By Santiago Lorenzo Alonso
Recently, the Financial Stability Board (FSB) issued a proposal on climate risk, as commissioned by the G20 Finance Ministers and Central Bank Governors meeting last April. The document, called Proposal for a disclosure task force on climate-related risks, asks the G20 to set up “an industry-led disclosure task force to develop voluntary, consistent climate-related disclosures … useful to lenders, insurers, investors and other stakeholders in understanding material risks” of climate change.
The FSB proposal refers to the increasing risks that financial institutions (and other industries) face from climate change impacts, identifying three main groups: physical, legal liability and transition (which includes the potential of stranded assets) risks. The proposal acknowledges the early stages of understanding these risks to the financial sector, which is in itself a good reason to set up a dedicated group in the G20. WWF notes the discussion of legal liability, which is timely as regulators are already beginning to act on disclosure of climate risks.
WWF welcomes the FSB proposal and hopes that the G20 accepts it and sets up the task force it describes. Climate risk in all its forms poses a threat to the stability of today’s financial systems, as well as a threat to nature and all of us who depend on it. Understanding and managing the financial risk of climate change can, in our view, address one obstacle to a just and more rapid transition to a zero carbon and zero poverty world.
We do, however, have a few suggestions as to how the proposal could be taken forward. While the FSB sees information disclosure by companies as the key to understanding these risks, the proposal offers little insight on how to process this information once it is provided. The list of deliverables is a good step forward in that regard. The two stages approach is correct but, in our view, the idea of only working for a year is unrealistic due to the amount of work and today’s state of the art on climate related risk assessment, which is in its infancy.
The FSB proposal set as a model the Enhanced Disclosures Task Force (EDTF), an existing FSB body dealing with “bank risk disclosures in a variety of areas including risk governance and management; capital adequacy; liquidity and funding; and market, credit and other risks.” WWF calls for the G20 to include in this new institutional arrangement entities that are specialized in climate change. While the financial system is complex, ecosystems and climate change are also complex systems under continuous change and evolution and it would be helpful to have expertise in these areas.
Furthermore, there are certainly other climate related risks beyond those reported by listed companies, and that directly will impact the G20 economies as well as many other countries. Even under a 2°C scenario large vulnerable territories will suffer the impacts of climate change and we will witness – as we have already – people struggling against extreme weather events. We may also see climate refugees and potentially migrations that will require comprehensive and coordinated government response.
Therefore, the G20 should go beyond this financial regulatory approach and set up an institutional arrangement that can inform the G20 on the different climate change scenarios and their economic and social consequences.
Santiago Lorenzo Alonso is the Head of Green Finance for WWF’s Global Climate & Energy Initiative.
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