It’s time for a Taskforce on Finance-related Climate Impacts

The TCFD’s remit is too narrow, argues James Vaccaro

Since its inception in 2015, under the guidance of Mark Carney & Michael Bloomberg, the Taskforce on Climate-related Financial Disclosures (TCFD) has focused on the “risks and opportunities” that climate change presents for businesses and finance. The G7 has agreed to make the recommendations of the Taskforce mandatory, with a good chance there will be global agreement by the time that COP26 comes around in November. 

But to ensure planetary stability, we must urgently shift focus to the other side of the coin: the impact that business and finance is having on the climate. Is it time for a Taskforce on Finance-related Climate Impacts?

The unprecedented and deadly heatwaves across the Northern Hemisphere over the past two weeks are just the latest indication that our planetary system may be heading towards an irreversible tipping point. The recently leaked IPCC report reveals that devastating impacts including “species extinction, more widespread disease, unlivable heat, rising sea levels and ecosystem collapse are bound to become painfully obvious before a child born today turns 30.” Vulnerable communities least responsible for this crisis will continue to bear the brunt of these impacts.

As we hurtle at breakneck speed from one climate-related disaster to the next, leaders from across business, finance, and politics continue to promote the disclosure of information on climate-related financial risks and opportunities as the business solution to the climate crisis.

Our climate system is destabilising irreversibly and our ecosystems are collapsing, yet the questions remain how can we protect financial interests, and how do we quantify the value at risk to asset prices and GDP? Beyond evidently distorted priorities, this framing reveals a complete failure to grasp that long-term financial stability is 100% conditional upon planetary stability, which the financial sector is contributing to undermining.

The TCFD has just closed a consultation on Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans. By extending its scope to transition plans, the committee’s framework is ostensibly moving into the territory of climate impacts, but its language remains entirely centred on financial risks and opportunities. This approach fails to grasp the dynamics of both financial markets and the climate crisis, relying excessively on the efficiency of markets, and attempting to measure the unmeasurable, hedge against the unhedgeable and reverse the irreversible.

Our climate system is destabilising irreversibly and our ecosystems are collapsing, yet the questions remain how can we protect financial interests?

Major monetary and financial authorities are rapidly recognising the limitations of a pure risk-based approach. The Bank for International Settlements, for example, highlighted in its Green Swan report that the radical uncertainty inherent in climate-related financial risks prevents their precise quantification. 

More recently, a paper by economists from the International Monetary Fund and the French central bank argues that the concept of ‘double materiality’ is generating a new paradigm in central banking and financial supervision – one that recognises the importance of financial institutions’ impact on the climate system. 

The concept of double materiality was reinforced in the EU’s revised Sustainable Finance Strategy and in the UK, where the Chancellor of the Exchequer announced new Sustainability Disclosure Requirements that will “require companies, pension schemes, financial services firms and their investment products to report on the impact they are having on the climate and environment”. 

By itself, disclosing information alone will not be enough to address the climate crisis, but requiring disclosure of impacts goes beyond the TCFD’s narrow framing and is a significant step in the right direction. There are other aspects where these disclosure frameworks – like those in the EU, UK (and the Securities and Exchange Commission in the US) – can help provide clarity and rigour for the financial sector, such as the inclusion of Scope 3 emissions and the concept of full ‘look-through’ of intermediaries to prevent avoidance of accountability via the concealment of emissions. 

At a philosophical level, the TCFD is at a watershed moment. It must clarify the ambiguity in its current approach and decide which problem it is trying to solve. It can evolve with the times and extend its scope to climate impacts, or it can retain its narrower focus on risks and opportunities. If it chooses the latter, the committee’s relevance will gradually fade as the disclosures become mainstream, and a new Taskforce for Finance-related Climate Impacts will be necessary to fill the gap. 

Whilst it’s entirely sensible and necessary to look at how to protect finance from the climate, all the scientific evidence suggests that this will be hopelessly insufficient unless we also address how we protect the climate and society as a whole from finance. Shifting focus to climate impacts will allow financial institutions and regulators alike to better establish how finance can become an ally, rather than an antagonist, in the just transition to a climate-safe world.

James Vaccaro is Executive Director of the Climate Safe Lending Network and CEO of UK-based sustainability consultancy RePattern. He is also Senior Advisor to the Club of Rome’s Rethinking Finance Hub, a Senior Associate at the Cambridge Institute for Sustainability Leadership and a  Special Advisor to Triodos Bank.