In the shadow of our collective COVID19 experience, it is clearer that financial policy frameworks will need to be enhanced to reinforce our resilience to exogenous shocks, including those brought about by climate change. Financial policies and frameworks that promote transparent information necessary for financing for low-carbon, climate-resilient investment will be essential.

Yet, the diversity of investors and types of investing means that there is a multitude of ways that climate considerations can be mainstreamed into financial policy and frameworks to accelerate climate-aligned investment. As such frameworks need to be tailored to the investors they cover.  Financial system governance bodies, such as central banks, prudential authorities and finance ministries, each have unique and vital functions and powers into which climate considerations can be integrated effectively.

Central banks and financial regulators are actively working together to develop common approaches to dealing with climate risk, including in the Network for Greening the Financial System (NGFS). So are finance ministries, many of whom are engaged in the Coalition of Finance Ministers for Climate Action. These coalitions serve as bodies for financial policymakers to share best practices, including to advance climate risk management further. Their cooperation helps develop the analytical foundation for sound climate-related financial policies nationally and internationally, such as mapping transmission channels of climate-related risks into the economy and the financial system.

IOSCO has joined other policy bodies to develop an industry-driven approach to mainstreaming

IOSCO, the international body of securities regulators, is also playing its part.  As IOSCO notes in its Objectives and Principles for Securities Regulation, securities regulators share the core objectives of protecting investors, maintaining fair, efficient and transparent markets and reducing systemic risk. This April, IOSCO released a report on the role securities regulators play in promoting good sustainable finance reporting practices among listed equities. As the report notes, “sustainability issues in general, and climate-related issues in particular, pose important challenges in meeting the core objectives of regulators […]. Given the global and cross-border nature of some of these risks, IOSCO itself provides a discussion forum for regulators to support coordinated approaches, avoid regulatory inconsistencies across markets and for knowledge sharing as IOSCO members address these challenges.”

Transparency is critical for crowding in finance for climate-related investment

The desire for consistent, high-quality climate-related financial disclosures was the driver behind the Task Force on Climate-related Financial Disclosures (TCFD), an industry-led task force that produced a voluntary disclosure framework around climate-related financial risks. The initial goal of TCFD was to address information asymmetry issues between companies and their investors.

IOSCO’s report mapped views of its members and ongoing initiatives taken or planned by securities regulators and market participants. The report makes three main observations:

  1. There are multiple and diverse sustainability frameworks and standards, including sustainability-related disclosure, creating confusion in the market;
  2. There is a clear lack of common definitions of sustainable activities; and
  3. Greenwashing is a concern among both regulators and market participants.

ESG” and “climate risk” are distinct

These observations reflect wider views among market participants as well. ESG frameworks, while valuable, typically do not comprehensively cover climate-related risks, particularly physical risks. ESG frameworks have historically focused on a company’s impacts on the environment and society, and in some cases the risks that this poses to the company itself, such as reputational risk. The concept of climate risk, on the other hand, also covers the impacts of climate change on an organization, including physical impacts as well as potential policy impacts. Furthermore, while ESG is often categorized as a “non-financial risk”, climate change is often a financial risk – a recognition that spurred the establishment of the TCFD by the G20 Financial Stability Forum.

IOSCO can help standardize ESG approaches and promote TCFD-style climate risk management through its members 

IOSCO’s member survey highlights one important point: most of its members support IOSCO as a venue for developing common approaches to promote transparency, reduce greenwashing, and facilitate the creation of industry-specific metrics – including those related to climate risks – which can provide decision useful information and comparability for investors and regulators alike. Furthermore, members support developing a common approach that can be usefully applied in different jurisdictions in a comparable way, and such efforts would be an extremely important contribution to the ongoing work to mainstream climate considerations across the financial sector. In doing so, IOSCO, should collaborate with other bodies, such as TCFD, NGFS and the Coalition of Finance Ministers to coordinate related efforts to mainstream climate risk-management approaches, each of which can help facilitate better climate-risk management practices, as well as the provision of disclosure, both qualitative and quantitative, that is decision-useful for both investors and companies.