Regulators from the Federal Reserve, Bank of England (BoE) and the International Accounting Standards Board (IASB) have stressed the importance in developing common standards to climate-related financial disclosures.
“Climate change and broader sustainability issues are urgent global challenges,” said Sue Lloyd, vice chair of the IASB, while speaking at the IIF’s sustainable finance summit.
“Reporting on sustainability has become increasingly important in capital markets and although there are already many good initiatives in this area, there’s been an increased call from investors and others for more consistency, comparability and reporting about sustainability internationally.”
There is broad demand for the International Financial Reporting Standards Foundation (IFRS) to take a leadership role in developing global standards for sustainability reporting, said Lloyd. The IFRS is currently in the process of setting up a sustainability standards board.
The board will build on the work of other regulators and “hit the ground running”. A working group is already developing a prototype climate reporting document.
“Using the work already done by Task Force on Climate-related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB) and others. This is to have something to offer the new sustainability standards board as a potential first document,” Lloyd said.
The board would require a change to the IFRS’s constitution, a consultation of 90 days is expected to be announced in the next few weeks. The foundation’s goal is to have the sustainability standards board established before the COP26 meeting in November.
Likewise, the BoE has been tasked by the UK government to integrate climate risk into financial reporting requirements.
“The aim of our work at the Bank of England is to green finance, to transform risk management and to improve reporting with an aim of ensuring that every financial decision takes the risks and the opportunities from climate change into account”, said Sarah Breeden, executive director of UK deposit takers’ supervision at the BoE.
Using guidelines developed by the Financial Stability Board’s TCFD, it will be mandatory by 2025 for UK businesses to make climate related disclosures.
Breeden said disclosures are a benefit to both the business and investors.
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“The process of going through disclosure is good for you, as the provider of information because it makes you look at the challenges that you have. Disclosure drives the right decisions in corporate and financial institutions as well as for investors.”
However, establishing standards for climate reporting is not without its challenges. Kevin Stiroh, senior advisor for the board of governors at the Federal Reserve said that uncertainty over the scenarios themselves is a major issue.
“The complexity, the uncertainty, heterogeneity and the differences in time horizon. Some of these climate related financial risks might not materialise in the normal traditional risk management time horizon,” he said.
“This is a case where the past is likely to be a less useful or less informative guide about what’s going to happen. Models that we’ve all grown to trust might be less valuable, going forward.”
The BoE will be conducting a climate stress test on UK financial services in June. Breeden said previous exercises have demonstrated the pain-points forming around climate-related disclosures.
“Firms are finding this a hard ask.”
“They need granular data to be able to participate in this exercise effectively. They need better models and they need to look decades ahead.”
She added that while firms are finding its challenging, they acknowledge it is something that must be done.
“There’s a recognition that it’s better to start and have a go, than it is to put it in the too difficult box.
“What starts as a risk driven focus ends up being an opportunity to help drive the real economy on an orderly transition to net zero. The smartest ones are using this as an opportunity to identify where that future business is.”