How the financial sector is taking account of climate-related risks

This article is contributed by Jovin Hurry, who is reporting from Paris.

As the ministers now negotiate the details of the COP21 Paris Agreement, some of the top key questions arising are how to finance the promised projects and what climate-related risks to shoulder.

Earlier this year, G20 Finance Ministers and Central Bank Governors asked the Financial Stability Board (FSB) “to convene public- and private- sector participants to review how the financial sector can take account of climate-related issues”.

The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability.

It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with 65 other jurisdictions through its six regional consultative groups.

The FSB has announced it is establishing an industry-led disclosure task force on climate-related financial risks under the chairmanship of Michael Bloomberg. The Task Force on Climate-related Financial Disclosures (TCFD) will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders.

Michael Bloomberg is the United Nations Secretary-General’s Special Envoy for Cities and Climate Change; Founder, Bloomberg LP and Bloomberg Philanthropies; and was the 108th Mayor of the City of New York.

The TCFD will make recommendations for consistent company disclosures that will help financial market participants understand their climate-related risks. Access to high quality financial information will allow market participants and policymakers to understand and better manage those risks, which are likely to grow with time.

The TCFD will comprise senior technical experts from firms that are the preparers and users of company risk disclosures, as well as risk analysts. The members of the Task Force will be private-sector individuals drawn from financial and non-financial companies across a broad range of countries within the FSB’s membership.

This industry-led Task Force will consider the physical, liability and transition risks associated with climate change and what constitutes effective financial disclosures in this area. It will seek to develop a set of recommendations for consistent, comparable and efficient climate-related disclosures.

It goes without saying that the wide range of existing disclosure schemes relating to climate or sustainability highlights the need for the companies and relevant stakeholders to reach a consensus on the characteristics of effective disclosures and examples of good practices.

“It’s critical that industries and investors understand the risks posed by climate change, but currently there is too little transparency about those risks,” said Michael Bloomberg in his conversation with Mark Carney, FSB Chair and Governor of the Bank of England.

“While the business and finance communities are already playing a leading role on climate change, through investments in technological innovation and clean energy, this Task Force will accelerate that activity by increasing transparency. In doing so, it will help make markets more efficient, and economies more stable and resilient,” he added.

Emma Herd, Chief Executive Officer of the Investor Group on Climate Change (IGCC) commented that “… investors who are managing financial risk for the long term, need to be managing for climate change. Regulators need to have good visibility of the system-wide implications…”

It is to be acknowledged that an increasing number of companies are voluntarily reporting through a variety of mechanisms on the carbon impacts across their portfolio; and that they are being actively engaged by institutional investors to better understand how climate change will impact their returns. Still there’s a need for even more investors and companies to jump on the bandwagon to demonstrate that they are positioning competitively for a two-degree economy.