Regulatory pressures and supervision and enforcement may dramatically increase depending on the passage of current climate-related public policy bills and/or perceived U.S. influence during the upcoming COP26. Despite this uncertainty, large financial services companies have begun to commit to and report on their progress toward meeting net-zero emissions goals; in so doing, they have started setting both the strategy and the execution of an approach to address decarbonization and overall climate risk by measuring, managing, and disclosing (i.e., reporting on) their efforts to minimize climate-related financial risks. Given heightened scrutiny by stakeholders, including regulators, investors, and customers, on the availability and accuracy of this information, it is critical for financial services companies to ensure that their disclosures are consistent across multiple reports, track financed emissions as well as those of suppliers and customers, are auditable/traceable, and provide clear documentation and/or rationale on approval/denial decisions.
The climate-related activities of financial services companies in the United States may be influenced by:
- Publication of multiple reports from the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD), including a 2021 status report; guidance on metrics, targets, and transition plans; and updates to the implementation guidance on TCFD recommendations.
- Biden Administration directives to address climate-related financial risks through regulatory and supervisory activities.
- Marketplace expectations for government and private finance commitments coming out of the next United National’s Climate Summit, or COP 26 (the 26th Climate Change Conference of the Partners)
The FSB’s Task Force on Climate-related Financial Disclosures published its 2021 Status Report based on a review of firms’ TCFD-aligned climate-related disclosures. In the report, TCFD highlights that:
- Climate-related reporting is increasing though only 50 percent of companies reviewed disclosed in alignment with at least three of TCFD’s eleven recommended disclosures
- Companies were more likely to disclose information on their climate-related risks and opportunities than other recommended disclosures
- The least reported disclosures were the resilience of companies’ strategies under different climate-related scenarios and descriptions of their board’s and management’s roles in overseeing and managing climate-related risks and opportunities
- Materials and buildings companies lead on disclosure across all eleven recommendations
- Europe is the leading region for TCFD-aligned disclosures.
TCFD notes that eight countries (Brazil, the European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom) have announced requirements for domestic organizations to report climate-related financial risk in alignment with the TCFD recommendations. It adds that “the IFRS Foundation is establishing an International Sustainability Standards Board (ISSB) to develop a baseline global sustainability reporting standard, built from the TCFD framework and the work of an alliance of sustainability standard setters.”
Two additional reports were released concurrently with the 2021 Status Report:
- Guidance on Metrics, Targets, and Transition Plans. This final document follows the June 2021 draft released for consultation (see KPMG Regulatory Alert, here). TCFD states that, based on the responses, it has clarified and simplified the proposed guidance and updated specific sections of the implementing guidance.
- Updates to the guidance on Implementing the Recommendations of the TCFD. Key updates to the recommended disclosures include:
- No changes to overarching recommendations on “Governance” or “Risk Management”
- Updates to the “Strategy” and “Metrics and Targets” recommendations for all sectors to include:
- Expanded disclosure of financial impacts of climate-related risks and opportunities plus key information from the organization’s transition plan
- More explicit disclosure of potential financial impacts from different climate-related scenarios
- More explicit disclosure of metrics used
- Revised disclosure of Scope 1 and Scope 2 emissions to be independent of a materiality assessment
- New disclosure of targets, including interim targets.
- Updates specifically for the financial sector, varying by type of organization – banks, insurance companies, asset owners, and asset managers - to generally include:
- Expanded definition of carbon-related assets to include non-financial groups (banks only)
- New disclosure of the extent to which the organization’s activities are aligned with a “well below 20 C scenario”
- New disclosure for greenhouse gas (GHG) emissions of the organization’s activities, “where data and methodologies allow.”
U.S. Roadmap to Build a Climate-Resilient Economy
In advance of COP26, the Biden Administration has issued a report, A Roadmap to Build a Climate Resilient Economy, that outlines a “comprehensive, government-wide strategy” to measure, disclose, manage, and mitigate the systemic risks posed by climate change. The report builds on the May 2021 Executive Order 14030, Climate-Related Financial Risk, and summarizes initiatives in process. (See KPMG Regulatory Alert on the Executive Order, here.)
For the financial services sector, highlights of the report acknowledge:
- A forthcoming report (November 2021) from the Financial Stability Oversight Council (FSOC) on “the importance of climate-related disclosures by regulated entities, current approaches to incorporating climate-related financial risk into regulatory and supervisory activities, and recommended processes to identify climate-related financial risks to U.S. financial stability”
- Anticipated proposed rules from the Securities and Exchange Commission (SEC) for mandatory disclosure for public issuers regarding material risks and opportunities posed by climate change
- A request for information published by the Treasury’s Federal Insurance Office (FIO) focused on the availability and affordability of insurance in markets that are vulnerable to climate change impacts as well as in traditionally underserved communities
- A Department of Labor (DOL) proposed rule that would permit retirement plan fiduciaries to consider climate change and other ESG factors when making investment decisions and exercising shareholder rights
- Efforts by the Departments of Housing and Urban Development (HUD), Veterans Affairs (VA), Agriculture (USDA), and Treasury to enhance federal underwriting and lending program standards under their jurisdictions to better address climate-related financial risks
- Updates to the National Flood Insurance Program (NFIP) standards to align construction and land use practices with flood risk reduction data.
The report further highlights the U.S. participation in climate-focused international forums, including the G-7, G-20, COP26, FSB, and standard-setting bodies, to “improve information available and methods to assess and monitor such risks and promote consistent and effective approaches to managing these risks.” It concludes that the United States is “driven to act urgently for three reasons: 1) the most effective risk strategy is investing in decarbonization; 2) climate change is already impacting the economy and poses a systemic risk to the financial system; and 3) the potential for irreversible climate impacts demands a precautionary approach.”
Mark Carney, the United Nations special envoy for climate and finance, recently participated in a Washington Post Live event1 during which he offered his thoughts on what business and finance, working through financial institutions, can do to help solve the climate crisis. Mr. Carney’s remarks were made in advance of the United Nation’s Climate Summit, which is expected to showcase these issues and concerns. COP26 is scheduled for October 31 through November 12, 2021 in Glasgow, Scotland.
Highlights of Mr. Carney’s comments follow.
- COP26 will showcase the roles of governments and private finance to help address the climate crisis. In his view:
- Governments (and their regulatory agencies) must:
- Recognize the scale of the issue and take responsibility to set the path (i.e., set climate policies, specific metrics/disclosures, legislate carbon pricing)
- Commit to financially support the poorest countries as they adjust to the net-zero goals. (Countries are redoubling efforts to meet this previously set objective)
- Private finance (i.e., an array of financial institutions, including banks, pension funds, insurers, and assets managers) must:
- Design a system – the information, the tools, and the market – to allow climate change to be accounted for and used as a fundamental driver in every investment or lending decision
- Recognize that some government support will be needed to formalize certain elements, such as disclosures, net-zero plans, or new markets (e.g., carbon offset markets)
- Commit to finance the projects needed to reach net-zero emissions.
- Companies will commit to make the investment toward zero emissions in response to:
- Government policies that make it more expensive to engage in high emissions activities
- Alignment with stakeholders - employees, suppliers, and customers/investors - looking for sustainable companies
- Strategic management, where failure to recognize the shift to decarbonization is a strategic risk.
- Financial institutions may continue to claim they support efforts to address climate change even if they finance fossil fuels projects. However, the designed system must provide transparency into the financing of fossil fuels/high emitting activities by showing those financial institutions that are helping to manage down the use of fossil fuels and increase net-zero generation. Efforts to increase transparency and accountability include:
- Moving toward mandatory TCFD-aligned disclosure (he referenced a G-7 agreement in June, G-20 agreement in July, and an IFRS standard to be revealed at COP26)
- Requiring the largest companies to formulate net-zero plans that include short-term milestones and metrics in addition to long-term ones
- Focusing investors on disclosures that demonstrate commitment to decarbonization, including discussions in annual reports (vs sustainability reports), clarity of the metrics used and consistency of use over time, and strategies to further the efforts being measured (e.g., for Scope 1, 2, and 3 emissions, discuss the metrics used, metrics for supply chain and customers, strategies to reduce)
- Factoring “climate competitiveness” into the determination of a company’s value.
- Coming out of COP26, success would look like:
- Funding commitments from governments ($100 billion)
- Commitments from the private sector to meet the scale of financing needed to reach net-zero ($100 trillion)
- A system to get those funds to where they are needed most (emerging markets) in a commercial and efficient manner.
Mr. Carney also highlighted a newly launched (April 2021) global coalition of financial institutions (including banks, insurers, asset managers, asset owners, and financial services providers), the Glasgow Financial Alliance for Net Zero (GFANZ), which he chairs. The members of the alliance are all members of the United Nations Race to Zero and have committed to transition their own investments and businesses to net zero by 2050. In addition, they have committed to 2030 interim targets and to provide annual reporting on all of their financing activity. This will include using “PCAF” standards for tracking emissions as well as access to external technical advisory panels.
TCFD 2021 Status Report is available here.
TCFD Guidance on Metrics, Targets, and Transition Plans is available here.
TCF Guidance on Implementing the Recommendations of the TCFD is available here.
Biden Administration report, A Roadmap to Build a Climate Resilient Economy, is available here.
KPMG Regulatory Alert on Executive Order 14030, Climate-Related Financial Risk, is available here
- Washington Post Live event, “Protecting our Planet,” conducted October 12, 2021, and sponsored by KPMG; KPMG’s CEO was a participant speaker.