As bank regulators introduce stress tests for climate-related risks, there’s a growing need for harmonized ESG disclosure requirements, says Fitch Ratings in a new report.
The rating agency said that banks in several developed markets already face climate-change stress tests that require them to collect data on how physical and transition climate risks translate into financial risks, including corporate clients’ exposure to these risks.
“However, banks and their corporate clients have an array of competing voluntary disclosure standards to choose from and not all corporates are ready to provide detailed inputs to meet banks’ needs,” Fitch said.
The report noted that banks carrying out climate-change stress tests in France and the U.K. “have warned of data gaps that could make it difficult for them to provide some of the model inputs required, according to the regulators conducting the tests.”
Fitch said that banks’ ability to carry out these stress tests would be improved by common sustainability standards, “ideally under the aegis of a single authority or industry body.”
“This could go some way to ensuring that stress tests use reliable, high-quality and comparable data, potentially leading to more meaningful stress test results.”
Additionally, standardized reporting and disclosures would make it easier for investors to assess these risks.
“This is important because investors and analysts benchmark banks against peers, and comparisons are more meaningful when based on information prepared on a consistent basis,” Fitch said.