THE ROAD TO ACTION: Financial regulation addressing climate change

THE ROAD TO ACTION: Financial regulation addressing climate change (original link)

Our report finds that investors, asset managers and banks urgently need a way to identify and measure how companies are responding to the risks of climate change.

The cost of inaction: Recognising the value at risk from climate change, a July 2015 report written by The Economist Intelligence Unit (The EIU) and sponsored by Aviva, identified the need for a framework to govern the disclosure of climate-related financial risk.

Since that report was published, several significant events have taken place including the historic agreement on a global warming limit at the Paris Climate Conference (officially known as the 21st Conference of the Parties, or COP21), its early adoption by 55 countries and the European Union and the US administration’s subsequent decision to withdraw its support from the agreement.

In this follow-up report, also sponsored by Aviva, we review the issues relating to climate-related financial disclosure and investigate the mandates of ten different international, EU and UK financial institutions, all with very different focuses and mandates, to consider what role they play, or could play, in supporting climate-related financial risk reporting.

We also review the recommendations put forward by the TCFD and consider how climate-related financial disclosure can be set into the UN’s broader Sustainable Development Goals (SDGs), rather than being siloed into green finance-related policies and regulations.

Key findings from the report include:

  • Banks, asset managers, industry and governments—and, in the US, individual states—will continue to need to work with regulators to determine what information is required to ensure that investors have sufficient knowledge of the risks affecting their portfolios, and which regulatory authority will be held accountable to implement such rules.
  • Based on their collective and individual commitments to ensuring financial stability, global, regional and national standard-setting and regulatory institutions can all play a role in ensuring that the Paris target is met.
  • There remains a lack of international consensus on what constitutes a material climate risk, particularly at the sector, subsector and asset-class level. Reporting on materiality is therefore ambiguous and unregulated.
  • Internationally accepted, integrated accounting standards which incorporate climate-change-related risks would reduce investor and financial stability risks.
  • Standardised and regulated scenario analysis is needed to allow asset owners and asset managers to understand how climate change would affect investment return.