Randal K. Quarles, vice chairman of oversight of the Federal Reserve Board (FRB), who is also chairman of the Financial Stability Board (FSB), delivered a speech on July 11, 2021 at the Venice International Conference on Climate Change, where he addressed two âcore componentsâ of the FSB’s recently released climate roadmap: disclosures and data.
The FSB is an international body that monitors and makes recommendations on the global financial system. On July 7, 2021, the FSB published its roadmap for tackling climate-related financial risks (the Climate Roadmap). The Climate Roadmap supports international coordination on climate-related financial risks in several ways, such as:
- promote relevant initiatives within standards bodies, the Network for Greening the Financial System (NGFS) and other international organizations
- present relevant international work underway and planned in one place, designed to help identify gaps for future work, limit duplication and promote synergies
- outline how the FSB can serve as a forum to discuss cross-sectoral and systemic issues and agree on a way forward
- contribute to broader international policy considerations by facilitating communication with the G20, G7 and the 26th United Nations Climate Change Conference (COP26)
As part of the efforts of the FRB and FSB to achieve more informed decision-making, transparency and cross-border consistency, the FSB-sponsored Working Group on Climate-Related Financial Reporting (TCFD) ” has led to greater recognition of the importance of climate-related financial risk and comparable and reliable disclosure, “according to Vice-President Quarles. The TCFD has defined four fundamental elements to guide any disclosure framework: governance , strategy, risk management, as well as measures and objectives.
Reflecting the consensus that a globally consistent benchmark for climate-related disclosures is needed, Quarles noted: âBroadly consistent and comparable entity-level disclosures by non-financial corporations, banks, insurers and asset managers are increasingly important to market participants and financial authorities. as a means of providing the information necessary for risk assessment and management. Among the additional trends identified by Quarles is “an important baseline that focuses on one-way materiality – or the financial risk that climate change might have on a particular entity – based on TCFD recommendations. . The majority of [the FSB’s] members are already using the TCFD recommendations as a benchmark for their own requirements or guidance. In order to achieve greater cross-border consistency, international organizations should develop additional international standards on climate-related reporting.
Quarles noted that in addition to disclosures, “international initiatives are needed to improve data quality and fill data gaps, and ultimately establish a comprehensive, consistent and comparable database for global monitoring and assessment. climate-related financial risks “. Quarles’ comments reflect the focus of the climate roadmap on establishing “a comprehensive, consistent and comparable database to monitor climate-related financial risks globally.” In order for the industry and financial regulators to better understand financial risks, Quarles noted that âbetter information is needed on the underlying physical risks, including the types of extreme weather events that pose the greatest risk to them. balance sheets of households, companies and financial institutions. . “
Quarles also noted that the data collected through increased climate-related financial reporting requirements will allow national regulators to more accurately monitor oversight risk. According to Quarles, “the FSB is studying how to assess to what extent climate-related risks could be transferred or magnified by different financial sectors, including the interdependence of banks and insurance companies.”
Points to remember and considerations
Quarles’ comments, coupled with the Climate Roadmap, are another very clear indicator that national financial regulators in the United States and around the world are examining the impact climate change may have on the financial sector. financial services, as well as the role of regulators to at least ensure that institutions and industries accurately disclose climate-related risks. At the level of the individual institution, the fundamental components of Quarles’ disclosure and data have already materialized. A growing number of large financial institutions are offering deposit and credit products targeting environmentally friendly businesses and programs. Institutions are finding that it is not enough to simply market their traditional banking products and services as environmentally friendly, but that they also need to have the data – and in many cases independent review – to verify that environmentally friendly banking products actually meet the climate-related goals for which the products were marketed.
In addition to technical data and verification, institutions also review for possible prudential oversight of their climate-related products and services. For decades, institutions have been aware of the risk of potentially deceptive products in the consumer financial services space. With the growth of environmentally friendly products marketed to institutional investors, many of which contain substantial components sensitive to climate-related issues, increased attention is being paid to the potential for misleading marketing materials aimed at non-consumer customers. Although many do not generally think of large institutional investors, funds, private equity groups, etc. specific representations of climate-friendly products, and these clients are making representations to their own constituents about their climate-related efforts – there is at least some risk of heightened scrutiny of a financial institution’s marketing practices for claims of statements and potentially misleading disclosures.
The Climate Roadmap and Vice President Quarles’ speech are further indications that financial institutions should integrate climate change risks into their overall operational strategy in a way that takes account of institution-specific risks. , but which also has a global vision.