A new, sustainable financial system is being built. It is funding the initiatives and innovations of the private sector, it has the potential to amplify the effectiveness of the climate policies of your governments and it could accelerate the transition to a low carbon economy. But the task is large, the window of opportunity is short, and the risks are existential.
And like virtually everything else in the response to climate change, the development of this new sustainable finance is not moving fast enough for the world to reach net zero. To bring climate risks and resilience into the heart of financial decision making, climate disclosure must become comprehensive; climate risk management must be transformed, and sustainable investing must go mainstream. Here’s how.
First, on disclosure. Catalyzed by the G20 and created by the private sector, the Task Force on Climate-related Financial Disclosures (TCFD) is a comprehensive, practical and flexible framework for corporate disclosure of climate-related risks and opportunities. The demand for TCFD disclosure is now enormous. Current supporters control balance sheets totaling $120 trillion and include the world’s top banks, asset managers, pension funds, insurers, credit rating agencies, accounting firms and shareholder advisory services.
The supply of disclosure is responding, with four-fifths of over 1100 top G20 companies now disclosing climate-related financial risks in line with some of the TCFD recommendations, and three-quarters of users of the information seeing a marked improvement in the quality of climate disclosures. The next step is to make these disclosures mandatory. The UK and EU have already signaled their intents.
It’s time for every country to get involved because the world won’t get to net zero if the financial sector doesn’t know how our companies are responding. In order to watch we must be able to see. Over the next two years, the current process of disclosure by the users of capital, reaction by the suppliers of capital, and adjustment of these standards will be critical to ensure that the TCFD standards are as comparable, efficient and as decision-useful as possible.
Second, risk management. The providers of capital – banks, insurers, asset managers and those who supervise them – all need to improve their understanding and management of climate-related financial risks. Changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset. Firms that align their business models to the transition to a net zero world will be rewarded handsomely. Those that fail to adapt will cease to exist. The longer meaningful adjustment is delayed, the greater the disruption will be.