At the Venice International Conference on Climate Change, Financial Stability Board ("FSB") Chair Randal K. Quarles described "foundational components" for climate-related financial risk disclosure. Separately, Secretary of the Treasury Janet L. Yellen called for consistency across climate change reporting frameworks.
Citing the FSB's Climate Roadmap, Mr. Quarles - who is also the Federal Reserve's Vice Chair for Supervision - stated that the two "foundational components" in addressing climate-related financial risks are: (i) the development of a global baseline for climate-related disclosure and (ii) the improvement of data.
Mr. Quarles said that the next step in climate-related disclosure is establishing a globally consistent baseline that focuses on one-way materiality (i.e., "the financial risk that climate change could have on a particular entity"). He explained that the International Financial Reporting Standards Foundation ("IFRS"), in consultation with other international organizations, will develop standards that can be integrated into individual jurisdictions; "interoperability" will enable each jurisdiction to build on the baseline disclosure, while permitting them the flexibility to expand broader concerns "consistent with their legal and regulatory frameworks." Mr. Quarles encouraged the IFRS to "press forward as quickly as possible" in the development of these standards, and asked that in the interim, jurisdictions implement frameworks based on recommendations to the G20 from the Task Force on Climate-related Financial Disclosures, first proposed by the FSB in 2015, to "avoid unnecessary fragmentation."
Mr. Quarles also highlighted the current lack of "usable data," meaning "reliable metrics that quantify financial risks" based on existing information regarding the drivers of climate risk. To bridge this data gap, he identified the following two challenges: (i) the "long time horizon - which requires dynamic balance-sheet analysis" and (ii) the relationship "between the macro-economy and drivers of climate-related risks."
In her remarks, Secretary Yellen emphasized the lack of reliable disclosures, calling for consistency of reporting frameworks and comparability across firms and jurisdictions. She reflected back to 1997, when climate change was already recognized as a crisis and noted that not enough has been accomplished since then; she urged not allowing another "25 years of inaction or low ambition." Secretary Yellen highlighted some of the efforts the United States has taken, including, but not limited to, setting a target of achieving net-zero emissions, working to mobilize $100 billion per year from public and private sources to support developing countries in their efforts to mitigate climate change, and creating America's first International Climate Finance Plan.
Secretary Yellen also discussed the agenda of the G20 Sustainable Finance Working Group which includes: (i) improving existing international initiatives on sustainability disclosure; (ii) developing recommendations to align finance with sustainability goals across jurisdictions and the private sector; and (iii) supporting multilateral development banks in their "efforts to align their financing with the goals of the Paris Agreement."
Commentary Steven Lofchie
In the words of FSB Chair Quarles,
"[e]xamining scenario analysis presents many challenges: A very long time horizon - which requires dynamic balance-sheet analysis - and the need to capture the interplay between the macro-economy and drivers of climate-related risks are two such challenges that would need to be overcome." Also, there is a "current lack of usable data." Further, he stated: "Climate-related risks vary across jurisdictions, and we need to look at how risks might be amplified by feedback loops with the real economy."
These challenges raise fundamental questions as to his proposed approach: How much of this is actually doable? In what timeframe? With what resources? Is every operating company supposed to perform such an analysis? Are banks supposed to perform an aggregate analysis taking account of the risks of all their borrowers? How is there to be any consistency in the evaluation of the risks by companies?
Ultimately, there will be huge disagreement as to the consequences of any mandated assumptions on climate risk, and, in particular, as to the risks to any specific issuer. The hypothesis behind governmental requirements on risk disclosures as they relate to future climate events is untested and untestable. There are reasons to be concerned.
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