New data initiatives intend to deliver transparency in climate reporting.

Recently, the US Securities and Exchange Commission announced a draft measure requiring US-listed businesses to disclose climate-related risks and their greenhouse gas emissions. The ruling was announced in response to investors requesting further guidance on how to report on climate-related impacts. Some have criticised the plan believing it is creating an added burden for businesses disclosing information.
The announcement represents a significant step in financial climate reporting. Policies and regulations greatly vary from nation to nation, but the US has been lagging behind Europe in requiring companies to disclose data on their climate-related impacts. The US has preferred a market-driven approach towards reporting and disclosures, while Europe has created a taxonomy with guidance on what specifically is an environmentally sustainable activity. The differing approaches toward regulations and frameworks result in fragmentation and uncertainty for financial markets. Industry experts are urging more collaboration, and the use of a common language to support the financial industry in disclosing climate-related information.

A recent report called ‘Forging the path to international standards in sustainable finance’ explores these issues in detail. The mentioned report will launch at a virtual roundtable with financial industry leaders examining the alignment of international markets and sustainability standards.

Back in 2015, the Financial Stability Boards created the Task Force on Climate-related Financial Disclosures, providing a framework for businesses to disclose climate-related risks and opportunities. The TCFD measures have become mandatory in certain areas, and many plan to follow a similar path.

Pedro Guazo, a representative of the UN Joint Staff Pension Fund, is addressing the challenges and risks created by climate change in its investment activities. Guazo explains that the fund wants to ensure its stakeholders have complete transparency in the processes, scenarios and metrics used to integrate climate-related risks and opportunities into their investment process.

Adam Banai, executive director of the Magya Nemzeti Bank of Hungary, one of the first central banks to publish a TCFD report, emphasises the important role central banks play in encouraging the adoption of TCFD recommendations. Banai admits that financial markets in his region aren’t ready to shift towards a more sustainable way of working and believes the bank must lead the way in delivering the support and guidance needed to improve this transition.

Banaii believes that a key reason why markets aren’t willing to integrate environmental, social and governance factors into investment decisions is because of data. Data has posed the main challenge when compiling reports, especially in finance and the scope of business portfolios. The more complex and varied a portfolio, the more difficult it is to find relevant and comparable data from other businesses.
While this is difficult for larger businesses, it is even more challenging for smaller enterprises that usually lack access to resources to collect and measure data. Banai believes that with time more financial organisations will collect and share data because continued rising demand will lead to more data production and collection.

The TCFD focuses on standardising approaches toward climate-related financial reporting. The more areas that adopt its recommendations and more businesses producing TCFD reports, the more realistic it will become that we can reach net-zero. However, until relevant data becomes more available and accessible, the challenges to adopting TCFD on a large scale will continue.