Financial companies can no longer afford to avoid climate risk disclosures as they would be putting their businesses at greater risk by doing so, even though disclosure in Europe has not yet been made mandatory.
During a City Week event panel discussion, for which ESG Clarity is media partner, on climate reporting and disclosures, experts agreed that climate reporting is on its way to being made a regulatory requirement across the globe and called for more consistency between countries.
Mary Schapiro, vice chair of global public policy at Bloomberg, said: “Not disclosing [climate risks] carries much greater penalties than disclosing. It is a company’s obligation to disclosure if it is a material risk. Those that don’t disclose are likely to face legal risks, whether disclosure is voluntary or mandatory.”
She added that although reporting obligations under the Task Force on Climate-related Financial Disclosures (TCFD) have not been made mandatory across the globe yet, acceptance of this framework has been “extraordinary”, with companies representing 73 countries with $13trn of market cap signed up to the framework to date.
“Disclosure is an essential building block to manage and measure climate risk,” she said. “It can help policymakers understand if there is extra legislation needed for certain industries, as every company within our economies will [eventually] have to be on a path to net zero.”
Mandatory reporting
Remco Fischer, climate change lead at the UNEP Finance Initiative, hailed the benefits of “trialling mandatory reporting”, with one of its natural results being consolidation across the climate reporting framework.
This could get around the problem of fragmentation, which the panellists highlighted as one of the key obstacles when it comes to creating a global regulatory framework around climate risk reporting.
Fischer used the example of New Zealand, the first country to make climate risk reporting mandatory for banks, asset managers and insurers this month. Its new mandatory disclosure requirements are based on the TCFD framework.
He said other governments should try to follow suit by align their climate frameworks with the TCFD, which would provide a “certain amount of standardisation”, though he added that “more industry specific guidance is required”.
He also noted that while TCFD concerns climate risks, there is a need to replicate this reporting framework when it comes to the impact of climate change and alignment of industries with a new net-zero future.
Challenges
However, Ashley Alder, chair of the IOSCO board, outlined a number of difficulties faced by regulators when trying to create a framework for mandatory climate risk disclosure.
Firstly, he said progress towards a global framework is “dependent on our ability to coalesce around standards and taxonomies”, adding that “multiple and diverse frameworks and standards do lead to confusion”.
Unfortunately, at this stage products and taxonomies are not globally consistent, so there is much work needed to bring all countries in line with a single framework.
In addition, greenwashing is a huge problem that must be addressed. “There is an extreme level of divergence [in ESG ratings and scores] which gives firms the ability to pick the scores that suit them,” he said.
And lastly, it is hard to determine “which components of disclosure should be mandatory and what a breach of disclosure would look like”, he said. With mandatory disclosure, there is a danger that it turns into a box-ticking exercise and investors end up dismissing the results.
However, the panellists agreed that global mandatory climate risk disclosures are all but inevitable. To ensure these work effectively, Schapiro said there is a real need for “global coordination and cooperation” between regulators to create consistent frameworks and “this work needs to begin immediately”.
