On Monday (Oct. 24) Paul Fischer, retired this year as deputy head of Prudential Regulation Authority, Bank of England, said that climate change “could be the trigger for the next financial crisis”. His statement rekindled the discourse about the interconnection between climate and finance.
The risk Fisher stressed out is related to the possibility of a sudden repricing of assets (typically the most carbon intense ones) or their conversion to liabilities. Since governments are growing increasingly serious about addressing climate change, they are likely to raise the current level of regulations which will affect corporate cost structure for many operators that will have to adapt to new requirements.
In this regard, the Task Force on Climate-related Financial Disclosures (TCFD), led by Michael Bloomberg, is to deliver final recommendations to the Financial Stability Board (FSB) at the end of the year. The purpose is to make reporting comparable by aligning disclosure practices and risk assessment methods, allowing investors to access climate-related risks information and incorporate it in their decisions. This would avoid major corrections in asset values which threaten the stability of financial markets.
The task force, currently in Phase II, is organized into four workstreams: a governance workstream focused on developing a common set recommendations for voluntary disclosure useful for boards and management in considering such issues, two workstreams evaluating the industry-specific point of view for both financial and nonfinancial sector, and the forth one supporting the task force’s engagement strategy by ensuring that findings actually reflect the need of operators as well as the variety of functional, regional and industry perspectives.
TCFD recently held two plenary meetings in Paris and London, and a special stakeholder outreach event in Amsterdam where firms were asked to participate in a live poll on their current commitments in integrating climate risk into management procedures.
TCFD is not the only initiative on the issue. The links between finance and climate change are drawing attention more than ever: at the latest G-20 meeting in Hangzhou the U.K’s Cambridge Center for Sustainable Finance presented a study commissioned by the Green Finance Study Group, warning that financial institutions face environmental threats of “increasing scale, likelihood and inter-connectedness” and urging firms to adopt “new tools and techniques to understand and manage them.”
The paper also highlighted some challenges in the way of improving risk assessment by financial firms. For instance, collaboration of finance, environment and policy specialists may be needed to gather and manage information on credit default risks originated from green policy changes and this may prove to be a costly and time consuming improvement.
(Image: Stock exchange. Photo credit: Ars Electronica/Flickr)