US Fed governor supports mandatory disclosure of climate risks

Comments come as finance body launches 10 principles for a US climate transition

Federal Reserve Governor Lael Brainard expressed support for mandatory climate disclosure yesterday, in the latest sign that ESG reporting moving centre stage in the US under President Biden. 

Speaking at the Institute of International Finance's US Climate Finance Summit, Governor Brainard – one of seven Fed governors – said the economic consequences of climate change were already evident, and that improved data, disclosures and modelling techniques would be crucial to understanding the potential impact of climate-related risks to balance sheets and business models. The Federal Reserve, she said, was investing in data and research in the area.

But, she warned that, while voluntary disclosure practices like alignment with the TCFD were an important first step, they were “prone to variable quality, incompleteness, and a lack of actionable data”.

“Ultimately, moving toward standardised, reliable and mandatory disclosures could provide better access to the data required to appropriately manage risks,” she said.

Some countries such as the UK and New Zealand are making TCFD reporting mandatory, and last month, former Chair of the US Securities and Exchange Commission (SEC), Mary Schapiro, called on governments to publish road maps and timelines to make TCFD recommendations mandatory.

Speaking at the same event as Brainard, the SEC's Acting Director of Corporation Finance,  John Coates, said the regulator “can and should help the creation of an effective ESG disclosure system”. However, he added there would need to be balance to avoid being too rigid, meet industry specifics and to allow for standards to evolve. 

Biden's nominee to chair the SEC, Gary Gensler, has not yet opined on the issue, but the body is under pressure from the financial sector to act on ESG disclosure and to ensure it keeps up with international developments.

Acting SEC Chair Allison Herren Lee has frequently called for more climate-related reporting, this month appointing Satyam Khanna as the agency’s first Senior Policy Advisor for Climate and ESG. The Federal Reserve is also bolstering its climate-related expertise, creating the Supervision Climate Committee last month, having joined the Central Banking Network on Greening the Financial System late last year. 

“I do worry about market fragmentation,” added Brainard, referring to the slew of efforts at local, regional and global levels to develop reporting rules, leading to widespread concern about a lack of comparability between sets of information. 

Singapore is the latest country to announce plans to develop a green taxonomy to underpin green reporting rules, with Canada, the UK, Russia, Mexico, South Africa, China and the EU among others developing their own frameworks.  

The European Commission, Swiss Ministry of Finance and Japan’s Financial Services Agency are together running a new group under the auspices of the International Platform on Sustainable Finance (IPSF) dedicated to how different regulatory regimes harmonise their disclosure rules. 

A spokesperson for the European Commission told RI that the new group would assess the “commonalities and differences” in disclosure requirements between jurisdictions for companies, banks, asset managers and institutional investors. It will also analyse how and whether these disclosure regimes “aim to ensure the reliability, comparability and pertinence of the information disclosed”, she said. 

RI was told that the group will adopt a “holistic approach”, so that while climate and other environmental disclosures are its “primary focus”, it will look at “social-related as well as governance disclosures”.

The Financial Stability Board also worked on globally consistent disclosures as part of the G20 in July.

US banking and finance bodies echoed Brainard's concerns yesterday when they released 10 principles as part of efforts to influence the Biden administration on climate finance. The US Climate Finance Working Group, which includes the American Bankers Association, the International Capital Markets Association and the Institute for International Finance, say the principles provide a framework for influencing national policy. 

Among the 10 principles are calls for more harmonised global taxonomies, metrics and standards to encourage comparable data and information on sustainability; and the promotion of “more robust climate disclosure and international standards”.

The principles are laid out in a position paper by the group, which claims that direct policy interventions to reduce emissions are the most efficient way of achieving climate objectives. 

Other requests include: 

» Setting science-based, Paris-aligned climate policy goals 

» Increasing and strengthening US international engagement 

» Providing clear and long-term policy signals that foster innovation in financial services

» Pricing carbon 

» Minimising costs and supporting jobs in the transition   

» Ensuring climate-related financial regulation is risk based

» Building capacity on climate risk modelling and scenario analysis 

» Strengthening post-disaster recovery, risk mitigation and adaptation

They have been welcomed by a number of major US banks. John Dugan, the Chair of Citigroup, described them as “a valuable climate policy framework for our industry as we collectively pursue efforts to transition to a sustainable, low-carbon economy”. Brian Moynihan, CEO of Bank of America, John Waldron, President of Goldman Sachs, and Daniel Pinto, Co-President of JP Morgan also issued statements welcoming them. 

With additional reporting by Paul Verney and Dominic Webb.