Eleven of the world’s largest banks, representing over US$7 trillion, are making a public commitment to promote climate risk transparency in financial markets.
The banks’ commitments follow the publication late last month of the final recommendations by the G20’s Financial Stability Board's Task Force on Climate-Related Financial Disclosures, TCFD.
The Financial Stability Board, chaired by Bank of England Governor Mark Carney, asked the Task Force to develop voluntary, consistent climate-related financial risk disclosures for use by companies, investors, lenders and insurers.
The Task Force recommendations were presented in Hamburg, Germany at the G20 annual meeting earlier this month.
The final recommendations were authored by Carney and former New York mayor and TCFD chair Michael Bloomberg.
Key features of the recommendations are that they must be: adoptable by all organizations, included in financial filings, designed to solicit decision-useful, forward-looking information on financial impacts, and have a strong focus on risks and opportunities related to transition to a lower-carbon economy.
The industry Task Force spent 18 months consulting with business and financial leaders to develop its recommendations for helping companies to communicate their climate-related information.
The Task Force and banks are collaborating on this effort with the United Nations Environment Finance Initiative (UNEP FI) to promote climate transparency in financial markets.
UNEP FI, a partnership between UN Environment and the global financial sector created after the 1992 Earth Summit, promotes sustainable finance. Over 200 banks, insurers and investors work with UN Environment to understand today’s environmental challenges, why they matter to finance, and how to participate in addressing them.
In the report accompanying its final recommendations, the Task Force points out that the financial consequences of climate change are not just some far-off future situation that can be addressed in the years to come – they are happening right now.
“One of the most significant, and perhaps most misunderstood, risks that organizations face today relates to climate change,” the Task Force writes. “While it is widely recognized that continued emission of greenhouse gases will cause further warming of the planet and this warming could lead to damaging economic and social consequences, the exact timing and severity of physical effects are difficult to estimate. The large-scale and long-term nature of the problem makes it uniquely challenging, especially in the context of economic decision making.”
“Accordingly,” writes the Task Force, “many organizations incorrectly perceive the implications of climate change to be long term and, therefore, not necessarily relevant to decisions made today. The potential impacts of climate change on organizations, however, are not only physical and do not manifest only in the long term.”
The Task Force says it will be expensive to transition to a low-carbon world, generating opportunities but also risks.
“The expected transition to a lower-carbon economy is estimated to require around $1 trillion of investments a year for the foreseeable future, generating new investment opportunities.”
“At the same time,” the Task Force writes, “the risk-return profile of organizations exposed to climate related risks may change significantly as such organizations may be more affected by physical impacts of climate change, climate policy, and new technologies.”
Bank executives say that by improving their understanding of climate-related risks and opportunities, financial institutions are better placed to help finance the transition to a more stable and sustainable economy.
“We welcome and support the recommendations of the Task Force on Climate-related Financial Disclosures,” says Liselotte Arni, head of UBS environmental and social risk management. “They represent a major step forward to help businesses and investors assess the risks and exposures associated with climate change. We look forward to working with other banks on implementing the TFCD’s recommendations.”