s world leaders meet at COP26 to tackle climate change, there is consensus among major financial institutions and multinationals on the need for a globally-aligned financial framework that supports the transition to a net zero economy. Internationally coordinated approaches are critical, both because the climate crisis is global, and because our financial systems and economic activities are highly integrated. That’s the message they are sending to the U.S. Securities and Exchange Commission as the regulator of the world’s largest capital market mulls disclosure rules that could advance the goal of a common framework for material, comparable, decision-useful information on climate risks, strategies and metrics.
Thus far, Washington has been playing catch up, not only with governments and regulators in other countries, but also with Wall Street firms and U.S. businesses that are now going farther and faster in driving decarbonization and green solutions. That could be changing. The Biden-Harris administration has determined that climate change poses an increasingly large risk to American economic safety and security. SEC Chair Gary Gensler wants mandatory disclosure on climate risks and expects the agency to develop a rule by the end of the year.
In September, the SEC dropped a mini bombshell in the form of a sample letter to public companies that signals a toughening of demands for climate risk disclosures around the impact of pending or existing climate-change related regulatory and business trends and the physical impacts of climate change. While it was expected that the SEC would decide on guidance related to climate disclosure, this is the strongest statement yet on what investors should expect. If anything, the letter sets a minimum baseline for what the SEC could do.
Hundreds of corporations, investors, financial institutions and market data firms submitted public comments that overwhelmingly favor some type of regulated climate reporting. “Climate risk is investment risk,” says Larry Fink, CEO of $9 trillion fund manager Blackrock in making the case for why financial markets need to decarbonize and engage companies to improve their ESG performance and transparency. The recommendations show the extent to which companies and financial markets alike support globally-aligned standards that build on existing frameworks and avoid creating a patchwork of inconsistent disclosures. There is emerging consensus on three points:
1. Companies and investors agree on the need for making decisions based on ESG management strategies and disclosures, especially around climate change, and the time has come to move from voluntary to mandatory reporting on financially-material issues and core metrics.
2. The G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) is a good starting point for standardized reporting on governance, strategy, risk management, and metrics and targets, especially given the endorsement of mandatory TCFD rules by G7 countries and widespread adoption into company reporting systems.
3. A global framework with industry-specific areas of emphasis is needed and U.S. regulators will need to coordinate with other countries and standards bodies including SASB, GRI, the IFRS Foundation’s new International Sustainability Standards Board (ISSB) and other groups to reduce fragmentation and align standards.
The SEC this year took on joint leadership of the 130-member strong International Organization of Securities Commissions’ sustainable finance technical experts group to assess the International Financial Reporting Standards Foundation’s work on a prototype ESG and climate reporting standard. Other international coordination will be needed as policymakers come to grips with climate finance issues for their own markets. Calling climate change a threat to the financial system U.S. Treasury Secretary Janet Yellen backs a whole-government effort to combat it, but Federal Reserve Chair Jerome Powell’s muted comments contrast with the more interventionist approach of Christine Lagarde and other central bankers pledging to inject climate considerations into policy-making. The European Central Bank has unveiled an action plan to “include climate change considerations in its monetary policy strategy” with incredibly ambitious goals to direct hundreds of billions of euros into sustainable investments annually through EU banks and markets to create the first "climate-neutral continent" by 2050.
The right transparency and market signals will create incentives for achieving real progress aligned with the opportunities of a net zero economy. The United Nations’ Glasgow Financial Alliance for Net Zero has announced private sector capital commitments to deliver $130 trillion of financing needed for this transition. Global businesses and financial market participants can also play an important role in shaping effective international rules and advancing what “good” looks like in terms of their own climate reporting and performance. Given the fluid state of ESG methodologies and data quality issues, regulators may choose to adopt a phased approach to mandatory reporting—but this ought to be a floor that prompts companies to go further with forward-looking information, targets, scenarios and strategic roadmaps. Regulators will act; markets can define the future.
a global affairs media network
Climate Rules Are Coming to Wall Street
Photo by Chris Li via Unsplash.
November 6, 2021
As world leaders meet at COP26 to tackle climate change, there is consensus among major financial institutions and multinationals on the need for a globally-aligned financial framework that supports the transition to a net zero economy.
A
s world leaders meet at COP26 to tackle climate change, there is consensus among major financial institutions and multinationals on the need for a globally-aligned financial framework that supports the transition to a net zero economy. Internationally coordinated approaches are critical, both because the climate crisis is global, and because our financial systems and economic activities are highly integrated. That’s the message they are sending to the U.S. Securities and Exchange Commission as the regulator of the world’s largest capital market mulls disclosure rules that could advance the goal of a common framework for material, comparable, decision-useful information on climate risks, strategies and metrics.
Thus far, Washington has been playing catch up, not only with governments and regulators in other countries, but also with Wall Street firms and U.S. businesses that are now going farther and faster in driving decarbonization and green solutions. That could be changing. The Biden-Harris administration has determined that climate change poses an increasingly large risk to American economic safety and security. SEC Chair Gary Gensler wants mandatory disclosure on climate risks and expects the agency to develop a rule by the end of the year.
In September, the SEC dropped a mini bombshell in the form of a sample letter to public companies that signals a toughening of demands for climate risk disclosures around the impact of pending or existing climate-change related regulatory and business trends and the physical impacts of climate change. While it was expected that the SEC would decide on guidance related to climate disclosure, this is the strongest statement yet on what investors should expect. If anything, the letter sets a minimum baseline for what the SEC could do.
Hundreds of corporations, investors, financial institutions and market data firms submitted public comments that overwhelmingly favor some type of regulated climate reporting. “Climate risk is investment risk,” says Larry Fink, CEO of $9 trillion fund manager Blackrock in making the case for why financial markets need to decarbonize and engage companies to improve their ESG performance and transparency. The recommendations show the extent to which companies and financial markets alike support globally-aligned standards that build on existing frameworks and avoid creating a patchwork of inconsistent disclosures. There is emerging consensus on three points:
1. Companies and investors agree on the need for making decisions based on ESG management strategies and disclosures, especially around climate change, and the time has come to move from voluntary to mandatory reporting on financially-material issues and core metrics.
2. The G20 Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) is a good starting point for standardized reporting on governance, strategy, risk management, and metrics and targets, especially given the endorsement of mandatory TCFD rules by G7 countries and widespread adoption into company reporting systems.
3. A global framework with industry-specific areas of emphasis is needed and U.S. regulators will need to coordinate with other countries and standards bodies including SASB, GRI, the IFRS Foundation’s new International Sustainability Standards Board (ISSB) and other groups to reduce fragmentation and align standards.
The SEC this year took on joint leadership of the 130-member strong International Organization of Securities Commissions’ sustainable finance technical experts group to assess the International Financial Reporting Standards Foundation’s work on a prototype ESG and climate reporting standard. Other international coordination will be needed as policymakers come to grips with climate finance issues for their own markets. Calling climate change a threat to the financial system U.S. Treasury Secretary Janet Yellen backs a whole-government effort to combat it, but Federal Reserve Chair Jerome Powell’s muted comments contrast with the more interventionist approach of Christine Lagarde and other central bankers pledging to inject climate considerations into policy-making. The European Central Bank has unveiled an action plan to “include climate change considerations in its monetary policy strategy” with incredibly ambitious goals to direct hundreds of billions of euros into sustainable investments annually through EU banks and markets to create the first "climate-neutral continent" by 2050.
The right transparency and market signals will create incentives for achieving real progress aligned with the opportunities of a net zero economy. The United Nations’ Glasgow Financial Alliance for Net Zero has announced private sector capital commitments to deliver $130 trillion of financing needed for this transition. Global businesses and financial market participants can also play an important role in shaping effective international rules and advancing what “good” looks like in terms of their own climate reporting and performance. Given the fluid state of ESG methodologies and data quality issues, regulators may choose to adopt a phased approach to mandatory reporting—but this ought to be a floor that prompts companies to go further with forward-looking information, targets, scenarios and strategic roadmaps. Regulators will act; markets can define the future.
