Can financial disclosure accelerate Climate Action?
The MIT Science and Policy of Global Change Program recently brought a number of financial sector experts together to discuss best practices for mitigating climate risk through financial disclosure.
A bit like the Covid-19 pandemic, scientists and economists are trying to work through different scenarios to try to understand the impact of different types of policies and actions. Instead of “flattening the virus curve”, these specialists are trying to understand how to flatten a different set of risks.
The financial disclosure of climate risk by companies, if more accurate and usable, could reduce the risks of climate change by directing investment to lower-risk activities, altering the approach and purpose of some existing industries, and pinpointing where infrastructure needs to be made more resilient.
During the panel representatives from the Bank of England, Bank of Canada, HSBC and MIT underlined the importance of scenario modelling – which projects how the climate and economy are likely to evolve under different climate policies – to managing climate risk.
The heterogeneity of scenario modelling does, however, present challenges – with the financial community struggling to sort the many scenarios now available.
Theresa Löber, head of the Bank of England’s Climate Hub, noted that they are trying to strike a balance between being ‘as prescriptive as we can be so financial firms can process this, but also so that we can aggregate the results to understand how the system as a whole is exposed to these risks.’
Löber touches on a key issue here – for climate-related financial disclosure to be useful, investors need to be able to process, compare and easily analyse that data. In the multi-faceted world of sustainability metrics an underlying, global set of reporting standards with an accompanying XBRL taxonomy to record measurable metrics such as carbon use could provide this.
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