Quality Of Climate Risk Disclosures Only As Good As The Data

New Zealand is the first country in the world to introduce laws mandating banks, insurance, and investment firms to report on the impacts of climate change to their business. To accurately quantify climate risk, firms will need greater consistency, sophistication, and availability of climate risk data.

Accenture New Zealand Managing Director Ben Morgan said, globally, financial regulators are placing greater demands on financial institutions to demonstrate effective management of climate risks.

“The OECD estimates that US$6.9 trillion of investment would be required each year through to 2030 to meet the Paris Agreement. Governments alone can’t pay for this so private finance will be essential for global economies to transition to low carbon,” Mr Morgan said.

“Climate-related financial risk disclosures will be an important part of the solution. They help create discipline around the collation, analysis and interpretation of data which, in turn, could lead to a more efficient allocation of capital in which climate risks are fully priced in.

“However, banks and financial services firms will have to overcome a number of hurdles to quantify and manage climate risk properly.

“This is no small task. It remains uncertain how the risks emerging from a transition to a low-carbon economy will unfold over time. Allowing firms to respond effectively will require greater consistency, sophistication, and availability of climate risk data.

“Many of the financial risks associated with climate change are also unlikely to manifest itself within firm’s current financial planning cycles. The degree to which they should seek immediate action depends on the exposure to the balance sheets to climate change.

“For example, physical risks are more immediately relevant for banks with a high share of products with a long term like mortgages. Transition risks are more important for those with a greater proportion of commercial leans to certain industry sectors.

“Adding to the challenge, significant disparities exist between the industry-level impact of climate change and that on the individual firms within an industry.”

To date, global progress on climate-related financial disclosure regimes is through the industry-led Taskforce for Climate-Related Financial Disclosures (TCDF) which provided financial disclosure recommendations to help companies provide better information to support capital allocation.

The TCDF is supported by 1,500 firms globally with a market capitalisation of US $12.6 trillion and financial institutions responsible for assets of over US $150 trillion.

However, there is a varying degree to which firms explicitly link disclosures to specific TCFD recommendations, hence hindering comparability across firms. The progress in climate disclosures also varies across industries, resulting in incomplete data sets across companies, sectors and countries, and limiting banks’ ability to fully assess the nature of climate risks on the physical assets they lend against or invest in.

“A mandatory disclosure regime, as will be the case in New Zealand, is designed for greater consistency in terms of financial risk from Climate Change that is disclosed by firms.

“That will place significant data collection and scenario modelling requirements on banks, and indeed the wider financial services sector. There will likely be significant limitations in the data available for reporting and modelling both at the individual firm level, but also sector and national level.

“Firms will need to assess the maturity of their climate risk management and begin incorporating climate change considerations into their risk appetite and pricing. A climate risk register can help give a ‘point-in-time’ view of a firm’s climate risk exposure and can serve as a basis for an ongoing review to find risks that need active monitoring.

“Additionally, firms and regulators would benefit from teaming together to recalibrate and standardise capital and risk models, to drive uptake and ensure a nationally consistent approach to data collection and reporting,” Mr Morgan said.

The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill will come into effect in 2023.

For further information on how firms can understand and respond to the risk implications of climate change, visit here.

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