Better disclosures, data coming to assess climate change risks, Fed’s Quarles tells international group

Globally consistent, comparable, and reliable disclosures as well as a broader set of high-quality, relevant data together can provide the basis to assess the risks of climate change, particularly on financial stability, the vice chair for supervision of the Federal Reserve Board said Sunday.

Speaking in Venice, Italy, at the Venice International Conference on Climate Change, Fed Vice Chair for Supervision Randal Quarles (who also serves as chair of the international financial regulators’ group the Financial Stability Board, FSB) said it is time to establish a “globally consistent baseline standard for climate-related disclosures.” He indicated in his remarks that the framework for establishing that standard is being developed.

“Globally consistent and comparable entity-level disclosures by non-financial companies, banks, insurers, and asset managers are increasingly important to market participants and financial authorities as a means of providing information needed to assess and manage risks,” he said.

Quarles referred to previous work performed by the FSB-sponsored Task Force on Climate-related Financial Disclosures (TCFD), which he said has led to greater recognition of the importance of climate-related financial risk and of “comparable and reliable” disclosure. (The TCFP recommendations, he said, include four core elements for a disclosure framework: governance, strategy, risk management, and metrics and targets.)

The Fed vice chair told the group that the FSB had surveyed its membership to determine what each was doing to promote disclosures. He said the survey found that almost all members of the group had set requirements, guidance, or expectations (or plan to do so). He noted that there was some diversity in approaches – with some members preferring disclosures that are mandated and others voluntary – and variation in scope.

“However, there is a trend toward an important baseline that focuses on one-way materiality – or the financial risk that climate change could have on a particular entity – based on the TCFD recommendations,” Quarles said. “The majority of our membership are already using the TCFD recommendations as a baseline for their own requirements or guidance.”

Quarles said a next step will be for the International Financial Reporting Standards Foundation (IFRS) to develop a set of standards. “This work holds the promise of providing baseline standards that could inform or be built upon by national authorities as they develop their approaches to climate-related financial disclosure or broader sustainability disclosure,” he said, adding that the FSB encourages IFRS “to press forward as quickly as possible.”

On the data side, the Fed official said comprehensive, consistent and comparable data for global monitoring and assessing of climate-related financial risks are needed. He acknowledged that “this is not an easy task.”

“To understand the financial risks, better information is needed on the underlying physical risks, including the sorts of extreme weather events that pose greatest risks to the balance sheets of households, firms, and financial institutions,” he said. “Comparable data is also needed on the nature of jurisdictions’ climate-change targets and progress in meeting them. All this information needs to be related to financial risks – including financial institutions’ exposures to non-financial counterparties.”

He said that improved financial risk data can help financial authorities achieve their financial stability mandates. “For example, the FSB is exploring how to assess the degree to which climate-related risks might be transferred or amplified by different financial sectors, including the interdependence of banks and insurance firms,” Quarles said. “Climate-related risks vary across jurisdictions, and we need to look at how risks might be amplified by feedback loops with the real economy. Such analysis will contribute to a more comprehensive and global understanding of how to assess climate change and potential effects on the financial system, but those efforts are hampered by a variety of data limitations.”

Federal Reserve Board Vice Chair for Supervision Randal K. Quarles: “Disclosures and Data: Building Strong Foundations for Addressing Climate-Related Financial Risks”