Carney

The Financial Stability Board (FSB) has tasked a new body to develop a consistent measure of corporate climate risk, raising the profile of the climate threat to global stability, and perhaps adding momentum to a capital shift towards low-carbon assets.

The FSB on Friday launched a “Task Force on Climate-related Financial Disclosures (TCFD)”, led by former New York mayor Michael Bloomberg, to develop voluntary rules on carbon emissions disclosure.

The FSB was established in April 2009, to try and avoid a repeat of the global financial crisis, by monitoring and making recommendations about the global financial system.

Friday’s initiative will raise the profile of climate risk. It will see central bankers looking at climate change as a risk to global financial stability, at the same level and urgency as other real-world threats, say China’s slowdown.

The new TCFD task sounds very similar to the Enhanced Disclosure Task Force, which the FSB established to catalyse improved disclosure by the world’s largest banks following the financial crisis.

On the down side, disclosure on its own does not guarantee transparency. The Volkswagen scandal highlights the problems of emissions reporting. On the plus side, however, simply measuring emissions will change behaviour, since it adds a new benchmark for investors to test performance.

Presently, only about a third of the top 1,000 companies report their carbon emissions, said Mark Carney, FSB Chair, speaking in Paris on Friday. And even this reporting was inconsistent.

Investors, activists and businesses agree a low-carbon transition needs a clear, global direction of travel. In other words, everyone from the public to leaders should be convinced that there will be increasingly ambitious action over time. That should avoid disruption, shocks and excessive costs.

Perhaps the best way to transmit that direction of travel globally would be a global carbon price, rising gradually over time. Of course, there is no such price, and probably never will be.

But simply giving investors more information goes some of the way. Already, responsible investors pride themselves on how they apply strict environmental, social and governance (ESG) scores to their investments.

On Wednesday, I spoke with Philippe Desfosses, chief executive of ERAFP, France’s biggest public pension fund, which has more than 25 billion euros assets under management. They apply ESG criteria to all their investments; if companies persistently fall short,  the fund will divest, and has recently exited RWE, Banco Santander and Bollore in this way.

The fund also uses external sources, such as data on corporate carbon asset exposure, reported by the Carbon Disclosure Project, for example.

That is where the FSB effort will come in. The new TCFD task force will pull together existing initiatives, for carbon disclosure which is “consistent, comparable, reliable, clear, efficient”. It will aim to deliver a voluntary standard for carbon disclosure, by those companies that produce or emit carbon.

“Ideally this will be a one-stop shop on climate,” said Carney, adding he hoped that it would solve the market failure of inadequate information disclosure in a low-carbon transition.

Carney recently stressed his concern about the threat climate change poses for financial stability. He highlighted the risks that some high-carbon assets may fall abruptly in value through a low-carbon transition; that low-carbon assets might pose particular growth opportunities which are missed; and that climate change itself threatened to portfolios, for example through impacts on real estate assets, and in turn insurers.

Friday’s announcement was focused on the carbon “transition” risk.

The FSB task could trigger pervasive change in behaviour. Companies will learn more about their carbon exposure – by measuring their emissions. And investors, increasingly worried about portfolio risk, may punish those who don’t.

There is still a piece missing. To have real teeth, information disclosure has to be in tandem with ratcheting consequences of inaction. That is where a Paris conference, meant to reach a global climate agreement next week, may have to step up.

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