Firms' disclosure on their financial risk to climate change will become mandatory in the coming years once improvements are made in how to best report such data, according to the Bank of England Governor Mark Carney.
Since June 2017, a voluntary framework has been in place named the Task Force on Climate-related Financial Disclosures, established by the Financial Stability Board, which monitors vulnerabilities in the global financial system, prompted by the G-20.
"We are going to go through a few years of trial and error in order to perfect this disclosure," Carney said at a conference at the Bank of France. "Then in our judgment … it is likely something like this disclosure will become mandatory so it can be comprehensive and consistent, not yet because it's not ready."
Carney said some 1,100 companies in G-20 countries were disclosing on the financial risks of climate change, with about 80% reporting according to the TCFD metrics.
There is a "virtuous cycle that is beginning to be established and needs to be extended whereby disclosure is demanded," Carney said. "Some will be found wanting and insufficient, some will be irrelevant."
Carney said there was €100 trillion worth of balance sheet demanding these disclosures, including asset managers, banks and insurers.
Investors and regulators have become increasingly concerned about the impact of climate change on businesses, fearing that if industries such as coal and gas become obsolete, financial institutions will be left with stranded assets. The Bank of England is part of a a network of central banks designed to help increase the role of green financing in the global economy, named the Central Banks and Supervisors Network for Greening the Financial System.
However, Carney said it was not only up to central banks to drive the transition to a low-carbon economy.
"Our job is to make sure that the system is ready for whatever transition is driven by climate policy but what we can do is to amplify the effects of good policies and bring forward the transition," he said.
Markets were good at adjusting to policy and would then make the changes needed to adapt to a low-carbon economy, he said.
Banks and insurers would also have to take individual responsibility by appointing senior managers to address climate change risk, Carney said.
The most effective signal from society and government on climate change would be the introduction of a carbon tax, he said, adding that what the tax hoped to achieve would have to be clear over the longer term.
"What the financial sector will do if the climate policy is credible and if they have the disclosure information, and they have to manage the risk which is what the supervisor has asked them, to do is to start pulling forward that adjustment in anticipation of a higher tax," Carney said.
As a result, financial institutions would start allocating capital companies who have a climate strategy and stop financing companies who do not, he said.