Visitors attend the UN Climate Change Conference COP25 in Madrid. Picture: CRISTINA QUICLER / AFP
Visitors attend the UN Climate Change Conference COP25 in Madrid. Picture: CRISTINA QUICLER / AFP

The International Monetary Fund (IMF) considers climate change a systemic risk to the global economy, and is stepping up its efforts to deal with climate risk. So, too, are many central banks and other regulators, which are seeking to raise climate risk disclosure standards.

The immediate aim is to help financial institutions and investors better assess their climate-related exposure, and help regulators better gauge system-wide risks. The broader goal is to help ensure that more money flows into low-carbon, climate-resilient investments.

The rapid increase of green bonds (for which 95% of the proceeds go to environmental uses) is a positive trend — new green bond issues topped $100bn globally in the first half of 2019 — but much more is required.

Bank of England (BOE) governor Mark Carney estimates that the world has just two business cycles, or 12 years, in which to stop runaway climate change.

Limiting global warming to 1.5°C will require a 45% decrease in emissions by 2030 and net-zero emissions by 2050. This means nearly 95% of the global electricity supply will have to be low carbon and 70% of new cars will have to be electric by 2050, according to the International Energy Agency.

This will require a "massive reallocation of capital", Carney concludes in the latest issue of the IMF’s Finance & Development magazine. He believes changes in climate policies, new technologies and growing physical risks will prompt a reassessment of the value of virtually every financial asset.

"Firms that align their business models with the transition to a net-zero world will reap handsome rewards," Carney says. "Those that fail to adapt will cease to exist. The longer meaningful adjustment is delayed, the greater the disruption will be."

To hasten the transition, the issue of climate change must be brought into the heart of financial decisionmaking. This means "climate disclosure must be comprehensive; climate risk management must be transformed; and sustainable investing must go mainstream", he says.

The BOE is overhauling its supervisory approach in anticipation of this shift. Firms will be expected to embed the consideration of climate risks into their governance frameworks, assign oversight to specific managers, and develop methods to evaluate and disclose these risks.

In the UK, almost 75% of banks are starting to treat climate risk like any other financial risk (as opposed to a corporate social responsibility issue), and are taking steps to assess their exposure to these risks, including to carbon-intensive sectors, says Carney.

In fact, voluntary disclosure by private firms is rocketing globally — four-fifths of the top 1,100 G20 companies now disclose climate-related financial risks. The next step, says Carney, is to make disclosure mandatory, as the UK and EU have signalled they will be doing.

A flexible framework for corporate disclosure already exists in the form of the recommendations developed by the task force on climate-related financial disclosures (TCFD). It is an initiative of the Financial Stability Board, an international body that promotes global financial stability.

Globally, there is considerable demand for TCFD disclosure. Current supporters include the world’s top banks, pension funds and other asset managers with combined control over $120-trillion in funds. But SA is behind the curve, with few firms either willing, or able, to measure or disclose their exposure to climate risks.

The Prudential Authority (PA) within the SA Reserve Bank, like many other regulators, is still at an early stage with regard to the explicit monitoring and reporting of climate risk. Though it has not yet made disclosure of financial firms’ exposure to climate risk mandatory, it looks likely to go that route.

As a first step, the PA has surveyed domestic banks and insurers to assess the current level of voluntary reporting in line with the TCFD recommendations.

It aims "to develop private reporting requirements and will assess these on an ongoing basis in order to decide when to require some of the information to be made public," the Bank said in response to questions from the FM.

"It is important to have standardised, consistent and frequent reporting from our financial institutions on climate risk in order to better understand this risk and the effect it has not only on the financial soundness of supervised institutions but also on the financial system," the Bank added.

The IMF would also have country regulators develop climate-related "stress tests" to help identify the likely impact of a severe climate-driven shock on the solvency of financial institutions and on global financial stability.

The BOE will be the first to do this. The Reserve Bank says it is also working to include climate risks as a component of future stress tests of financial firms.

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