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Better emissions data won't compensate for insufficient understanding of physical climate risks in companies' value chains
There is a tug-of-war underway in sustainability that strongly impacts responsible finance. What is the appropriate balance between data availability and standardization and action on topics like climate change? Often, the relationship is viewed as complementary: mandating stronger data disclosure requirements is seen as strengthening the ability of companies and their stakeholders to advance action on issues that are material to their businesses.
Transparency is valuable for supporting more informed decision-making relating to climate change, as it is in many other fields. The advance in better data availability comes with a cost, however, in how to responsibly gather, validate and report the data. This has led to efforts to weaken or streamline reporting requirements, depending on your perspective, as has been proposed in the EU Omnibus, for example.
‘Reporting fatigue’ has been widely shared among smaller companies, those based in emerging markets, and startups, and it impacts large companies as well.
Most of those expressing concern about reporting burdens are not pushing back on the financial importance of climate, nature and other ESG issues. The concern is often about whether particular reporting requirements strike the right balance between comprehensiveness and data quality (often pressed by users of the data) and efficiency in producing and disclosing the data (often heard from those reporting the data). But this is not a two-dimensional game of push and pull, and the right level of disclosure is not categorized as ‘more’ or ‘less’ of existing disclosures.
The context in which this is occurring overlaps with a global coordination problem centered on climate change and nature loss in a way that has huge economic implications. These issues care not about the volume of data produced; the only thing that matters is whether the right decisions for the future are made today, even if they are made using imperfect or incomplete data. Having more high-quality data is not enough if it doesn’t measure the right things, or lead to the right decisions.
Banks in the GCC region are tackling climate transition risk, but it remains a ‘work-in-progress’
Standard & Poor’s Ratings has this week addressed frequently asked questions about climate transition risk facing banks in the Gulf Cooperation Council (GCC) countries, describing banks’ efforts in measuring the risk to date as a ‘work-in-progress’. On financed emissions, like those covered by RFI Foundation’s financed emissions database, S&P highlighted that “banks' difficulties with measuring scope 3 emissions come up regularly in our discussions”. This is understandable because emissions measurement is an almost universal challenge for banks globally.
This context of data gaps was a motivating factor for the way RFI undertook its financed emissions work, which is catalogued in an open-access database with five years of data covering banks and financial markets in the six GCC countries and five other OIC markets. The financial sector plays a key role in financing the transition and will need substantial new capabilities beyond what they have now to understand the many types of climate transition risk they face from the activities they finance.
IMF report examines climate & stranded asset risks facing banks in MENA and Central Asia
A research paper written by an IMF team examines the readiness, risk and opportunities for the financial sector in the Middle East & North Africa (MENA) and Central Asia and identifies some areas that need particular focus. The evaluation of the region’s preparedness for the climate transition starts by looking at the sources of physical climate risk, transition risk, and the risk related to stranded assets on the region as a whole, including some that have been identified by financial sector supervisors and central bank Financial Stability Reports.
Emerging markets need to be able to absorb much more climate finance than they do today
Following the COP 28 climate summit in Dubai, there will need to be a redoubled effort to drive finance in the direction of alignment with the transition. International private climate finance in particular will need to rise by 15 times from current levels. One of the major challenges in driving this growth is that it often relies on data to guide and assess whether financing flows are moving consistently with the Paris Agreement or inconsistently with these global objectives.
Transition finance mapping highlights key gaps
Transition finance is a particularly challenging concept to move from idea to reality. In contrast to sustainability, which has been defined in taxonomies, there are far more pieces in the puzzle when creating transition finance. It is made up of more discrete thresholds when evaluating and assessing credible transition thresholds. The Climate Bonds Initiative has compared a range of transition guidance methodologies and created a mapping of the issues covered or omitted from each guidance, some related to transition finance and others focused on corporate transition planning.
Trying to create a singular measurement of climate risk can distract from urgent efforts to address climate change
A short brief from the Environmental Defense Fund digs into some of the challenges of interpreting the financed emissions data released by financial institutions. It examines the disclosures made by two U.S.-based financial institutions on absolute emissions and emissions intensity, and it looks behind the numbers to illustrate a point about the way that financial institutions report their financed emissions.