Climate transition plans could be useful for sniffing out financial stability risks, but they aren’t helpful just yet, the Financial Stability Board (FSB) says.
In a report released Tuesday, the global policy group examined the potential for firms’ climate transition plans to inform financial regulators of climate-related stability risks.
“Transition plans may be used for various purposes by shareholders, investors and regulators to be informed of a company’s strategy and approaches to climate change and transition,” it said.
Among other things, the FSB found that these kinds of planning exercises, and the plans they produce, could provide authorities with forward-looking information about how companies and financial institutions aim to respond to climate risks.
“These plans could enable an assessment of how firms may adjust their activities in response to climate risks and include information that could support financial stability objectives, including through metrics for financial stability monitoring,” it said.
Transition planning could also benefit financial stability by beefing up market transparency about the strategies, risks and opportunities that firms have identified, it suggested.
However, the report also concluded that the value of transition plans for regulatory purposes is limited at this point for several reasons.
For one, these plans aren’t built for that purpose, but instead designed to inform corporate strategy and decision-making. Also, only a limited number of firms are engaging in these exercises, and those that do aren’t using a consistent set of metrics.
“At the current stage, information about transition plans is neither fully standardized nor widely disclosed,” it said.
To make these plans more useful for financial regulators, there needs to be broader adoption of transition planning, along with increased standardization of this work by international groups and standards setters, the FSB suggested.
“For information in transition plans to be useful for financial stability monitoring, it would need to be credible, transparent, based on clearly stated assumptions and on sufficiently consistent methodologies and metrics. Enabling conditions for such use include sufficient coverage, transparency, credibility, comparability and broader availability of information,” the report said.
There are signs that policymakers are moving in the right direction on some of these requirements, the report suggested.
For instance, the adoption of global disclosure standards developed by the International Sustainability Standards Board, along with the IFRS Foundation’s plans for standardizing disclosures about transition plans, and the development of a global assurance framework “could improve disclosure comparability and reliability,” the report said. That would make the information more useful for financial stability purposes.
“These developments may also enable financial institutions and non-financial firms to make more informed decisions and adjust their strategies in response to climate related risks, thereby also supporting financial stability,” it said.
“Because of their forward-looking perspective, transition plans could help improve the monitoring of climate-related financial risks by financial authorities, but more work is needed to enhance their coverage, transparency, reliability and comparability,” said Satoshi Ikeda, deputy commissioner for international affairs and chief sustainable finance officer at Japan’s Financial Services Agency, in a release. Ikeda chaired the FSB group that prepared the report.