Disclosure and Data on Climate Change

IMF News, April 1, 2021

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Disclosure and Data on Climate Change

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• Published: April 1, 2021

Overview

• Remarks by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF.
• Event: New Economy Forum, 2021 Spring Meetings.
• Date: April 1, 2021.
• Purpose: Outline the IMF’s perspective and priorities on climate-related disclosures, data gaps, and the information architecture needed to assess climate risks to the financial system.

Urgency and systemic relevance of climate risks

• Climate risks are framed as an "urgent global imperative" with potential for "catastrophic global scenarios" that could have "devastating effects on societies, economies, and the financial system."
• The COVID crisis illustrates how extreme "tail events" can cause extensive disruption of economic activity and informs approaches to assessing climate risks.
• The IMF has made understanding implications of climate change for the global financial system and financial stability an important additional priority.

Financial-stability implications and supervisory priorities

• Climate-related disclosures matter for:
  • Financial stability assessments.
  • Informed market pricing of physical and transition risks.
  • Growth of sustainable finance.
• Stress-testing, sensitivity analysis, and scenario analysis are identified as important tools to assess potential financial implications of climate risk.
• Over the past decade, "one in five Financial Sector Assessment Programs (FSAPs) conducted by the IMF contained an examination of climate-related physical risks, with transition risks becoming an increasing focus."
• Regulatory and supervisory frameworks should be strengthened to ensure:
  • Supervisors identify and monitor key exposures of financial institutions to climate-related financial risks.
  • Clear expectations are set for governance and management of those risks by financial institutions.
• Taking the global dimension into consideration will be increasingly important given the financial-stability implications of climate change.

Information architecture needed to assess climate risks

• The IMF views the information architecture around climate risks as consisting of three components:

1. Reliable and high-quality data. 2. A harmonized and consistent set of climate disclosure standards. 3. A broadly agreed upon global taxonomy.

• Data:
  • The IMF is active through:
  • Co-chairing the Network for Greening the Financial System’s "Bridging the Data Gaps (BDG) Workstream".
  • Internal work on developing a database on climate indicators.
  • Bridging climate-related data gaps is challenging due to issues of data availability, reliability, and comparability.
  • The NGFS BDG has adopted a user-centric approach based on:
  • Categorizing use cases.
  • Classification of metrics.
  • Links to data sources.
  • The IMF’s workplan to develop climate-change indicators for macroeconomic analysis will complement NGFS work and address a subset of BDG-identified data gaps.

• Climate disclosures:
  • The current space is "fragmented" with multiple frameworks, creating an "urgent need for convergence toward a harmonized and consistent set of climate disclosure standards."
  • The IMF strongly supports the International Financial Reporting Standards Foundation’s initiative on global sustainability reporting standards to align with financial reporting and assurance by auditors.
  • The IMF commends the alliance of leading standard-setters on sustainability for developing prototype standards.
  • The IMF encourages use of insights from the Task Force on Climate-related Financial Disclosures (TCFD) as a framework to build on; TCFD "has gained strong support" and "can serve as a basis for greater climate-related disclosures."
  • Outstanding issues include:
  • Pathways to mandatory adoption.
  • Approaches on materiality.
  • Interaction with jurisdictional approaches.
  • Scope of what is covered within climate disclosure standards.

• Taxonomies:
  • Steps toward globally agreed-upon taxonomies are "probably less advanced," though efforts by the European Union and others are notable.
  • Given the absence of harmonized metrics that accurately measure climate-change-related risks and opportunities, taxonomies can:
  • Facilitate information about climate risk to investors.
  • Foster sustainable finance markets.
  • Help monitor financial risks associated with climate change.
  • A minimum agreed-upon global taxonomy combined with good quality data would enhance effectiveness and quality of disclosure.
  • Identifying opportunities for convergence toward a common taxonomy is important to ensure consistency and a consolidated and uniform framework for climate-related disclosures.

IMF roles, collaboration, and expected outcomes

• The IMF’s roles highlighted:
  • Participation in NGFS BDG as co-chair.
  • Internal development of a database on climate indicators.
  • Development of a workplan for climate-change indicators for macroeconomic analysis.
  • Support for convergence on disclosure standards and taxonomies.
• Collaboration across jurisdictions, standard-setters, private sector, and international organizations is emphasized.
• The goal is to build a climate-resilient financial system globally by focusing on key priorities, coordinating efforts, and delivering necessary outcomes.

Key findings and priorities (bulleted)

• Climate risks can cause "catastrophic global scenarios" with systemic effects.
• Experience from COVID underscores relevance of analyzing extreme "tail events" for climate risk assessment.
• One in five FSAPs over the past decade included examination of climate-related physical risks; transition risks are an increasing focus.
• Three critical components of information architecture: data, disclosure standards, global taxonomy.
• IMF actively contributes to BDG and is developing climate indicators for macroeconomic analysis.
• Support for IFRS Foundation’s initiative on global sustainability reporting standards and use of TCFD insights.
• Need to resolve issues on mandatory adoption, materiality, jurisdictional interaction, and scope of disclosure standards.
• Need for convergence toward a common taxonomy to improve consistency and disclosure quality.

Remarks by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF; New Economy Forum, 2021 Spring Meetings; April 1, 2021.

References

• Tobias Adrian
• Speeches
• PRESS CENTER
• https://www.imf.org/en/home