Financial regulation can’t end military conflict or defeat a global pandemic. But it can, and should, play a significant role in confronting the defining challenge of our time: climate change.
The latest report from the United Nations’ Intergovernmental Panel on Climate Change (IPCC), released at the end of February, paints an increasingly dire picture of the planet. The IPCC report said climate hazards posed by global warming — such as floods, droughts and wildfires — are materializing more quickly and severely than expected. The report also warned that adaptation efforts may be thwarted once the average global temperature rise exceeds 1.5°C above pre-industrial levels. The report closely linked climate change with concerns such as biodiversity loss, economic inequality and food insecurity — in short, human survival.
The financial sector has a critical obligation to help address this crisis by allocating capital toward sustainability, climate risk mitigation and adaptation. To that end, regulators have begun to act on several fronts.
In Canada and elsewhere, central banks are engaging in climate risk-related stress-testing for financial institutions. Those exercises have confirmed that climate change represents a major source of systemic risk, and that expected losses due to climate-related risks are likely to grow exponentially. In other words, acting sooner rather than later is necessary to avoid the direst outcomes, both environmentally and financially.
Securities regulators, including the Canadian Securities Administrators (CSA), have also begun tackling the issue from the perspective of disclosure, with the aim of illuminating issuers’ climate-related risks and opportunities so that investors can allocate capital in a way that favours sustainability.
To that end, the CSA initiated a consultation last year on proposed climate-related disclosures for issuers. And, earlier this year, it added guidance for investment funds on ESG disclosure practices.
However, these efforts are too weak. Largely voluntary disclosures won’t allow investors to make informed decisions or enable them to finance a sustainable future.
So far, regulators are too worried about inflicting short-term costs while heavily discounting the existential benefits of early action.
Recent events, from war to public health crises, demonstrate how fragile civilization is. Decisive, principled action to avert even greater calamity is needed now.