It has been predicted that 2020 will be the climate super year. The impacts of climate change on financial stability and economic growth has become the focus of attention for the entire financial industry. One of the main catalysts of this movement was the process leading to the adoption of the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This document has provided a common framework for different financial market players to evaluate and disclose the climate-related risks and opportunities most relevant to their operations.

Today, questions are being asked about climate change and low-carbon transition strategies not only by NGOs, but also by clients, financial regulators, and shareholders. Announcements of new climate strategies and targets, green technologies, and regulatory efforts are being made almost daily. A key challenge for everyone working in finance, from banking to insurance, is keeping up with the rapid evolution in this field.

This briefing aims to provide an overview of the current major climate-related financial regulation trends and insights on what the future may hold in this regard.

Major international forums

Coalition of Finance Ministers for Climate Action convenes finance ministers from more than 50 countries seeking to promote shared principles and facilitate the exchange of experience and information on climate change-related fiscal and economic policies and practices. In December 2019, they issued the Santiago Action Plan which outlines the Coalition’s goals for 2020 and includes discussions on carbon pricing and the disclosure of climate-related financial.

International Platform for Sustainable Finance was launched by the EU together with a group of non-EU countries, including China and India, and aims to disseminate sustainable finance information among public authorities and share related best practices.

Network for Greening the Financial System (NGFS) is a voluntary, consensus-based, international coalition of central banks, financial regulators, and supervisors. The NGFS is currently the main international forum in the area of sustainable finance. In 2019, it issued recommendations to its membership on how to enhance their role in the greening of the financial system and the management of environmental and climate-related risks. Also, the NGFS published a paper with a set of indicators that can be used to monitor climate change’s impacts on the economy and the financial system.

Key legal frameworks

Banking: In 2019, the UK financial regulator issued a supervisory statement setting out expectations around banks’ (and insurers’) approaches to managing the financial risks from climate change. Also, the European Banking Authority received a mandate under the EU Capital Requirements Directive to establish mandatory guidelines for banks operating in the EU on how to manage and disclose physical and transition risks.

Insurance: In the USA, since 2013, insurance regulators in California, Connecticut, Minnesota, New Mexico, New York, and Washington have required insurers to disclose their climate-related risks. In Europe, after Mark Carney’s speech at Lloyd’s of London about the “tragedy of the horizon”, regulators have adopted different approaches on how to asses (re)insurance companies’ exposure to climate change. Seeking to provide an overview of practices across the globe, the International Association of Insurance Supervisors recently issued a paper addressing what insurance supervisors are considering when they develop climate-related disclosure requirements for their markets.

Investment: This financial market segment has been experiencing the most climate change-related regulatory pressure over the last few years. For instance, in November 2019 a new French law came into force enhancing the responsible investment framework introduced by Article 173 of the Energy Transition Law. Also, the first two regulations derived from the EU Action Plan on Sustainable Finance (Benchmarks Regulation and Regulation on Disclosures) entered into force in December 2019. These regulations not only impact institutions based in the EU, but also those incorporated outside the EU that serve or seek to serve EU-based clients.

Listed companies: Regulators in several jurisdictions have issued statements that place climate-related disclosures within the scope of corporate disclosure. For example, the EU Commission published a non-binding supplement addressing climate-related disclosures under the EU Directive of Non-Financial Information, and the US House of Representatives is currently discussing the Climate Risk Disclosure Act of 2019 that would require issuers to annually disclose physical and transition risks in a 2°C or lower scenario. Additionally, securities regulators, such as in Australia, Canada, and the US, have issued documents to assist companies in identifying and improving their disclosure of material risks posed by climate change.

Key cases

McVeigh v. Retail Employees Superannuation Trust (REST): McVeigh claims that REST is failing to protect his retirement savings from the risks related to climate change. An Australian court is now set to establish (in July 2020) whether REST has breached its fiduciary duties by failing to adequately consider climate change risks.

Budha Ismail Jam v. International Finance Corp. (IFC): The US Supreme Court approved the assertion that US courts can hear a case against the IFC; further analysis of the merit of this case is now pending before US courts. The plaintiffs claim that the IFC did not observe environmental standards (including those related to climate change adaptation) in the processes preceding a loan to the Tata Mundra Ultra Mega Power Project (a coal-fired power plant).

Oxfam Novib, Greenpeace Netherlands, BankTrack and Friends of the Earth Netherlands (Milieudefensie) v. ING: In April 2019, the Dutch National Contact Point (NCP) for the OECD Guidelines for MNEs issued its final statement on a specific instance (i.e. complaint) addressing ING’s approach to climate change. In its statement, the NCP “stresse[ed] that absence of a methodology or international accepted standard will not dismiss companies, including financial institutions, to seek measurement and disclosure of environmental impact”, such as those related to climate change. In addition, the NCP “observe[d] that the OECD Guidelines demand that ING, and other commercial banks, put effort into defining, where appropriate, concrete targets to manage its impact towards alignment with relevant national policies and international environmental commitments.”

Key resources for climate scenario analysis

Dutch Central Bank Study “An energy transition risk stress test for the financial system of the Netherlands” assesses four climate change scenarios for potential impacts on the Dutch financial system.

IPCC Data Distribution Centre provides climate, socio-economic, and environmental data, both from the past and also for various climate change scenarios projected for the future.

MIT Climate-Related Financial Disclosures, The Use of Scenarios addresses key aspects of climate-economy models, scenarios, and scenario analysis in the climate-related disclosures of oil and gas companies.

NGFS Preliminary List of Key Risks and Indicators (annex 1) provides an overview of climate change indicators that can be considered when formulating/assessing climate change scenarios. The list also provides input on the availability of data and potential information sources.

Transition Pathway Initiative (TPI) Tool offers a corporate climate action benchmark.

Expected regulatory developments in 2020

• The Australian Securities and Investments Commission is expected to conduct surveillance of climate change-related disclosure practices by selected listed companies.
• During the spring session of the Swiss Parliament (March 2020), a debate on the Swiss Federal Act on the Reduction of CO₂ Emissions (CO₂ Act) is expected to take place.
• European Supervisory Authorities will issue Regulatory Technical Standards for sustainability indicators that concern climate and other environment-related adverse impacts by the end of the year related to the EU Regulation 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector.
• The EU Commission will issue technical screening criteria covering activities that substantially contribute to climate change mitigation and adaption necessary for the operationalization of the EU Sustainability Taxonomy.