International law firm DLA Piper has launched a new report into the state of climate-risk financial reporting, which reveals nearly nine in 10 senior bankers (88 per cent) agree that diverting capital away from environmental polluters is critical to tackling the climate crisis.
When it comes to positively influencing ESG change, senior bankers agreed that key levers at their disposal were:
- Financial Penalties: 92 per cent of senior bankers agreed that hitting firms with fee, margin, or other relevant financial penalties is the best way to deal with clients whose climate risk profile causes significant exposure for a relevant financial institution.
- Diverting capital: Nearly nine in 10 (88 per cent) senior bankers agree that diverting capital away from environmental polluters is a good way to tackle climate change.
- Improved Reporting: 90 per cent of respondents agreed that significantly improving climate risk reporting practices for financial services institutions would have a substantive impact on global efforts to reduce climate change.
Improved disclosure is key
Over four in five senior bankers (86 per cent) say their firm is planning to invest in the improvement of climate-related financial disclosure in 2022, as conversations about ESG rise up the agenda for financial services firms. Yet, while there is ambition to invest in climate-related financial disclosure, it is clear that barriers remain for financial services firms, who are currently being held back by a critical lack of accurate and reliable data.
More than a third of bank decision-makers pointed to the quality of available data (36 per cent), the reliability of third-party data (36 per cent) and accessibility to client data (34 per cent) as the biggest impediments to better climate-related financial disclosure. A significant proportion (32 per cent) of banks said they were concerned about double-counting, which could lead to a miscalculation of risk, while 31 per cent said they were uncertain about how to calculate risk, which could be attributed to either a lack of resource, or skills, or a lack of dedicated risk analysis tools.
While this is a huge undertaking for all banks, it’s clear that some are better prepared than others. Certain institutions have been voluntarily disclosing climate-related information for a number of years, which may mean that adapting to a mandatory reporting environment is less threatening. The size of the institution also has a bearing on the sophistication of its disclosure.
Banks with large compliance departments may have already invested in the necessary training and tools and may already possess robust and transparent data for risk analysis.
Ensuring accurate and reliable data is also central to tackling greenwashing in the sector, with respondents listing improving the technical skills of internal stakeholders and advisors, and improvements in data underpinning disclosures as the two top ways to help minimise the challenges of greenwashing.
Bryony Widdup, partner at DLA Piper, said, “Banks have a crucial role to play in the fight against climate change. Increasing flows of finance to low-carbon initiatives, while reducing flows to less sustainable activity, will enhance the speed and effectiveness of climate action. Climate change poses a material risk to global financial stability and financial services firms must act to stem the tide as the material costs of climate change to businesses, communities and individuals continue to rise.”
Legislation holding banks back?
One of the key challenges facing firms is the current lack of agreement on standard metrics and measures for assessing and comparing climate risk and disclosures – and change does not appear to be on the near horizon.
The majority of respondents were sceptical that these changes would happen in 2022, with just over three quarters (76 per cent) estimating that it would take longer than a year for the market to create and agree uniform metrics and reliable data and tools specific to climate risk assessment and disclosure. 15 per cent of respondents felt even more pessimistic, predicting it could take more than two years to get these measures in place.
At a legislative level, there are concerns about whether current systems are working – with 84 per cent of respondents agreeing that the Task Force for Climate-Related Disclosures (TCFD) disclosure should be mandatory. Yet there are concerns about this being taken too far, as 76 per cent agreed that mandatory disclosure could be counterproductive when it comes to encouraging beyond-compliance standard climate-related financial disclosure – provoking a race to the bottom to meet the standard rather than push beyond its limits.