Business and industry face a number of climate change-related challenges including acute risks such as extreme weather events and chronic risks associated with long-term shifts in climate patterns with impacts, for example, on water availability. Transition risks related to the move to a lower-carbon economy also exist. Conversely, there are also climate-related opportunities associated with improving resource efficiency, managing energy costs and developing new products and services.
Financial markets typically manage risks and opportunities through the allocation of capital, where higher risk investments are priced accordingly. Yet this is only possible when information about risks is made available. However, investors currently do not have access to this information and without it market adjustments to climate change will be incomplete, late and potentially destabilising.
In response to this challenge, the Financial Stability Board created a taskforce on climate-related financial disclosures. Its purpose is to develop voluntary, consistent disclosures to help investors, lenders and insurance underwriters manage material climate risks. The taskforce released its recommendations for consultation on December 14.
Financial disclosure will not only create better-functioning markets - it will also provide signals to business and industry to manage their climate-related risks. Those that manage their risks effectively will benefit from increased investor interest as well as the long-term adaptation of their assets and activities.
While financial disclosure is only one step towards effectively adapting to climate change it is an important one and should not be discounted.
Financial disclosure is essential to a market-based solution to climate change. A properly functioning market will price in the risks associated with climate change and reward firms that mitigate them.