reporting or the things that banks are planning to report. I guess I would categorize this overall by referencing our first polling question, which really proves that there's a very broad spectrum of disclosure levels across institutions at this point. Some are early in that journey, and then some have quite robust reports. Awesome. I want to switch gears and talk specifically about the SEC's climate disclosure rule. Danielle, could you talk to us about how banks should be preparing for this rule, which we anticipate will be finalized later this year? What do you recommend banks do while we kind of wait for the final ruling in the fall? Sure. Generally, I think banks and other public companies subject to the rule should be getting their houses in order to the extent they're not already, so that they will have information to disclose that they will be proud of when the time comes. I know it's very difficult not knowing when the rule will come out and what it will say, and certainly don't want to spend resources on complying with requirements that you might have to pull back a little bit to comply in a slightly different way. Banks do have an advantage over other companies that maybe are not quite as heavily regulated, and that they do have guidance from their regulator that's independent from the SEC rulemaking process, as we discussed before, that's focused on climate risk management. They should definitely focus on the information that they may have to disclose under the SEC rule that aligns to their other regulatory expectations. Some of the things that come up a lot with clients that are earlier in their journey include having some level of board and senior management expertise when it comes to climate-related financial risk exposure, especially for the smaller clients that I work with, and making sure that there's a proper monitoring oversight framework in place for specifically for climate risk. Like I said earlier, the components of the other risks that are the climate risk portion of that. In general, I would just say focus on the things that make sense for you anyway, regardless of the regulatory requirement to disclose those things. In the meantime, Jessica was talking about that TCFD alignment is something to consider, especially for global, globally operating companies, because if there is one most commonly aligned to framework out there globally, it's TCFD. Awesome. Jessica, same question for you. I know that your team works with companies to measure and disclose Scope 1 and Scope 2 emissions, and we'll talk about Scope 3 a little bit later. Can you talk about what banks should be doing now to move towards measuring and disclosing Scope 1 and Scope 2 as a starting point? I mean, I certainly wouldn't go so far as to provide any advice on that, but I think what Danielle was saying really makes a lot of sense. Working towards more precision around data, I think takes a lot of time and a lot of investment. Not having to build that strategy around disclosure requirements, but rather the strategy of the organization, I think makes a lot of sense. I'll go back and kind of reiterate the importance of baselining. If you have, for example, greenhouse gas emissions baseline ahead of disclosure, your disclosure and reporting becomes a little bit more around achieving progress towards goals and maybe a little bit less of just a measurement activity. I think that that's one way to kind of think about it, is just improving that data precision and what you can do with your baseline. Other things to consider is depending upon where you are in your journey, if you're very early on, you know, things like materiality assessments and broadening the scope of what you're looking at to, you know, environmental, social, and governance topics, and just figuring out what is relevant and important to your firm, based on sustainability frameworks like SASB or GRI, but also kind of in consultation with your management and your key stakeholders, can also be a good all-encompassing way to start. It'll include things that have to do with climate risk, but also includes things like data security, systematic risk management, often Scope 1 and 2 evaluations and peer assessments can be included in those types of initial assessments. In fact, you know, even just the peer disclosures of investigation can be worthwhile while we're waiting for disclosures to be finalized. Excellent. Thank you. Drew, how are you getting ready for this impending regulation with the SEC's climate disclosure role? Yeah, we, you know, when the draft initially came out, we performed a readiness assessment to the key elements of it and put together somewhat of a roadmap as to how we would comply with it. Given some of the delays in being finalized and uncertainty as to what is going to be implemented, you know, we're being selective about where we're doing work, and the majority of that work is focused on the areas that we were already working on before the draft guidance came out. You know, you mentioned the TCFD earlier. We had already published a TCFD report. We've published two now. We continue to work towards, you know, fully addressing each of the principles within that framework to make sure that we're disclosing, you know, what investors are looking for with respect to climate-related risks. We also, you know, committed to calculating our finance emissions and disclosing those at a future date as we continue to work towards that end. You know, really, for us, it's been continued doing what we are doing with the recognition that there may be some additional elements required or some tweaks that need to be made based on the final guidance. At this point, we're waiting to see what that final guidance looks like before making any significant investments outside of our, you know, current track. Could you touch on how the industry should be thinking about materiality as it relates to the climate disclosure role? Yeah, it's, you know, materiality is a challenging question in this space, particularly from a risk perspective, given that, you know, a lot of financial institutions haven't recognized any sort of significant losses relative to a number of these risks. It's not the same historical data to rely upon the time frames associated. Certainly, a lot of the climate-related risks can be much longer and different than we're used to thinking about as financial institutions that have been, you know, focused on a, you know, four-quarter or nine-quarter kind of view of the world and view of risk. The industry is taking some different approaches to think through some of the materiality specific to climate risk and evaluating what a potential impact of an event could be if it were to happen now or kind of worst-case scenario, regardless of time frame. I think that's been helpful for all of us in really sizing what potential impact to some of these risks could be. From a, you know, from a SEC reporting standpoint, it really remains to be a challenge that we're hoping that we get further guidance on before, you know, in the final version of their guidance when it comes out. Awesome. Thanks, Drew. Before we kind of move on to the next, talking about TCFD and some of the physical and transition risks, Jessica, I wanted to go back to you, and I wanted to see if you could elaborate on some of the methodologies that you've seen companies use if with the voluntary disclosure of GHG Scope 1 and Scope 2 emissions. Can you talk about that a little bit? Certainly. Accounting for a firm's environmental impact is kind of one of those first steps to managing risks and then ultimately to reducing greenhouse gas emissions. But as I mentioned at the beginning, it can be quite difficult to get a very insightful footprint without that structured data. So it definitely takes quite a bit of understanding of how to go about this process. And the structured process that we use in line with industry best practices and the Greenhouse Gas Protocol is first, to make sure that we are understanding the scope of what we're measuring, right? Scope 1, direct emissions, these are emissions from branch locations or offices, company car transportations, directly from the company. Scope 2 is obviously emissions that are indirect, purchased electricity, heating and cooling. You've got your scope of: what am I trying to measure? You need to understand what the operational boundary is for that. What is the scope of my sphere of influence? There's several different ways to kind of look at that, as recommended by the GHG Protocol. There's operation control approach, which is all about how you would understand the way that your company accounts for GHG emissions over which it has full operational control. There's a financial control equivalent, which accounts for emissions over which you would have full financial control. Then there's an equity share approach, which really looks to represent the extent of the rights that you would have as a company to the risks and rewards that flow from an operation in which you have a share of equity. The reason that that's important, obviously, is because we're just trying to understand very first and foremost, the scope of what we're trying to measure. Once you have a vision of that, your organizational boundaries, it now comes to us saying, "Okay, well, what are my sources for Scope 1? What are my sources for Scope 2?" You've got physical assets. You might potentially have some sort of company vehicle fleet. Those are Scope 1 emissions. You need to understand what kind of fuel is powering that consumption and the volume of activity. When we're looking at that, you can do things like using the cost of fuel, like how much did you spend on fuel in a given period? You could even go to meters at branches and understand the physical volume that has been used. But that's obviously quite granular collection, and can take some time and investment. Then on the Scope 2 side, we're really looking at, you know, utility providers, district heating and cooling, understanding how much you're spending, the cost of electricity, steam, heat, cooling, or the energy units used. Then there's typically two approaches that are used to quantify and report that. One is the market-based approach, which is really looking specifically at the generation mix of the energy provider that you have chosen. There's a location-based approach that looks at the actual electricity grid and the physical location of the asset that you're considering. With all of that baseline, with all of that information kind of gathered, what you would then do is apply emissions factors to the various greenhouse gases that you're using across your Scope 1 and 2. This is measured in tons of CO2, and the emissions factors are going to be specific to the business activity. These are widely available from GHG Protocol, government bodies, or other standard setters. The combination of this data and the emissions factors is how you would achieve your Scope 1 and 2 reporting, and it's something that we kind of have a data collection practice around and can help with interpretation on. Awesome. Thank you. Switching gears, a little bit, I wanted to dive into, talking about additional risks, so both physical and transition risks. Drew, I know you've recently finalized your second TCFD report, which you describe, these risks in great detail. I encourage, if anyone has not checked that out, it's a great resource. Could you talk about, how you are assessing both physical and transition risks, kind of starting with that second TCFD report? Yeah, happy to. You know, it's, it's a process, you know, not too dissimilar from risk identification and in a variety of, you know, other fields. I guess maybe to, as a foundational point, I think this was mentioned earlier, but climate risk is not seen by the industry or by Truist as a standalone risk, but rather a driver of our other primary risks across the organization. When we start to think about the physical and transition risks, really, the most, you know, impactful and most significant of those is going to be the potential impact that they have on credit risk for us. From a physical risk standpoint, you know, that's going to be thinking through the potential hazards associated with increasing frequency and severity of climate-related events. We really have to take a geographic approach to assessing that risk, better understanding where we have concentrations of real estate collateral, and also our operational risk, the corporate, you know, functions and real estate that we own, and what the potential physical perils are facing those locations. You know, for a bank like Truist, based in the Southeast, obviously, we deal with a lot of hurricane strikes down here, and we've been assessing that for a lot longer than my position and team have been in place. It's those types of analysis to say, you know, what are the physical risk hazards that matter to where our portfolio is based? What type of analysis can we do to understand either the concentrations of risk or how the potential impact of those risks may evolve over time? We've done a good bit of that. You can see in the TCFD report, we're in the process of getting more granular with that analysis now as we kind of continue to progress and getting into to more, you know, from a location standpoint, that is. On the transition risk side, it's a little less real estate-focused, a little bit more C&I lending and really understanding, you know, who are the clients and industries that we lend to as a company and what are the activities that they're involved in? You can see in our TCFD report and many of our peers, one of the initial things you have to do is just take a sectorial view of the industries that your clients are operating in and risk assess those from a transition risk perspective. We do that across a variety of potential drivers to get a sense, you know, qualitatively as to how these risks may manifest within an industry kind of generically. As you move beyond that initial phase, it's really a matter of diving deeper into each of those and not only understanding...... how those risks may manifest, but who the clients are that you have operating in those industries, because they're not all, you know, equally at risk or approaching this new challenge in the same way. There's a deeper dive there as well to really get into each sector, understand some of the subsectors, how the risk may manifest in each of those, and how your clients are thinking about and approaching this. Ultimately, you know, their approach to recognizing and mitigating the potential transition risks facing their business are, you know, ultimately how we're going to incorporate that into how we think about credit risk. I know you mentioned that you have been evaluating physical risks like hurricanes for a while now. Can you elaborate on how maybe that's changed over the last few years, with a more sharpened focus on climate? Maybe it hasn't. Any thoughts about that? Yeah, I mean, you know, in the past, it was more of a, of a capital construct and trying to assess potential losses that could result from a hurricane or a series of hurricanes. You know, now it's a little bit more of a, of a concentration risk as to the potential exposure we have to storms in certain geographies. Ultimately, I think the biggest shift is less about the actual impact of an individual storm and more about the longer-term economic trends that could result if certain areas are impacted more frequently or more severely on a regular and recurring basis. Obviously, the most visible and probably nearest term impact of that is the cost and availability of insurance. Really understanding how the insurance markets are responding to climate change and how that could, you know, as a second-order impact property values and economic activity, in certain geographies that maybe seem to have a higher risk of some of those physical hazards. Could you elaborate on how you're assessing these risks, both qualitatively and quantitatively? Thoughts there? Yeah, I mean, so, you know, qualitatively, it's more on the transition risk side, just trying to understand or think through the potential, you know, policy implications for a sector, the legal ramifications where stakeholders are going to be more active than others. And, and really, you know, thinking through, you know, what we know of the landscape and how we think that might translate. From a quantitative basis, you know, it's taking that scenario analysis perspective to really think about how losses and property values and some of the key factors that financial institutions are monitoring might be impacted by various climate scenarios. There's a handful of those out there for companies to use and to think through, assessing a range of potential outcomes, based on both policy and technology changes over time and in response to climate change. Being able to run those scenarios quantitatively with some of the models that have been developed over prior years with CCAR and CECL implementation, and just beginning to understand how we can use some of those methodologies to inform our initial views as we, you know, build out better quantitative methods for really assessing the potential climate drivers. Excellent. That's really insightful information. Last question, and we'll move on to the next topic, but you alluded to this a little bit, but could you elaborate on what you feel are the most material financial risks, and kind of over what time horizon you're looking at? That's, you know, again, one of the more challenging things that we're working through because, you know, as I mentioned, not many financial institutions have experienced, you know, a significant amount of loss to date, as a result of some of these risks that are more on the horizon and coming down the pipe. I think the, you know, the insurance piece that I mentioned a moment ago is probably one of the more shorter-term, intriguing questions that the industry is grappling with right now and trying to get a grasp of. Certainly as we look at forecasts for the transition, expectations of policy changes and certainly the adoption of certain, you know, more sustainable activities, trying to get a sense as to how those will impact existing businesses and existing revenue streams, you know, could become more material over time. It's certainly a challenge to assess that with any sort of certainty at this point. Makes sense. Okay, for the last few minutes before we get to Q&A, I wanted to touch on Scope 3 finance emissions, which are obviously a very important part of the equation and risk evaluation for commercial banks. Jessica, just to give Drew a little breather, since I just fired a bunch of questions at him, could you talk about how you're working with banks to measure and disclose Scope 3 finance emissions, kind of in accordance with PCAF? Yeah, most certainly. We were just talking about Scope 1 and 2, but arguably Scope 3, finance emissions are where financial institutions can have the most impact. Quantifying finance emissions, it's basically one of the biggest steps to understanding the overall risk exposure, and could be one of the ways that's critical for setting baselines for science-based targets and just broader decarbonization strategies. This is one of the areas that I'm particularly excited about, the way we work with banks, and we do that in a few ways. One, we have a data miner, which kind of provides emissions data and apportioning data points for companies within S&P's broader coverage, if you want to kind of look at this information yourself. We can also look specifically at an individual's loan book and assess recommendations in accordance with PCAF. What we can do there is really help to quantify the financed emissions by understanding the loan portfolio and associating emissions data with your borrowers. The methodology for this kind of depends on the asset type and the borrower profile. Just as an example, for corporate loans, what we can do is kind of take into account the value of the holdings, so the loan, the apportioning factor, which we define as enterprise value and get from the S&P databases, and then the emissions data for that company. Where data may be less available, like if it's not a public institution, we can do things like use the weighted average carbon intensity approach, which is from the TCFD framework. What we do there is assess the risk exposure based on sector carbon intensity, for the borrower. We've done engagements where we've worked through corporate loans, mortgages and real estates, equity and debt investments, as well as sovereigns, which is not necessarily part of the PCAF framework. PCAF does also address and outlines methodologies for additional factors like project finance and motor vehicles. Awesome. Drew, going back to you, I know Truist has joined the Partnership for Carbon Accounting Financials, PCAF. Could you talk about where you are in the process, with Scope 3 finance emissions? Yeah, happy to. Yeah, so we signed up with PCAF, a couple of years ago, or a year and a half ago or so, and really began a process to, you know. Again, going back to the data, it all starts with the data. What do we have available on our clients that we need? Then what can we find externally and, with the methodology that PCAF has laid out, while extremely helpful and, and thoughtful, it requires some data elements that we, as financial institutions, haven't been historically tracking, and, in other cases, you know, it hasn't been historically available, in the case of emissions reported from many of our clients. You know, we are, and here at Truist, have built out the calculations for the asset classes that have been developed by PCAF so far, and are really just working through how do we both, you know, refine those calculations, and make sure that they're as accurate as possible with the data available, and then how do we improve the data quality over time? We're fortunate to have, you know, a decent amount of available external data to help us estimate those emissions. Ultimately, as we start to think through future reporting and disclosure of those emissions and working with our clients, you know, it's great to have as accurate of a number as possible. Ultimately, when we are using factors such as, you know, the asset size of a company or its revenues, you know, that's not a very refined calculation to be able to have a valuable conversation on. That, you know, translates across to other asset classes as well, whether it's our residential mortgages or our the motor vehicle loans. You know, in many cases, we're using some pretty broad-based assumptions still there, and would love to improve that data quality over time, but that's something that's going to be a long journey for the industry as a whole, and certainly for us here at Truist. What would you say are kind of your next steps in progressing in that journey for your most immediate to-dos? Well, you know, most immediately, we've got some internal processes to go through and govern some of these calculations. And then as far as, you know, from the data perspective, we're really starting to shift into a more forward-looking view of what would be great if we could start collecting it directly from a client or at the time of financing, to better, you know, improve the data quality of those calculations with information that should be available but just hasn't had a use in the past. And so thinking through how we go about integrating that into existing databases and processes, kind of in the front line to collect better data on a go-forward basis is one of my top priorities right now. Awesome. I'm sure we could spend much more time talking about that. We have about five minutes left. I wanted to take some time to get some questions. Danielle, question for you, kind of, switching gears a little bit, the intersection of all of the components of ESG. With the new CRA rules that are in the works now, how might the new CRA rules kind of intersect with environmental justice and climate disclosure? I know the CRA rules are something that every bank, large and small, deals with and is a very important discussion for banking institutions. I'd love to get your thoughts on how you see that evolving. Yes, just for those who may not know or be familiar with the CRA rule or what's going on there, Community Reinvestment Act is a, you know, decades-old law that has rules that haven't really been updated substantively since the 1990s. There have been fits and starts in trying to revitalize and modernize the CRA rules. Just like the SEC climate disclosure rule, the proposed rule has been pending for over a year, and we are hoping that the final rule will drop any day now. Historically, it has been very unclear whether anything related to environmental resiliency or disaster preparedness would count as a CRA-eligible activity or investment that banks would get CRA credit for. The proposed rule makes it very clear that disaster preparedness and climate resiliency activities that benefit low and moderate-income communities will count. That's a very positive development. This goes back to what I was alluding to earlier. Find something that makes sense for you anyway, and see if it can also work to comply with a different requirement. You're thinking about climate resiliency when it comes to the impact on borrowers. That's the exact same thing that you might get CRA credit for. Good advice. Another question came through about the time and monetary cost of compliance, related to, I guess both climate and ESG, especially for smaller financials. Do you have any tips, I guess starting with Danielle again, for smaller cap community banks with more limited resources on how they can go about with complying with the SEC climate disclosure rule or voluntarily working towards some of these disclosures? Yeah, sure. Again, I know this is, like, the third time I'm saying this, but try to kill at least two birds with one stone. When you are thinking about the things that you're working on now, that are front of mind now, it would be great if you could also keep in mind whether that's going to check any other boxes when it comes to the climate disclosure rule. Fortunately, for the smaller caps, they should have a lot more time to comply. When it first goes into effect, they'll have the benefit of the larger cap companies going through the compliance process first. It also gives the service providers a chance to fi`gure out what's most efficient. By the time it... The rule, the applicability of the rule gets to the smaller companies, there should be some cost savings that they can take advantage of as a result. Great. We just sent out another polling question, just related to whether you'd like to receive additional information about our sustainability products and solutions. We help banks with a variety of pain points and would love to have the opportunity to talk to you about how we can help you with some of these challenges. Let us know if you would like us to follow up. In closing, I wanted to ask one final question of all the panelists. Kind of what would be the biggest piece of advice that you would give banks on how to progress in this journey, depending on kind of where they are? Drew, can we start with you? What do you think is the biggest takeaway that you would give banks at this particular point? I mean, I think it's just to start, you know, simply. I highlighted some of the concentration components of the risk, whether in the sector analysis or some of the geography analysis, and really just starting there to identify whether or not there's any potential concentrations of climate-related risks that are worth exploring further. Awesome. Jessica? Yeah. I think, not so much advice, but just a thought to leave everyone with. We talk rightfully a lot about risk, and this is part of the TCFD framework, but there's also opportunities, and it's always really exciting to me to see when firms are integrating sustainability strategically, and looking for those opportunities, whether that's, you know, new business opportunities, green financing, ways to shore up their operational efficiency or resiliency. I think there's a lot of opportunities out there to also consider with regards to this topic. Danielle. I'd just say don't wait until the rule is finalized to start thinking about it, because of all the things we talked about before, there are efficiencies to be had by thinking about how else you can achieve other goals by complying with certain parts of the rule. Awesome. All right, well, we are out of time. Just a few closing comments. As I mentioned earlier, the webinar has been recorded, and you'll receive the replay link shortly after we wrap up here. When you close out of the webinar, you will be routed to the evaluation form, so we'd love to hear your feedback. Thank you again to Drew, Danielle, and Jessica for joining me and for you all for taking the time to attend. If you have any questions about today's presentation or any of our solutions, please don't hesitate to contact me. Hope everyone has a great summer, and look forward to more conversations with you all throughout the rest of the year. Thanks so much. This concludes today's webcast. Thank you.