Erik Thedéen, Finansinspektionen's Director General and Chair of IOSCO's Task Force on Sustainable Finance made a speech at the conference Driving Global Standards on Sustainable Finance.
Good afternoon everyone,
I have worked in the government sector as well as the financial services industry my whole career. I am an economist, not an expert in climate, but I think we can all agree on that the climate is changing.
We all read the same news. This year alone we have seen a series of devastating climate disasters in various parts of the world. From raging wildfires in California to massive flooding in Pakistan. In 2018 Sweden was hit by the worst wildfires in our modern history, and some as far north as the Arctic Circle!
Even though every single fire cannot be directly linked to climate change, scientist's message is clear; extreme weather events like these will increase in both scale and scope. This is a fact that all governments, businesses and consumers have to adapt to. Only the most hardline climate sceptics would argue otherwise.
So the key question for us is what role the finance sector should be playing to help stop it? Well, as it turns out for most of us paying attention to this event, the answer is a whole lot.
With trillions of dollars in assets, the financial industry is superbly able to facilitate major change by moving money to sustainable investments. Many of the climate change – and wider sustainability – impacts that are critical for society are also relevant for enterprise value creation and this relevance is increasingly dynamic. As the global pandemic has shown, sustainability impacts can rapidly become material for companies. The key question for me, and for the Global Organization for Capital Markets regulators, IOSCO, is how we make sure we all have the same idea of what information the financial sector needs to support their assessment of sustainability impacts.
Take the car industry for example. How do you determine a car company's environmental impact? How does investing in BMW differ from investing in Ford in terms of climate risks and opportunities? To achieve this we need better transparency of key metrics that can inform of their potential impact. High-quality, comparable and verifiable disclosure is a prerequisite to enable investors to correctly evaluate the risk and opportunities in different investments. To price the risk in investments – including climate risks – correctly is key for an efficient market economy. So, better disclosure will enable, as an example, the financial sector to better allocate investments away from fossil energy, in to more solar and wind energy. Hence, to get the market economy to work in the best interest of the society and its shareholders, you need to insert correct and comparable information.
Two years ago, IOSCO established a Sustainable Finance Network (SFN) to provide a platform to share experiences and discuss sustainability in terms of challenges and possibilities among regulators and stakeholders. And this spring we published the report "Sustainable Finance and the Role of Securities Regulators and IOSCO". The report underscored three areas where further improvements was needed.
The first is reliability of ESG data and disclosures. Today there are numerous ESG reporting frameworks and standards, some high-level and some voluntary in nature. This fragmentation means there is a clear lack of consistency and comparability.
Secondly is the risk of greenwashing based on observations of misleading disclosures, incorrect product labeling, and concerns with the reliability of ratings. This is a big problem.
Thirdly are issues around management of material ESG-related risks, in particular by Asset Managers and transparency of how they do so.
For IOSCO, whose members regulate more than 95% of the world's securities markets, a natural response to address the findings was to establish a board level task force. We are carrying out work in all three of these areas, and they are closely connected. One of our main issues is to address the wide range of different sustainability standards for corporate reporting.
IOSCO is in close dialogue with organisations, capital market participants and other stakeholders all around the world, and the overall message is very clear. There is an urgent need to address the current confusion and to facilitate a high-quality and consistent sustainability disclosures.
I believe IOSCO has a unique position to help and facilitate that process. In fact, IOSCO played a similar role in the development of the financial reporting, the IFRS, almost 20 years ago.
Striving towards a global solution does not mean that we should stop with the various regional initiatives. The EU Action Plan on Sustainable Finance for instance includes several legislative actions that will require the private sector to consider and to integrate sustainability into their business. This is really good. But in order to avoid fragmentation and to find a solution that is scalable and can operate internationally, we also need to work globally.
Looking ahead, I believe fundamental work will be done ahead of next year's UN climate change conference in Glasgow, known as Cop 26. Hopefully, this event would become a turning point for climate reporting.
I would also like to mention two initiatives that we are engaging with, that I think are both very interesting and very promising.
In September, an alliance of five global leading standard setters, CDP, CDSB, GRI, IIRC and SASB, announced a commitment to working towards a comprehensive corporate reporting system. Together they are examining how their frameworks and standards can be applied in a complementary and additive way, and how they can complement generally accepted accounting principles. We understand that the standard setters are working with a strong sense of urgency and expect to release a draft climate standard very soon. This will be a tangible demonstration of their proposed architecture. To have these standard setters working together shows that the ambition for better and more comparable ESG disclosure is something that is evolving from users and producers of disclosure, and not by any regulatory order from above. But it is natural for us as regulators to engage and to safeguard the public interest in any future framework for ESG disclosure.
At the same time a working group of IFRS trustees is considering what role the IFRS Foundation can play in setting standards for sustainability reporting. The Trustees of the IFRS Foundation actually published a consultation paper earlier today, to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the IFRS Foundation might contribute to the development of such standards. Also today, I received a letter from the CEOs of the five standard setters, expressing their commitment to work closely with IOSCO and the IFRS Foundation.
While these initiatives are currently running in parallel, I expect them to come together. And taken together, these steps may lead to the foundation of a structure that can deliver a more coherent and comprehensive corporate reporting system. One that:
I am hopeful the initiatives under way can deliver exactly this.
So to sum it up. Climate change is real and we need to act and funnelling capital into sustainable investments is a massive part of the solution. A global system architecture for correct and comparable disclosure will be essential. And this will be one of the main focus areas for the task force within IOSCO that I am chairing.