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EXECUTIVE PERSPECTIVE: Why it’s time for IOSCO to take on climate

It has been a long time coming but investors have finally awoken to the threat that climate change poses to their investments. Pension funds, insurance companies and sovereign wealth funds with long-term liabilities are starting to recognize that the physical effects of climate change, and the global effort to reduce greenhouse gas emissions, will both destroy and create enormous economic value in the decades to come.

Increasingly, institutions are scrutinizing their portfolios for exposure to physical and regulatory climate risks. Research firms are developing new metrics to assess companies’ likely vulnerability. Investment managers are designing strategies and funds tilted away from high-risk stocks, or toward companies offering solutions to the climate challenge.


But they all face a profound challenge: the availability and quality of the climate-relevant data that companies disclose.

Since the first company stocks were publicly traded in Amsterdam in the 17th century, a body of securities law and regulation has grown that dictates what information listed companies must make public. These mandated disclosures are intended to give existing and prospective investors a full picture of the financial health of the company in question. They allow investors to compare companies with their peers, and make informed assessments of the value of each company’s stocks or bonds.

However, despite transforming the investment sector, this body of law has failed to keep pace with the myriad of environmental, social or governance (ESG) challenges companies face today – and not least their exposure to climate risk.

Investors are taking action to address this failing, and many companies are responding. Since 2000, a growing number of institutions – today representing more than US$100 trillion of assets – have banded together in the CDP (formerly the Carbon Disclosure Project) to request that companies voluntarily disclose investment-relevant information related to climate change. The Principles for Responsible Investment (PRI) counts some 1,750 investor signatories, who manage some US$70 trillion. Its signatories – who consider climate change to be the most urgent environmental issue they face – commit to encourage the companies in which they invest to report on ESG issues.

G20 policymakers have also identified climate change as a ‘systemic risk’ to future global financial stability. This is because investors, lenders, and insurance underwriters do not have the information they need to appropriately assess and price climate-related risks and opportunities.

The solution according to the Financial Stability Board (FSB), a G20 body that brings together central banks and finance ministries, is more and better financial disclosure.

Earlier this year, the Task Force on Climate-related Financial Disclosures (TFCD) made its final recommendations. Launched by Mark Carney, the governor of the Bank of England, the TCFD was convened by the FSB to develop voluntary, consistent climate-related financial risk disclosure recommendations that would promote more informed investment, credit, and insurance underwriting decisions.

At the recent One Planet Summit in Paris, Mike Bloomberg and FSB Chair Mark Carney announced[1] support for the TCFD recommendations from 237 companies with a combined market capitalization of over US$6.3 trillion, including more than 150 financial firms responsible for more than US$81.7 trillion in assets. Both the CDP and the PRI have announced plans to incorporate the TCFD’s recommendations into their reporting frameworks. Countries such as the UK, France, and Sweden have also endorsed the recommendations.

While this marks an encouraging step forward, the TCFD’s guidelines remain voluntary. According to the Task Force’s own research, almost a third of companies surveyed are unwilling to report against its framework. Meanwhile, companies could choose to disclose only partially – meeting the letter of the recommendations, but not the spirit. Even among companies looking to comply in letter and spirit, considerable uncertainty persists as to the what, where and how of effective disclosure.

There is thus a clear role for the International Organization of Securities Commissions (IOSCO) which brings together the world’s securities regulators, setting standards for the securities sector worldwide to “build sound global capital markets and a robust global regulatory framework.”

Historically, IOSCO has played an important role in harmonizing and integrating existing disclosure regimes and setting market standards, providing guidance that is timely and responsive to market developments. Given the novelty of some of the TCFD’s recommendations, including that companies use and disclose scenario analysis around climate change, IOSCO could play a crucial role in developing norms and ensuring uniformity.

While it does not have mandatory powers, IOSCO is influential in promoting consistency, oversight, and enforcement, and has a clear mandate “to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks.” Guidance from members of IOSCO could, in turn, provide national regulators with a consistent framework for implementation at the national level. The EU’s High Level Expert Group on Sustainable Finance is actively discussing climate-related financial disclosure issues, including IOSCO’s role.

Whether in terms of investor protection, market integrity and efficiency, financial stability, emerging market inclusiveness, or meeting the demands and expectations of financial markets and the general public, addressing climate change fits squarely with IOSCO’s criteria for prioritizing action.

Climate change is, unquestionably, the most important and serious systemic risk facing the world’s equity and debt markets.

As the international standard setter for national securities regulators, IOSCO can play a central role in advancing climate-related financial disclosure, leading in due course to the establishment of a mandatory, harmonized regime. Doing so would reduce risk for investors and the financial system as a whole, and help leverage the power of the capital markets to address one of the most pressing challenges facing humankind. It’s time to turn up the heat on climate reporting.

[1] https://www.fsb-tcfd.org/wp-content/uploads/2017/12/TCFD-Press-Release-One-Planet-Summit-12-Dec-2017_FINAL.pdf

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