Market-based solutions to address climate change are underpinned by a key assumption: More and better climate risk information will support the efficient allocation of capital that a successful adjustment to a low-carbon economy requires.
In moving from a primarily voluntary to a more regulated disclosure paradigm, the Task Force on Climate-related Financial Disclosures (TCFD) has proven to be one of the most important means by which this information is gathered and communicated.
Amid this shift, the TCFD is set to continue serving a central role.
I checked in with David Carlin, lead for the United Nations Environment Programme Finance Initiative’s TCFD programs for banks and investors, to hear about how he views this pivotal year given his work with global financial institutions on climate modeling, climate scenario analysis, climate opportunities and regulatory developments.
This conversation has been edited for clarity and length.
Grant Harrison: Banks continue to finance fossil fuels at a rate that will keep us off the path to net zero and a stable climate. Should sustainable finance advocates shift their attention more towards, as Sen. Sheldon Whitehouse (D-RI) emphasized at a recent GreenBiz event, banks’ "political footprint" given the influence of their lobbying to delay action?
David Carlin: I would say the context here is that we need a system's change, and finance is key. This is why the Paris Agreement article Article 2.1(c) talks about making financial flows consistent with a 1.5- degree [Celsius] aligned world and makes clear that we also need action from governments.
We need this on the supervisory and financial policy side but also on the elected policy side around tax and spending. Again, we do need a full systems approach here. What does that mean? For finance it means providing financing to the real economy — if the real economy is transitioning, finance can be an accelerant.
Finance’s responsibilities don't end at the end of the financial system.
And that's kind of the argument that the financial sector has taken. What I would push on is to say that doesn't really relate the interconnections between finance and government, and between finance and the real economy. There are things that the financial sector can do to push on those other levers, and one is how and where the financial sector’s political voice is used.
A lot of the work that has gone on in the net-zero alliances, as well as work that is going on through initiatives around transition planning, is about making finance consistent with the Paris Agreement. Making lobbying consistent with that pathway is important too. The question is what are the things that are going to provide the wind in the sails of private capital? You can’t reap the benefits from a reputational standpoint if your policy is behind closed doors or if your lobbying isn't going to help bring about a net-zero future.
Finance’s responsibilities don't end at the end of the financial system. It feeds into the dialogues and conversations that finance has with the government, and it feeds into the incentives and structuring that finance has with its clients in the real economy. That’s why making sure efforts are aligned both on client engagement and on lobbying — it’s critical to delivering the things that finance says now that it wants to attain.
Harrison: A key part of your role is to provide guidance to financial institutions on key regulatory developments. Focusing on the United States, can you share any consistent themes from your work with banks and investors that demonstrates regulatory readiness and/or indicates some speed bumps that may lie ahead?
Carlin: The knowledge about climate and the quality of climate reporting has improved by leaps and bounds due to the work of the TCFD. I think it's illustrative looking at an organization that has made disclosures since 2018 or 2019 and seeing how those have evolved. The frequency of the use of scenario analysis, the interest and efforts in quantification and senior-level engagement and involvement are evidence not only of the mainstreaming of this issue but a greater understanding of the issue.
And yet, unfortunately, I think we're still much closer to the beginning than to the end. The TCFD set out to create a more efficient market that incorporates climate risk into prices. We've seen only tentative signals in terms of pricing — we've seen some in certain industries in certain places. But fundamentally, I think few will say that climate risk is being priced in. Few will say that investors and those who are allocators of capital have the information they need about climate to make effective decisions.
And that I think speaks to one of the key speed bumps ahead. Whether you're moving on to climate stress testing from disclosure or whether you're really just trying to fully integrate climate into risk management, what’s needed is to go beyond completeness of disclosure as an indicator of quality and instead quality in terms of a plan and the effectiveness of actions taken.
We're not yet at that point. The analogy I give most frequently is about annual reports and financial statements. It is now expected in many cases in many jurisdictions that firms submit an annual report — firms clearly have fudged numbers before and have gotten in trouble for accounting irregularities. We know that those things are bad.
But that is a very different prospect from saying, "This firm will continue to be a viable business." From the reporters to the users of this climate information, I think this is a place where uptake still remains too slow. And importantly, how are you making [reporting] not just a standalone for the exercise but really something that integrates with your activities? And how are you looking at this in a comparable and standardized way to your peers, as well as to your clients, to be able to say a client fits well into our strategy and our commitment?
Harrison: The International Sustainability Standards Board (ISSB) recently affirmed the drafting of two standards — S1 and S2 — as final rules, voting to require that the global disclosure rules take effect in 2024. What are some key themes of what you’re hearing in conversations with banks and investors on what’s to come?
Carlin: In a lot of ways, the structure of the ISSB is very much connected to the TCFD framework, and I think very consciously. The overall pillars are and structures are relatively the same. Where ISSB is so valuable, especially in climate disclosure, is the ability to go further in its prescriptions. I think TCFD was very valuable as a voluntary framework, but where it may have fallen short, and where regulators also are looking for guidance, is "What does good look like? What is completeness?"
I think the other piece of ISSB that is so important is realizing that with climate, we have just one piece of this triple planetary crisis — we also have biodiversity and pollution. Fundamentally, these are topics and content areas that are significantly more novel to many financial institutions. If there's a dearth of skills and knowledge in certain climate spaces, it's only more acute in these other ones. By thinking more broadly and comprehensively about sustainability, I think the ISSB is providing an opportunity for firms to begin taking a holistic perspective.
Whether you're moving on to climate stress testing from disclosure or whether you're really just trying to fully integrate climate into risk management, what’s needed is to go beyond completeness of disclosure as an indicator of quality ...
We know climate is an uncertain future for us. If you boil it down to the most pithy element, it’s an exercise in radical uncertainty. Scenario analysis can be a torch in that darkness, a way to see things we otherwise may have missed. So the expectation on ISSB’s incorporation of scenario analysis is key.
Harrison: Is there a question that you find yourself not getting asked that you think, based on the conversations you have in your role with TCFD, you think you should be asked more?
Carlin: On the technical front, I feel that people have a very strong self-interest in asking a lot of good questions. I really enjoy staying up on them to effectively provide insights and advice.
But I think the area that I come back to — and it's a little bit similar to what I said about the current state of disclosure — I don't think enough people are asking, "How do I really win the future with a better climate strategy?" People talk about whether [they] have a climate strategy or [they’re] doing a climate risk appetite or what other people are doing.
But I think few people are really taking this in a more competitive direction. TCFD was built with the idea that markets with better information will function more effectively, but we need to do better at putting this information to use. I think there's a real tremendous opportunity for a firm with better data, better insights and a better understanding of how things may develop and how they can position themselves to really thrive. We should stop seeing climate as a sustainability topic and one that fundamentally is altering the future in many unforeseen ways.
This is all predicated on the idea that being able to understand what the future is like better than a competitor can lead an organization to thrive. The world in which we are inhabiting now will be increasingly changing. Taking advantage of those changes and understanding how to play your role in them will make you successful — it's not just going to make you able to have a best-in-class report, it's not going to just get you plaudits from this or that advocate or this or that activist, but it's really going to be a way that successful firms guarantee success in the future.
I'd like to see more people getting strategic, whether it's asking me or whether it's working internally on those topics. But to start moving from what I would almost call defense — thinking we need to do these things for regulatory reasons, even for risk reasons — to a bit more of an offensive posture toward this is the future.