Disclosure momentum

“The time has come to take this to the next level and ensure that we avoid harmful market fragmentation.” Thus spoke Randal Quarles, the US Federal Reserve Vice Chair who also chairs the Financial Stability Board (FSB), this week as it launched a report to finance ministers and central banks belonging to the G20 on harmonising climate risks regulation.

As I’m sure you are all aware, the FSB was established in the wake of the financial crisis in April 2009 as the successor to the Financial Stability Forum (FSF).

Its latest intervention comes as different regulatory regimes appear to be taking markedly different approaches to the issue of climate-related risk disclosures.

The European Union, an FSB member, requires companies to say not only how climate change will affect their performance but also how companies themselves impact the environment.

Indeed, the EU’s sustainable finance framework – published on Tuesday – sets out detailed milestones and measures for finance, companies and households to reach its climate goal.

It builds on a 2018 initiative which set the stage for the bloc’s taxonomy, or classification of truly green investments, and mandatory climate-related corporate disclosure.

“As the scale of investment required is well beyond the capacity of the public sector, the main objective … is to channel private financial flows into relevant economic activities,” the EU’s executive  body the European Commission said.

However, such an approach is viewed with suspicion in other jurisdictions, with many in the US regulatory sphere in particular regarding this as overly interventionist and whiffs of mandates as unacceptable.

So what chance for success for the FSB? Well, on the face, of it, it appears to be adopting a level-headed approach which does not seek to build Rome in a day. As such, it is aiming for comparable climate-related disclosures by companies to help firms and their stakeholders assess and manage risk; as well as more granular data on how physical and transition risks translate into financial risks.

The FSB is also asking for regular vulnerability analyses to deal with the “highly uncertain” nature of climate risks; and consistent tools and practices for regulators to oversee individual sectors as well as the wider system.

Setting aside the almost laughable vagueness of the need for “consistent tools and practices”, I suppose one can laud the practicality of an approach which focuses on better data and a greater level of disclosure. After all, this will aid investors, risk managers and even the end customer in the long-run. Oh yes, and it might even help in the larger battle to contain the looming climate crisis.

Enjoy the read,

Marcus Alcock