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Key initiatives and trends in emerging climate-related financial regulations & disclosure

Financial supervisors and regulatory bodies are increasingly focusing on climate-related issues, particularly climate-related risks. A principle focus of climate-focused regulatory discussions to date is on improving financial and non-financial disclosure from both financial actors, as well as companies.

Over the last two few decades, companies and financial institutions have been either requested or required to increase reporting on non-financial information – often across environmental, social and governance issues. The primary goal of disclosure frameworks is often to provide improved information for market stakeholders, increase transparency, and permit comparability. Climate change has increasingly been part of disclosure frameworks, often focusing on carbon footprinting or GHG emission reporting of activities and portfolios – or the volume or relative share of “green” or “brown” activities.

As labelling and disclosure of climate and other sustainability information has increased, regulators and countries around the world have begun to develop formal taxonomies of activities that are defined as contributing to or penalising climate objectives – as well as in some cases reporting requirements.

In 2015, disclosure and reporting of climate-related risks started to become a focus of regulators following the Bank of England public recognition that climate change was a threat to financial stability (Carney,  2015). It was quickly recognized that improved transparency is needed from both financial and non-financial institutions on their exposure to climate-related financial risks as well as their climate actions more broadly.

In response, the G20’s Financial Stability Board mandated the Task-force on Climate-related Financial Disclosures (TCFD) to “develop voluntary, consistent climate-related financial risk disclosures”. These recommendations prescribe the use of forward-looking assessments and disclosures in four different areas: governance, strategy, risk management, and metrics and targets. They have been broadly taken up by voluntary initiatives first and more and more by countries and regulatory bodies.

In 2021, G7 Finance Ministers and Central Bank Governors’ Communiqué supported moving towards mandatory climate-related financial disclosures. This topic is also on the agendas of the Coalition of Finance Ministers for Climate Action, as well as the G20 Sustainable Finance Working Group.

Beyond climate-related financial risk exposure, other types of climate-related metrics aiming to assess the climate performance of institutions have been included in the latest work conducted by the TCFD.

 

Key initiatives:

  • Central Banks and Supervisors Network for Greening the Financial System (NGFS): This group of Central Banks and Supervisors aims to contribute to the development of environment and climate risk management in the financial sector.
  • Coalition of Finance Ministers for Climate Action (CAPE): Finance Ministers of the coalition have developed and signed on to the ‘Helsinki Principles’, a set of six principles that promote national climate action, especially through fiscal policy and the use of public finance.
  • Sustainable Banking Network (SBN): this network gathers financial sector regulatory agencies and banking associations from emerging markets committed to advancing sustainable finance in line with international good practice
  • EU Sustainable Finance Platform: This platform is an advisory body to the EU Commission. Its main purpose is to advise the European Commission on several tasks and topics related to further developing the EU taxonomy.
  • International Financial Reporting Standards (IFRS): The Trustees of the Foundation announced in March 2021 the formation of a working group to accelerate convergence in global sustainability reporting standards
  • G20 Sustainable Finance Working Group: This working group is mandated to develop a climate-focused sustainable finance G20 roadmap.
  • Task-force on Climate-related Financial Disclosures (TCFD):This task-force was mandated by the G20’s Financial Stability Board to “develop voluntary, consistent climate-related financial risk disclosures”. These recommendations promote disclosures in four different areas: governance, strategy, risk management, and metrics and targets.