High-quality, reliable, and comparable gauges are lacking. Here’s how to close the gap.
Climate change is transforming the global investment landscape,
creating new risks and opportunities. Physical risks, from rising sea
levels to the lethal heat waves scorching Europe and elsewhere, affect
asset values for everything from stocks to real estate and
infrastructure. So-called transition risk—including government policies
to reduce greenhouse gas emissions—lowers the value of fossil fuel
companies.
To evaluate these risks and support the transition to a low-carbon
economy, investors and others in the financial world need information.
For example, they may want to know if a company’s assets are physically
vulnerable, the volume of greenhouse gases it emits, and what its plans
are for lowering emissions.
In addition, heightened geopolitical risks, notably due to Russia’s war in Ukraine, and the deterioration of the global economic outlook may make the transition to a low-carbon economy more complex, expensive and disorderly.
Banks, pension funds, and other investment firms need better climate data to assess risks.
Energy policy decisions could also be affected by the amount of
carbon lock-in—which occurs when fossil fuel-intensive systems
perpetuate, delay or prevent the low-carbon transition—that is generated
in the near term, including by a delayed phase-out of thermal coal.
Data deficit
Currently, however, financial market participants face a lack of
high-quality, reliable, and comparable data needed to efficiently price
climate related risks and avoid greenwashing—spurious attempts by
financial or non-financial companies to burnish their environmental
credentials.
This data deficit poses a serious obstacle to the energy and
ecological transition, which requires migrating capital toward
low-carbon industries and massive new investments in mitigation and
adaptation. It also makes it more difficult for financial supervisors to
assess risks to financial stability given uncertainties and challenges
to quantifying climate-related impacts. Therefore policymakers urgently
need to ensure that better climate data are made available.
A new report from the Network for Greening the Financial System takes an important step. It features a directory that evaluates available climate data, identifies gaps, and offers practical, concrete ways to close those gaps.
The report, a product of a working group co-chaired by the IMF and
the European Central Bank, strengthens what we call climate information
architecture. This has three building blocks:
high quality, comparable data; global disclosure standards; and climate
alignment approaches and methodologies, including taxonomies of assets
and activities.
The report makes three contributions. First, it highlights that,
despite the substantial progress on the climate data front since COP26, challenges remain, including:
- Insufficient coverage in disclosures of non-publicly listed companies and small and medium-sized companies
- Limited availability of comparable and science-based forward-looking
information, such as targets, commitments, and emissions pathways, that
are needed to assess physical and transition risks
- Auditability is needed to build trust and enhance the quality of data, yet it remains limited
Second, the report makes tangible policy recommendations:
- Foster convergence toward common and consistent global disclosure
standards, for example by increasing availability of granular emissions
data and improving the reliability of reported climate-related data
- Increase efforts toward shared principles for taxonomies, for
example by increasing the linkages between taxonomies and disclosures
- Develop well-defined metrics and methodological standards, for
example by better harmonizing forward-looking metrics and reinforcing
public and private cooperation to improve methodologies
- Better leverage available data sources, approaches, and tools, for example by improving use of new technologies
The third and most important contribution is the climate-data
directory, which surveys available data based on the needs of the
financial sector and how information is used.
For example, banks, pension funds, and other investment firms apply
scenario analyses and stress testing to analyze climate-related risks
from individual securities and companies themselves, in combination with
credit ratings. They need climate-related data to assess vulnerability
to these risks at the sector, company, household, and sovereign level,
and to evaluate the determinants of physical risks and transition risks.
Policymakers may need other data to determine whether a sharp drop in
asset prices could hurt balance sheets of financial companies, putting
financial stability at risk.
Climate data directory
The climate data directory can shape evidence-based conclusions on
the main data gaps. For example, it shows where raw data aren’t
available to construct metrics such as the exposure to climate policy
relevant sectors, or the share of assets such as coal-fired power plants
in energy portfolios. Missing are accounting data and exact geographic
location of assets, as well as data on greenhouse-gas emissions and
effects related to biodiversity, forest depletion, floods, droughts, and
storms.
Though not offering direct access to underlying data, the directory
is a public good, a living tool aimed at better disseminating
climate-related data and offering practical solutions to bridge data
gaps. It’s designed to help financial professionals identify relevant
sources to meet their needs, facilitate access, and better disseminate
existing climate-related data. It can play a decisive role in fostering
progress on the four policy recommendations described above.
The report’s findings and accompanying policy recommendations line up
closely with the IMF’s work on climate data, disclosures, and
taxonomies and other methodologies intended to align financial
portfolios with Paris Agreement goals.
Metrics and methodologies
For example, the Fund’s Climate Change Indicators Dashboard,
a statistical initiative to address the growing need for data used in
macroeconomic and financial stability analysis, may benefit from the
directory’s improved metrics and underlying methodologies.
The IMF is also leading a joint project to provide guidance on the Group of Twenty’s high-level principles for taxonomies and other sustainable-finance alignment approaches.
This work is particularly relevant for emerging market and developing
economies, which face considerable challenges in reducing greenhouse-gas
emissions and attracting private capital to finance the transition.
The IMF participates in the International Financial Reporting Standards Foundation’s new standard-setting board for sustainability and climate disclosures, which plays a key role in such work. It also co-leads the Financial Stability Board’s Climate Vulnerabilities and Data workstream to incorporate climate in the organization’s regular vulnerabilities assessment.
These efforts aim to address areas of concern in climate
vulnerabilities, metrics, and data based on their materiality and their
cross-border and cross-sectoral relevance. Finally, the IMF has started
to include climate-related risk analysis in its financial sector assessment programs.
Late last year, the IMF dedicated its annual statistical forum to gauging climate change,
and discussed with other international bodies how to close climate
finance data gaps. And in October, we will publish an analytical chapter
of the Global Financial Stability Report that takes a more in-depth
look at financial markets and instruments in scaling up of private
climate finance in emerging market and developing economies.
IMF
© International Monetary Fund
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