Several financial regulators including the Securities and Exchange Commission (SEC) and the Bank of England (BoE) have disputed claims that environmental, social and governance (ESG) disclosures should be standardised.
“We need to further clarify and standardise what we’re expecting from companies in terms of climate reporting,” said Julie Ansidei, head of strategy and sustainable finance at the Autorité des Marchés Financiers (AMF), at this year’s Isda AGM.
“One is around how to define risks, but also how they relate those risks to their strategy and objectives – that connection needs to be demonstrated.”
But SEC commissioner Hester M Peirce was quick to dispute this, arguing that an overly prescriptive approach could be detrimental to the growth of markets.
“While I understand these efforts to standardise climate disclosure, I’m concerned that we’re forcing a uniformity and comparability that doesn’t really exist.
“We can’t prescribe what is going to be material for every company. It deludes us into believing there’s more definitiveness around these kinds of things than there actually is. It’s important to remember that any solutions to climate challenges really do lie in the market, so we need to be careful not to try to drive capital where we think it ought to go.”
Sarah Breeden, executive director at the BoE took a more moderate stance on the matter, acknowledging the importance of bank disclosures on climate risk management. However, she added that she recognises the complexity of the issue.
“It’s really important that banks disclose to the market what they are doing. The challenge of course is that this is a risk you see looking forward not backwards. Financial institutions need to understand the forward risk profile of all of their customers in order to be able to help us understand whether they are doing a good job of managing them.”
The BoE uses scenario analysis for supervising the performance of UK banks, comprising a range of climate and financial data in order to understand what risk profiles look like in different scenarios.
“This means we can avoid assuming problems away. We don’t try to predict the future – we put a variety of scenarios out there and share our expertise on them so they can be used as a comparable lens.”
Dan M Berkovitz, Commodities and Futures Trading Commission (CFTC) commissioner, offered a similarly bipartisan view. He argued that while standardisation and uniformity is necessary, a balance between prescription and principles must be struck.
“The objective is not just reporting for the sake of reporting – it’s to make sure that these risks are considered internally.
“I think we should be examining the pros and cons of prescriptive versus a principles-based approach on how to actually achieve these objectives.”
Rupert Thorne, deputy to the secretary general at the Financial Stability Board (FSB) also commented on the importance of ESG, highlighting the damning consequences of an ineffective transition.
“A disorderly and poorly anticipated transition could lead to financial instability, falling asset prices, and abrupt increases in risk premia.
“This may weaken financial system resilience and lead to a self-reinforcing reduction in the provision of finance to the real economy.”