On the February 11th the European Systemic Risk Board (ESRB) – which is responsible for macro-prudential oversight across the EU - joined with the Bank of England and the G20 Financial Stability Board (FSB) in highlighting how a late and abrupt transition to a low carbon economy could have implications for financial stability.  The ESRB has emphasised the need to pre-emptively manage ‘stranded asset’ risk in financial institutions, and throughout the financial system as a whole, but without better data availability this will be extremely challenging. Correcting this major gap is now an urgent priority.

The Task Force on Climate-related Financial Disclosures (TCFD) was established in December 2015 by Mark Carney as Chair of the FSB to navigate the way ahead. It is deciding what data could be required for the job and how this links back to voluntary disclosure frameworks. The TCFD is chaired by Michael Bloomberg and had its first meeting in London on the 9th February.

The TCFDs recommendations, which are due by the end of 2016, will have a very significant role in ensuring that different users of data have what they need to manage the risks recently identified by the ESRB, Bank of England, FSB, and others. The four main users of such data are: a) asset managers evaluating the environmental performance of companies; b) asset owners evaluating the environmental performance of funds run by asset managers; c) regulators monitoring the stability of the financial system and build up of systemic risk; and d) policymakers concerned with ensuring that capital is flowing at sufficient scale and pace to deliver the transition to a more sustainable global economy.

These four groups have different data requirements. While there are some common buildings blocks that can be useful across all groups it is clear that existing climate-related disclosures through voluntary frameworks are completely inadequate for the task at hand.

Frameworks that work

Voluntary disclosure frameworks have a theory of change. Namely that companies that disclose are likely to manage their environmental performance more thoroughly. This ought to be an iterative process improving both disclosure and action. However, the data that is currently disclosed has surprising little utility in terms of assessing the exposure of assets and companies to environmental risk and opportunity. As a result, the TCFD must not conflate the theory of change adopted by disclosure frameworks with the provision of timely, consistent, comprehensive, and material data to asset managers, asset owners, regulators, and policymakers.

The current voluntary company-level reporting paradigm - where some companies annually disclose data; where reported data might not actually be relevant for assessing real exposure to environment-related risk and opportunity; where reported data may be inaccurate and out of date; where companies that report spend a significant amount of time filling in forms for different reporting systems; and where third parties spend significant effort trying to assure reported data – could be significantly improved. Current reporting is slow moving, unable to achieve universal coverage of companies, and disconnected from the requirements of investor analysis.

What needs to change?

But if the current company-level reporting paradigm is not fit to deliver the data required to meet the challenges set out by the ESRB and others, what needs to change? Two areas could have an important effect on the reporting paradigm. Firstly, disclosure frameworks can ask for data that is actually useful for the audiences identified. Better data on specific assets within company portfolios would allow for researchers and analysts to undertake their own research on the risks and opportunities facing company portfolios. The data points disclosed would depend on the sector in question and would need to take account of commercial confidentiality. But introducing a new ‘Principle of Asset-level Disclosure’ into reporting frameworks would significantly enhance the ability of investors to understand the environmental performance of companies. Asset-level information could also be aggregated to give regulators and policymakers the information they need. Similarly, knowing who owns which assets allows you find out which asset managers are more or less exposed to different environment-related risks – which would be important to asset owners. Asset-level disclosure can give new life and purpose to existing disclosure frameworks.

Secondly, there needs to be a ‘stick’ to disclosure’s ‘carrot’. The idea that all companies globally will disclose all the information required to undertake a meaningful analysis in any useful timeframe is fanciful. In the absence of perfect reporting, it is necessary to build datasets independently of perfect reporting and put these in the public domain. The good news is that much of the data required to undertake an effective analysis of the risks identified by the ESRB and others already exists – it is just in disparate locations and needs to be brought together and can be augmented with remote sensing and ‘big data’ datasets. This is an awkward task, but not a particularly expensive one – perhaps several million dollars per year initially to get a good level of understanding in key sectors. It also lends itself to being a coordinated public goods endeavour, as a piecemeal proprietary approach would cost much more and be a key barrier to such data being widely used.

Actions over words

The TCFD should recommend the creation of a new initiative to find asset-level data, integrate it, clean it, and publish it. This ‘Company Data Intelligence Service’ (CDIS) would have the benefit of transcending mandatory and voluntary schemes as all companies would be in scope. CDIS would also give companies the opportunity to correct mistakes and provide enhanced disclosure. It would operate in a completely transparent and accountable way and could collaborate with researchers and civil society to track down, assure, and release data on company assets.

To rise to the challenge set by the ESRB and others, we need to be open about what the current problems are with climate-related disclosures and set out how we can systematically transform data availability. We can improve existing voluntary disclosure frameworks by putting a new emphasis on asset-level disclosure. In addition, we need to develop a public goods data initiative to get the most out of existing data as possible. Together these reforms would transform the capability of asset managers, asset owners, regulators, and policymakers to manage stranded asset risks and at least cost. 

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.