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Climate disclosure framework 'disappointing,' regulation may be answer

A voluntary climate disclosure framework has had disappointing results so far, and regulation may be the answer to encourage companies and financial firms to improve their climate risk disclosure, according to the head of the International Organization of Securities Commissions.

Speaking at an EU sustainable finance conference in Brussels, Belgium, Ashley Ian Alder said the results of a status report on the G-20's Task Force on Climate-related Financial Disclosures, or TCFD, were "quite disappointing," with a low level of disclosure regarding strategies and resilience to climate change, and the financial impact.

Alder, who is also CEO of Hong Kong's Securities and Futures Commission, said regulators needed to take a more global approach and team up on financial regulation and disclosure. Several central banks from around the world — including Mexico, Japan, China and France — launched a network in 2017 to manage the financial risks of climate change. That approach could be combined with that of the TCFD, he said.

"What we need to do is combine the central bank approach through the network for greening the financial system, which is a prudential approach to financial risks within banks and we need to combine that with the TCFD approach which is about disclosure by corporates of financial risks related to financial change," he said.

"We need to start thinking quite seriously ... that ultimately when we are thinking around regulatory approaches what elements are mandatory or should be mandatory," he said.

'Powerful tool'

"Regulation is a very powerful tool in climate change," Alder told the conference.

"The problem with climate change is that we cannot wait, and we have a very very small window in which to put together implementation," he said.

He noted that regulators were independent and thus had the ability to act quickly; he also said that attitudes to sustainable finance had changed.

"We've had a change in approach from seeing sustainable finance as part of the corporate responsibility ... to one that can be defined as a set of important longer-term financial risks," he said.

Gaining an international consensus on how to tackle climate change, however, would take too long, and organizations motivated by climate change need to work together to improve disclosure, he told the conference.

"If we are going to get the level of disclosure up, my view is [we need] a coalition of the willing, focus on climate change, focus on [the] central bank piece and disclosure piece and work out ... what elements of that have to be consistent and what elements have to be mandatory," he said.

Legislation

Frank Elderson, chair of the Network for Greening the Financial System and executive director of the Dutch central bank, said legislation can work in helping governments tackle climate change.

"We need national governments to set clear deadlines when to phase out high emission industries so here in the real economy we need laws," he said.

However, central banks can use existing legislation to take into account climate-related risk management.

"They can and should integrate financial risk management in their micro-prudential supervision, they should and can integrate in their macro-prudential supervision by means of stress testing and by means of scenarios they should integrate climate thinking and risk management in their own reserve management," Elderson told the conference.