Banks Are Doing Better Disclosing Climate Risks. They Need To Do Better Still.
The world’s leading banks have made considerable progress on voluntarily disclosing the risks they face from climate change since 2017, when the Task Force on Climate-Related Disclosures (TCFD) published recommendations for how companies should manage the process. Recently, there have been encouraging regulatory developments in the US and in Europe. But the progress also highlights how far the banks still have to go to achieve what should be the gold standard—standardized mandatory climate disclosures, stress testing by regulators to assess the risk of losses and additional capital requirements for banks most exposed to the risks. This would help improve financial stability, encourage the transition to a low-carbon economy and give investors the information they need to make informed decisions, in our view.
Signs of progress
In the US, the Securities and Exchange Commission in March proposed that all public companies, including banks, be required to assess and disclose the impact climate change could have on their businesses. Simply put, climate risk comes in two forms: physical risk, such as damage from wildfires or rising sea levels, and transition risk—risk from changes in policies or shifts in demand triggered by the transition to a low-carbon economy. In those scenarios, we believe assets like oil reserves could lose much of their value.
Under the SEC proposal, listed companies would have to disclose their own greenhouse gas emissions, and in some cases, the emissions generated by their supply chains. For banks, that would mean calculating customers’ emissions that the bank has financed via lending or arranging bond offerings.