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Climate change


ACHIEVING NET-ZERO EMISSIONS REQUIRES CLOSING A DATA DEFICIT
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HIGH-QUALITY, RELIABLE, AND COMPARABLE GAUGES ARE LACKING. HERE’S HOW TO CLOSE
THE GAP. 

CHARLOTTE GARDES-LANDOLFINI , FABIO NATALUCCI

August 23, 2022

Climate change is transforming the global investment landscape, creating new
risks and opportunities. Physical risks, from rising sea levels to the lethal
heat waves scorching Europe and elsewhere, affect asset values for everything
from stocks to real estate and infrastructure. So-called transition
risk—including government policies to reduce greenhouse gas emissions—lowers the
value of fossil fuel companies.

To evaluate these risks and support the transition to a low-carbon economy,
investors and others in the financial world need information. For example, they
may want to know if a company’s assets are physically vulnerable, the volume of
greenhouse gases it emits, and what its plans are for lowering emissions.

In addition, heightened geopolitical risks, notably due to Russia’s war in
Ukraine, and the deterioration of the global economic outlook may make the
transition to a low-carbon economy more complex, expensive and disorderly.

Banks, pension funds, and other investment firms need better climate data to
assess risks.

Energy policy decisions could also be affected by the amount of carbon
lock-in—which occurs when fossil fuel-intensive systems perpetuate, delay or
prevent the low-carbon transition—that is generated in the near term, including
by a delayed phase-out of thermal coal.

Data deficit

Currently, however, financial market participants face a lack of high-quality,
reliable, and comparable data needed to efficiently price climate related risks
and avoid greenwashing—spurious attempts by financial or non-financial companies
to burnish their environmental credentials.

This data deficit poses a serious obstacle to the energy and ecological
transition, which requires migrating capital toward low-carbon industries and
massive new investments in mitigation and adaptation. It also makes it more
difficult for financial supervisors to assess risks to financial stability given
uncertainties and challenges to quantifying climate-related impacts. Therefore
policymakers urgently need to ensure that better climate data are made
available.

A new report from the Network for Greening the Financial System takes an
important step. It features a directory that evaluates available climate data,
identifies gaps, and offers practical, concrete ways to close those gaps.

The report, a product of a working group co-chaired by the IMF and the European
Central Bank, strengthens what we call climate information architecture. This
has three building blocks: high quality, comparable data; global disclosure
standards; and climate alignment approaches and methodologies, including
taxonomies of assets and activities.

The report makes three contributions. First, it highlights that, despite the
substantial progress on the climate data front since COP26, challenges remain,
including:

 * Insufficient coverage in disclosures of non-publicly listed companies and
   small and medium-sized companies
 * Limited availability of comparable and science-based forward-looking
   information, such as targets, commitments, and emissions pathways, that are
   needed to assess physical and transition risks
 * Auditability is needed to build trust and enhance the quality of data, yet it
   remains limited

Second, the report makes tangible policy recommendations:

 * Foster convergence toward common and consistent global disclosure standards,
   for example by increasing availability of granular emissions data and
   improving the reliability of reported climate-related data
 * Increase efforts toward shared principles for taxonomies, for example by
   increasing the linkages between taxonomies and disclosures
 * Develop well-defined metrics and methodological standards, for example by
   better harmonizing forward-looking metrics and reinforcing public and private
   cooperation to improve methodologies
 * Better leverage available data sources, approaches, and tools, for example by
   improving use of new technologies

The third and most important contribution is the climate-data directory, which
surveys available data based on the needs of the financial sector and how
information is used.

For example, banks, pension funds, and other investment firms apply scenario
analyses and stress testing to analyze climate-related risks from individual
securities and companies themselves, in combination with credit ratings. They
need climate-related data to assess vulnerability to these risks at the sector,
company, household, and sovereign level, and to evaluate the determinants of
physical risks and transition risks.

Policymakers may need other data to determine whether a sharp drop in asset
prices could hurt balance sheets of financial companies, putting financial
stability at risk.

Climate data directory

The climate data directory can shape evidence-based conclusions on the main data
gaps. For example, it shows where raw data aren’t available to construct metrics
such as the exposure to climate policy relevant sectors, or the share of assets
such as coal-fired power plants in energy portfolios. Missing are accounting
data and exact geographic location of assets, as well as data on greenhouse-gas
emissions and effects related to biodiversity, forest depletion, floods,
droughts, and storms.

Though not offering direct access to underlying data, the directory is a public
good, a living tool aimed at better disseminating climate-related data and
offering practical solutions to bridge data gaps. It’s designed to help
financial professionals identify relevant sources to meet their needs,
facilitate access, and better disseminate existing climate-related data. It can
play a decisive role in fostering progress on the four policy recommendations
described above.

The report’s findings and accompanying policy recommendations line up closely
with the IMF’s work on climate data, disclosures, and taxonomies and other
methodologies intended to align financial portfolios with Paris Agreement goals.

Metrics and methodologies

For example, the Fund’s Climate Change Indicators Dashboard, a statistical
initiative to address the growing need for data used in macroeconomic and
financial stability analysis, may benefit from the directory’s improved metrics
and underlying methodologies.

The IMF is also leading a joint project to provide guidance on the Group of
Twenty’s high-level principles for taxonomies and other sustainable-finance
alignment approaches. This work is particularly relevant for emerging market and
developing economies, which face considerable challenges in reducing
greenhouse-gas emissions and attracting private capital to finance the
transition.

The IMF participates in the International Financial Reporting Standards
Foundation’s new standard-setting board for sustainability and climate
disclosures, which plays a key role in such work. It also co-leads the Financial
Stability Board’s Climate Vulnerabilities and Data workstream to incorporate
climate in the organization’s regular vulnerabilities assessment.

These efforts aim to address areas of concern in climate vulnerabilities,
metrics, and data based on their materiality and their cross-border and
cross-sectoral relevance. Finally, the IMF has started to include
climate-related risk analysis in its financial sector assessment programs.

Late last year, the IMF dedicated its annual statistical forum to gauging
climate change, and discussed with other international bodies how to close
climate finance data gaps. And in October, we will publish an analytical chapter
of the Global Financial Stability Report that takes a more in-depth look at
financial markets and instruments in scaling up of private climate finance in
emerging market and developing economies.

 

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IMFBlog is a forum for the views of the International Monetary Fund (IMF) staff
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expressed are those of the author(s) and do not necessarily represent the views
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