It will take more than global standards to build the data, disclosure and decision-making capacity for climate action

Emerging markets financial institutions are working hard to keep up with investor expectations as well as emerging regulations in their home countries. It will take more than a global standard to accelerate action at the pace that’s needed, and this should be done without overwhelming financial institutions’ capacity for data, disclosures & decision-making in the interim.

  • Comments received by the ISSB from its draft global sustainability and climate disclosure standards suggest a long path for emerging market financial institutions to build comprehensive & comparable climate data
  • In the interim, the efforts they are taking should be supported as much as possible with a ‘dashboard’ approach that recognizes the limitations of looking at data in isolation
  • A key need for emerging market financial institutions in particular will be the tools that help connect and give additional context to the links between the data they have and how this can inform decision-making relating to all of their assets

The International Sustainability Standards Board (ISSB) met last week to discuss comments received on its draft sustainability and climate-related disclosures standards. According to staff reports prepared for the meeting, many of the comments supported the idea of creating a global baseline of disclosure standards. At the same time, commenters highlighted the many challenges in creating standards in parallel with rapid developments within various jurisdictions that have differing terminologies and methodologies.

The climate elements of the standards are particularly notable in this regard because of the layered nature of disclosure requirements for non-financial companies and their value chains. There are complex issues in measuring the value-chain emissions mentioned by many commenters, such as how to link an entity’s emissions with those of its direct (Tier 1 suppliers) and indirect (Tier 2 suppliers) emissions.

The emissions guidance for individual entities when viewed in isolation is often much clearer than the ways in which the emissions disclosures link together with an entity’s value chain. Similar companies might report different emissions despite having similar operational structures if they choose different depths within their value change.

The differences between companies are one of the features that the standard-setting process is designed to resolve. However, the continued evolution of standards and long time-frame before the standards are approved (2 years after publication of the final standards appeared to be a consensus among commenters) will have an impact during the development process. The impact is likely to be most significant in jurisdictions, including most Islamic markets, where the jurisdiction-level disclosure guidance has been least widely adopted.

Within these jurisdictions, which include many Islamic markets, there are the most barriers, such as lack of data or common frameworks for disclosures set at a national level. This will significantly impede financial institutions’, investors ‘and asset owners’ consideration of climate-related risk for many years.

On an ‘asset-share’ basis, however, the combined assets may not be as large as those of developed market financial institutions in various Net Zero initiatives. The issue may have more salience in terms of directing the funds needed to address transition-related investments as a whole, but particularly those needed to make that transition ‘just’.

One of the points that came through in ISSB’s summary of opinions expressed by commentors was how far the financial sector in particular had progressed in coming up with ways to create comparable metrics for transition risk. As rapidly as the physical impacts of climate change are progressing, and transition-adjacent risks are materializing, there simply won’t be enough time for Islamic markets to benefit from development of global baseline standards on climate risk for financial institutions to develop.

Investors will see more rapid progress in the disclosures made by non-financial companies. Financial institutions will be led primarily by prudential concerns, and regulatory action may be precipitated by realization of climate risk, which could lead them to be somewhat abrupt in comparison to the capacity needed by financial institutions to react.

There has already been movement away from trying to devise a single ‘metric’ to measure climate-related risks and towards more of a ‘dashboard’ approach. Dashboards will be useful to incorporate different metrics for manage phase-out of the financing of high-emission assets from the long-term transition investments into decarbonizing sectors, for shorter-term mitigations, and for climate solutions. Viewing each side-by-side in isolation will pick up much of the direct emissions sources, as well as allow for rapid incorporation of new non-financial company data.

However, these types of dashboards are still limited in how many of the financial assets they cover, and how clearly they can show value-chain connections between emissions sources and the sectors that induce the emissions. This has been a focus of RFI Foundation, which has commented on the ISSB standards, particularly for Islamic markets, where it is likely there will be a substantial wait before decision-useful, bottoms-up data will be sufficiently comprehensive and comparable to make the same types of links.

There has been an impressive range of new data, tools, and guidelines and standards to address climate change. However, the way they fit together between countries is proceeding at a very different pace. One of the most striking contrasts has been between the European Union, which is rapidly mandating sustainability (including climate-related) regulations, and companies and (especially) financial institutions in emerging markets.

Emerging markets-based financial institutions are working with varying degrees of success to keep up with investor expectations as well as emerging regulations in their home countries, which isn’t always harmonized. It will take more than a global standard to accelerate action at the pace that’s needed without overwhelming financial institutions’ current capacity for data, disclosures & decision-making in the interim.

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Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.