Is the financial world starting to finally get to grips with climate change?

Posted by: Frances Lawson

‘Money makes the world go round’ is a well-worn adage with a distinct flavour of truth in the modern era of global capitalism. Yet the links between the financial world and the stable climate upon which the planet as a whole depends have so far received limited exploration. Day-after-day, our money is invested in infrastructure, energy sources and developments with a significant greenhouse gas footprint, and therefore with a real impact upon the climate. The majority of those investment decisions do not assess the risk to those investments from climate change. Given these two dimensions to the climate-finance linkage, the need for the financial sector to factor climate change fully into its investment strategies and decision-making is obvious.

Progress is starting to be made. On 14^th December 2016, a report was published with recommendations for enhanced climate-related disclosures in financial reporting. The report’s publication follows on from discussions earlier last year on the consideration of climate risks in pension fund management, and is suggestive of there being momentum behind efforts to raise the prominence of climate change within the financial sector. Such efforts are, of course, self-interested: the financial world is finally starting to wake up to the fact that climate change is not only a ‘long-term’ risk, but is highly relevant to today’s decision-taking. It has additionally understood the direction of travel signalled by the Paris Agreement to a low-carbon economy and an end to the fossil fuel era. Failing to respond to the climate challenge will cost money, potentially lots of money, to the global economy, and it is this prospect that has succeeded where altruism failed by jolting the financial world into action.

The jolt stemmed from a request by G20 finance ministers and Central Bank Governors for the Financial Stability Board, an international body mandated to promote financial stability and chaired by Mark Carney, to review how the financial sector can take account of climate-related issues. The FSB review concluded that greater information was needed to inform investment, lending and insurance underwriting decisions. It therefore created the Taskforce on Climate-related Financial Disclosures (TCFD) and asked it to produce a set of draft recommendations for voluntary, consistent financial disclosures related to climate change with a viewing to ensuring that climate risk is properly priced and fully considered in decision-making.

The recommendations cover governance, strategy, risk management and metrics and targets, and can be summarised as follows:-

1. Disclosure of the organization’s governance around climate-related risks and opportunities;

2. Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning;

3. Disclose how the organization identifies, assesses, and manages climate-related risks;

4. Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.

The report acknowledges that the recommendations are a first step, with climate-related financial reporting still at “an early stage”. The recommendations, they say, are aimed to be ambitious yet straightforward enough to be implemented at the earliest opportunity. Yet they remain in draft form, subject to consultation until 12^th February 2017 and for approval by G20 leaders ahead of their summit in July. Hopefully, by the end of the year, we will see leading financial institutions implementing the recommendations and demonstrating a concerted commitment to considering climate as part of what, together with the money they deal with, makes the world go round.

The full report can be found here: https://www.fsb-tcfd.org/wp-content/uploads/2016/12/16_1221_TCFD_Report_Letter.pdf

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