Investors who want clear, concise, and comparable reporting on climate-related risks at publicly-listed companies should consider asking the International Organisation of Securities Commissions (IOSCO) for guidance. IOSCO brings together the world’s securities regulators and other interested stakeholders to ensure maintenance of “sound global capital markets and a robust global regulatory framework.” The group’s 126 securities regulator members are committed to developing the research capacity required “to identify risks to the fair and efficient functioning of markets.” As a G20 body and the preeminent international standard setter for securities regulators, IOSCO has a key role to play in building capacity to address growing market risks like climate change and the transition away from fossil fuels. The global investor community would benefit from IOSCO action to support the harmonisation of climate risk reporting.
IOSCO is uniquely positioned to continue work started at the Financial Stability Board to clarify best practice on how climate-related financial risks should be assessed and communicated by public companies. For many companies and their investors, climate change now appears to be a material business risk, but securities regulators have yet to provide clear guidance for corporate reporting purposes. While definitions vary across jurisdictions, “material information” generally refers to all information that may affect an investor’s assessment of a listed company’s financial value and future business prospects.
Materiality matters
Much of the TCFD framework hinges on the assessment of materiality. In particular, the final report recommends that disclosures related to climate risk Strategy and associated Metrics and Targets be provided when that information is “deemed material” (link). Yet there is no internationally agreed upon process for assessing the materiality of climate risk across sectors, or even within those key sectors most exposed to the climate risks identified by the TCFD and others. IOSCO and its securities regulator members are uniquely positioned to tackle this information gap. In doing so, IOSCO could provide urgently needed clarity for all market actors, including listed companies, investors, and regulators on the question of how climate risk materiality is to be assessed and reported on.
The IOSCO advantage
IOSCO has a strong track record of addressing emerging risks in order to protect investors and ensure the efficient communication of risk-related information through the capital markets investment chain. In a number of areas, IOSCO has been proactive in order to both shape the future regulatory landscape and to avoid others supplanting its role in the global regulatory system. From financial benchmarks to hedge funds and credit rating agencies, IOSCO principles have consistently supported more informed capital markets, investor protection, and the reduction of systemic risk.
The need for a systematic approach to climate risk materiality assessment
Where no dominant national legislation exists, IOSCO has a first-mover advantage to provide globally relevant, systematic guidance on how securities regulators should approach risk assessment and reporting. This was the case for financial benchmarks, and it is now the case on climate risk.
The twin issues of climate-related risk disclosure and scenario analysis highlighted in the TCFD’s final report remain poorly understood from the perspective of materiality and existing corporate reporting standards.To tackle the issue of climate risk materiality assessment, IOSCO could draw on existing research on climate-related risk at the FSB, OECD, the International Association of Insurance Supervisors (IAIS), and other G20 bodies and then issue guidance for all securities regulators on the principles and process of assessing the materiality of climate risk within existing regulatory frameworks. IOSCO has collaborated with international research partners in the past, most recently on the 2012 Principles for Oil Price Reporting Agencies, which were developed in collaboration with the International Energy Agency (IEA), the International Energy Forum (IEF), and the Organization of Petroleum Exporting Countries (OPEC).
The clock is ticking
Time is of the essence as it will be more difficult for IOSCO to support a harmonised global approach by all securities regulators to this emerging risk if others act first. If securities regulators or their macroprudential counterparts – central banking regulators in China, the Netherlands, or France, for example – were to mandate certain forms of climate-related risk disclosures, their approach to the legislation may come to define international approaches, rather than IOSCO.
IOSCO work on climate risk materiality guidance for securities regulators would help to inform national regulatory action, rather than superseding any existing rules in place in its member regulator jurisdictions. Research on climate risk materiality would provide sorely needed guidance to securities markets administrators, submitters and regulators and would supplement existing IOSCO Principles on timely risk disclosure.
Detailed standards can be developed quickly
Luckily, IOSCO has a demonstrated ability to develop detailed guidance in a short time frame when regulatory convergence is required to both protect investors and to reduce systemic risk. The IOSCO Principles for Financial Benchmarks were developed in less than a year and show that IOSCO can develop international standards with the necessary granularity when there is a G20 commitment and little pre-existing national legislation.
IOSCO and the harmonisation of principles for financial benchmark oversight – could climate risk be next?
A variety of financial benchmarks guide price discovery across the global economy, including interest rates, currencies, and in commodities markets. Discovery of manipulation at the world’s 3 largest financial benchmarks, LIBOR, EURIBOR and TIBOR around 2010 highlighted the need for uniform global principles for the oversight of financial benchmark setting. No harmonised set of principles for benchmark oversight existed until the publication in 2012 of the IOSCO Principles for Financial Benchmarks. In the absence of any uniform international standards for the oversight of benchmark-setting, IOSCO stepped in to provide expert leadership and guidance to all capital markets players.
IOSCO’s Principles for Financial Benchmarks have rapidly become the international standards for assurance of the integrity of one of the most important components of the global financial system. All major benchmark providers now publish regular statements of compliance with the IOSCO principles and have third parties provide an assessment of this compliance. The benchmark principles provide a model for IOSCO to proactively address the information gaps around climate risk materiality assessment and scenario analysis for a global audience of investors, market regulators, and listed companies seeking to more accurately understand and report on emerging risks.
Andrea Marandino is a Sustainable Finance and Corporate Risk Manager with WWF-UK
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