The Institute of International Finance (IIF), which has 450 members from banks to central banks, is calling for greater international alignment of sustainable finance policies and regulation to better support the transition to a sustainable economy.
In a paper published on March 3, the IIF says that some headway is being made on integrating climate risk in the financial sector, but warns that the fragmentation caused by some groups looking to set regional and sector policy is creating confusion and slowing progress.
The report is critical of what it calls the current approach of throwing everything at a wall, and says these fragmented efforts must be honed into a global framework. For example, three multilateral bodies – the Central Banks and Supervisors Network for Greening the Financial System, the Coalition of Finance Ministers for Climate Action and the European Union – are currently working on integrating climate-related financial risk into policy.
Less than a third have adopted climate-risk considerations at all stages of the credit risk process- Moody's
Beneath them is a layer of individual jurisdictions also looking at their own policies. As of January 2020, more than 25 countries were working on some sort of sustainable finance roadmap.
Meanwhile, key jurisdictions such as the US have no sustainable finance strategy in place.
At the same time, numerous standard setters are working on developing frameworks. The list includes the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (Iosco), the International Association of Insurance Supervisors (IAIS) and the International Organisation of Pension Supervisors (IOPS).
Work on taxonomy is also being conducted at both national and regional level, as well as by multilaterals.
“Taking a fragmented approach to climate or broader sustainable finance topics would be deeply regrettable at a time where there is an urgent need to accelerate financial flows that support the transition to a sustainable economy,” say the paper’s authors.
In a recent survey of 70 financial institutions by the IIF, for example, some 65% of respondents say that green regulatory market fragmentation is a big source of concern and will have a material impact on the market for sustainable finance.
The IIF is therefore recommending greater coordination between the groups, as well as in global policy and regulatory framework.
It is “urging the G20 to consider an enhanced sustainability agenda that brings together, in a careful and considered manner, key policy discussions across finance ministries, central banks, financial sector regulators/supervisors, and multilateral institutions.”
"Experimentation is good but fragmentation is not,” says Judson Berkey, managing director and group head of sustainability regulatory strategy at UBS and vice-chair of the IIF Sustainable Finance Working Group.
He says that financial institutions should be more engaged with decision-making: “The industry is still in a research and development phase when it comes to climate-risk analysis.”
More positively, the IIF authors highlight that of the 70 financial institutions surveyed, around 60% of respondents comply fully or partially with the FSB’s Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and a further 30% plan to comply soon.
A study from Moody’s, however, showed "most banks' climate risk management is at an early stage”.
Its report showed “less than a third have adopted climate-risk considerations at all stages of the credit risk process, or provided a description of their climate-risk assessment and monitoring methodologies.”
Collaborative and collective
At the end of February, Mark Carney, the TCFD’s co-developer and governor of the Bank of England until March 15, said he hoped TCFD standards would become mandatory.
The IIF paper stresses that an international accounting standard would help that, as would more complete and better-quality disclosure from corporate counterparties.
Berkey says: “It would be helpful to work collaboratively and collectively with regulators as they develop their frameworks, as we did in the transition from Basel I to Basel II.
“Each country taking their own approach, while useful at first, quickly loses value as it is difficult to compare approaches and leverage resources, both in the public and private sector.”
That said, the IIF paper lays out how national nuances could be incorporated within a larger global framework.
Berkey also adds that while regulation is needed, it should not be rushed.
“It took 10 years to regulate the OTC derivatives market and to develop resolution planning concepts,” he says. “That is the sort of time period we should be considering here.
“We need to start now, but do this in stages learning and adapting as we go."
The IIF paper also suggests initially focusing on climate-related disclosures, rather than attempting to cover all environmental risks at once, but with any policy “framed to facilitate expansion to broader ESG [environment, social and governance] disclosures, including natural capital.”
The complexity of the problem – nature’s role in climate mitigation, as well as economic risk from pollution, land degradation and biodiversity loss – has meant that attempts to simultaneously focus on climate- and nature-related financial risks has overwhelmed those banks low on resources.
For them as for everyone, a roadmap from climate to ‘beyond climate’ – as suggested by some natural capital specialists – would be useful.