1. Engage and collaborate on data standards to drive systemic change
Financial institutions will require more trustworthy data than they have today to better assess the ample investment opportunities. Clearly, there is plenty of data available – especially relative to current carbon emissions and future targets – and from a range of sources. As the latest EY Global Climate Risk Disclosure Barometer confirms, the quality of the data – rather than the quantity – is the issue. It is often inconsistent and difficult to translate into meaningful analysis, modeling and reporting. Many financial services firms still lag in disclosing on their risk exposures and risk management approach, reflecting the dearth in quality data.
Higher quality and more consistent data will help investors understand what they are investing in. Another recent EY study of institutional investors found increasing dissatisfaction with information shared about ESG risks and that non-financial performance and risks play a pivotal role in investment decision-making. That’s why banks, insurers, and asset managers should engage in industry efforts for increased standardization across myriad reporting frameworks. Meantime, firms have been innovating on what they disclose. For example, some firms have begun applying the principles of impact-weighted accounting to track the effects of climate change on their financial performance.
The Taskforce for Climate-related Financial Disclosures (TCFD) has become the go-to standard for climate-related financial reporting, with more than 1,000 supporting organizations from 55 countries. TCFD is working actively to fill the gaps in current reporting relative to climate change strategies, governance, risk management and target setting. As recent EY analysis makes clear, there are definite benefits, (e.g., stronger risk management, improved modeling capabilities, and more consistent communication) that come from implementing the TCFD recommendations. EY worked with the Institute of Finance and UNEP FI to publish a TCFD playbook to provide clear and comprehensive guidance to financial institutions on how to develop a TCFD report to move from initial to advanced reporting.
Financial services leaders can provide input to refine TCFD recommendations. They can also contribute to the development of TCFD-compliant listing requirements and participate in coalitions supporting mandatory disclosures, which appear inevitable. The recommendations of the Climate Financial Risk Forum also bear watching. This collaboration between the Bank of England, the FCA, and private sector is focused on defining and sharing best practices for data consistency.
Similarly, as noted above, UNEP FI has released principles for responsible banking, insurance, and investment. These principles aim to “embed sustainability at the strategic, portfolio and transactional levels, and across all business areas” and “help the industry to demonstrate how it makes a positive contribution to society.” They clarify the common ground firms can find in terms of analyzing their impacts on people and the planets, setting and implementing sustainability targets, and reporting on progress.
The regulatory context is also changing quickly. A recent IIF paper highlighted the need for a “harmonized and sound policy and regulatory framework that ensures clarity of purpose, protects consumers, supports market development, and facilitates transition in key economic sectors.” Financial service firms can and should help in designing that framework and thus must engage as they did in the development of reforms after the financial crisis.
Boards and senior leaders are recognizing that emphasis on transparency and accountability means they may have to share data more openly and rely less on proprietary models than they are otherwise inclined to do. Such collaboration will be necessary to overcome regulatory fragmentation and achieve systemic change.
What financial services firms should do now:
- Understand current sustainability initiatives and how they are being measured
- Identify the data and information to be collected to meet reporting standards, as well as necessary process changes and governance structures
- Identify opportunities to engage with working groups and demonstrate leadership in key areas