Why Banks Need to Do Better Disclosing Climate Change Risks
Over the past few years, banks have begun to voluntarily disclose their exposure to climate change risks. It is a good start, but I believe there is more to be done. The disclosures should be more robust and I think they should be mandatory for large banks. The information is critical to bank management teams and investors, both of whom need to understand the challenges ahead.
The nature of the risks
For banks the risks fall into two buckets: physical and transition. Physical risks are more obvious and more familiar: wildfires, droughts, hurricanes, rising sea levels, any of which may affect the bank and its customers. Transition risks refer to problems that could arise if the world shifts more rapidly than expected to a low-carbon economy. Were that to happen, I believe assets like oil fields could lose their value quickly.
Climate risks pose potential hazards to banks through their lending books, in my view. Under certain circumstances they could also ensnare banks in litigation or cause damage to their reputations. I believe managements need to be on top of this information so they can make smart decisions. For investors, disclosures about all risks—economic, regulatory, climate—help them evaluate their holdings and compare one bank to another.
Disclosure standards emerge
Until recently, investors had little to go on. Bank information on climate issues tended to be promotional, lacking in detail and hard to compare. In order to change that, in 2017 a private-sector initiative, the Task Force on Climate-related Financial Disclosures (TCFD), released voluntary disclosure guidelines. International bank regulators have lent their support to the effort. Most of the world’s 30 global systemically important banks have signed on, but so far only a handful follow all of the recommendations.
My research on the 30 global systemically important banks found a very wide range of compliance with the TCFD standards currently. Broadly speaking, the Canadian banks did the best, the Chinese banks the worst, with banks from the US, UK, Japan and the eurozone falling somewhere in between.