Senior central bankers, including former Bank of England governor Mark Carney and some of Asia Pacific’s most climate-friendly investors are calling for mandatory disclosure of climate risks by all companies.

As AsianInvestor has reported, there are no end of studies available on environmental, social and governance (ESG) standards and attitudes towards climate investing issues. What is needed, say Carney and others, including New Zealand Super Fund chief executive Matt Whineray, is compulsion on companies to report on climate risks.

Carney, now the United Nations special envoy for climate action and finance, was speaking on a New Zealand-focused webinar on May 28, along with Whineray and his predecessor, Adrian Orr, now governor of the Reserve Bank of New Zealand and James Shaw, minister for climate change in the NZ government.

Carney stated that widespread disclosure is essential if economies are to meet their Paris Agreement obligations for net zero emissions of all greenhouse gases other than biogenic methane by 2050. “Net Zero will not be achieved in a niche,” he said.

Mark Carney

As one of the founders of the Task Force on Climate-related Financial Disclosures (TCFD) Carney said since the task force issued its disclosure guidelines in 2017, over $140 trillion of balance sheet across banks, insurers and asset managers is now backing TCFD disclosure. Four-fifths of the top 1,000 companies in the G20 are providing reporting material.

But it’s not comprehensive.“We think it is now time for mandatory disclosure. The standards have matured but the issue now is to make sure the coverage is as comprehensive as possible.”

POST-COVID OPPORTUNITY

New Zealand has picked up the challenge and in the post-Covid-19 world sees opportunities to help companies embrace the net zero concept.

Climate minister James Shaw said that New Zealand's transition to a low-carbon future requires that "every professional financial decision takes climate change into account".

“Companies are going to have to adapt their strategies to these new economic realities. This is a huge opportunity.” said Carney. “It will be a great help to investors looking for those companies best protected against climate change risk.”

Reserve Bank of New Zealand's Orr noted that five years ago, when Carney announced the formation of the TCFD in Paris, everyone was wondering what this had to do with financial markets and, particularly, central banks.

Adrian Orr, Reserve Bank
of New Zealand

"Now, it is the most common activity across all central banks in the world, wondering how we can best be part of managing the transition into a low carbon future; seeing it as a true risk to financial stability,” said Orr.

“The risks are terribly hard to identify. There is no market for pricing and hence no reward for any individual to be managing the risk. The market failure is rife, so for us, disclosure is critically important.

“Investors will be able to alter their portfolios and take opportunities around emissions reductions and climate adaptation.”

But Orr said that in New Zealand “leadership is still needed”.

While there is broad agreement regarding climate risk, “I have to say there is scant evidence of that concern changing business decisions,” said Orr. Disclosure was “pretty thin”, he added.

“Two-thirds of the banks we surveyed had some form of disclosure on climate risks, but only one-third of the insurers.

Shaw noted that there are “trillions of dollars of unquantified, undisclosed and therefore unmanaged risks sitting on corporate balance sheets around the world; all due to climate change.”

In October last year the New Zealand government put out a discussion document on a mandatory disclosure regime. It suggested that all asset owners, asset managers, banks and insurers would be required to comply in line with the TCFD guidelines.

The responses, announced in the webinar, showed an astonishingly high number (84%) of respondents, including three-quarters of all large asset owners, agreed that the TCFD framework was appropriate for NZ.

Stress testing

NZ Super's chief executive Matt Whineray asked Carney what companies saw as the main impediments to compliance.

The biggest challenge in terms of implementation is scenario analysis within the TCFD guidelines, responded Carney. Companies have to assess what would be the impact on their business in circumstances where they act decisively, where they leave it late or if they ignore it altogether. 

The TCFD is working with global central banks to stress test these scenarios. Once that process is complete, Carney said the scenarios would be released in open source, so that asset owners and asset managers can draw them down.

In this way, the initiative hopes to overcome the issues that have arisen with multiple standards, for example, around ESG metrics. “There’s over 1,000 of those, which can lead to confusion and the potential for greenwashing,” said Carney.

In Australasia there’s also a high degree of awareness and a broad expectation among investors that banks and asset managers need to invest ethically. That’s according to the Responsible Investment Association of Australia, which has just issued its 2020 report gauging investor views on a range of ESG issues.

The recent drought and bushfire conditions in Australia have prompted two thirds (67%) of Australians to think about their investments and prompted half – 49% – to think about whether their investments are contributing to climate change, said the RIAA.

Meanwhile 86% of Australians expect their super fund to disclose in which companies their money is invested. They also want their super fund to communicate the impacts – positive and negative – their money is having in climate change terms.