Requiring financial institutions and companies to disclose climate change risks will trigger huge shifts in capital investments around the world, says United States Special Presidential Envoy for Climate John Kerry, adding that US President Joe Biden plans to issue an executive order on the issue soon.
Kerry, speaking on a panel with International Monetary Fund (IMF) chief Kristalina Georgieva on Wednesday, gave no details about the executive order and the White House had no further comment. Kerry noted that the European Union has already adopted such requirements.
“It’s going to change allocation of capital. Suddenly people are going to be making evaluations considering long-term risk to the investment based on the climate crisis,” Kerry said.
Georgieva said the IMF was working closely with the Group of 20 (G20) large economies and central banks to standardise reporting of the risks, together with central banks, and then stress-test the global financial system for its response to those risks.
The changes come amid a surge in global activity to address climate risks following Biden’s inauguration and his decision to re-enter the 2015 Paris climate accord abandoned by his predecessor, former President Donald Trump. Biden will host a leaders’ summit on climate change later this month.
The IMF on Wednesday launched a new “Climate Change Indicators Dashboard,” which will inform economic policy decisions by bringing together data on greenhouse gas emissions, economic activity, trade in environmental goods, green finance, government policies and physical and transition risk.
“We have to make the invisible visible – the transition risks that banks are carrying because they’re investing in high-carbon activities that over time are going to be phased out, and the physical risk, investments in highly vulnerable coastal areas, or in agriculture that could be affected by floods or by droughts,” she said.
One key concern is that companies could be left with stranded assets – holdings that turn out to be worthless because of changes associated with a transition to low-carbon energy sources. But there are also physical risks such as the increased incidence of natural disasters.
Georgieva said G20 finance officials agreed during a virtual meeting on Wednesday that it was “increasingly urgent” to do more to tackle climate change and promote environmental protection.
She said an IMF analysis found that climate risks were not sufficiently reflected in equity valuations, an issue that could lead to economic losses. She said investment managers overseeing some $25 trillion in investments were also demanding greater transparency about the risks.
“The new IMF Dashboard will help fill data gaps, so policymakers can undertake the macroeconomic and financial analysis that underpins effective policies,” Georgieva said.
Kerry said increased disclosure of risks and new tax incentives would drive “significant amounts” of new investment to help solve climate-related problems.
He added that demand for new technologies in batteries and alternative fuel, among others, would likely lead to increased activities by venture capitalists.
Kerry drew parallels to the rise of telecommunications in the 1990s, which quadrupled the existing market.
‘Fundamental reshaping of finance’
The US Securities and Exchange Commission signalled last month that corporations will have to disclose more to shareholders about how climate change affects their businesses. The agency said it will solicit public comment on potential policy changes.
Many Wall Street firms have been vocal about the risk of climate change amid pressure from shareholders and activists, as well as concern of its financial effect.
Larry Fink, the chief executive officer of BlackRock Inc, the world’s largest asset manager, has warned corporate America that climate change will bring about a “fundamental reshaping of finance.”
US Treasury Secretary Janet Yellen spoke on Tuesday about the Biden administration’s general plan to align tax policy with climate change goals. That includes a shift to carbon-free sources of electricity by 2035.
Yellen said that the administration would encourage companies to align portfolios with the Paris Climate agreement.