Panel E | Green Swan Conference 2021

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Bank for International Settlements

Climate change-related risks data and accounting: how are existing methods being implemented? What are the alternatives to the existing reporting methodologies? Panellists: Magnus Billing (Alecta), Klaas Knot (DNB; FSB Vice Chair), Emilie Mazzacurati (Moody’s), Lucrezia Reichlin (London Business School). Moderator: Joe Perry (IAIS)

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Video Transcript:

Good morning good afternoon and good evening everyone thank you for joining us on this panel discussion on climate disclosure today we have an excellent panel this afternoon and a lot of ground to cover so i'm going to move fairly quickly into the discussion but i would first of all like to name check out panelists who will be well known to to all of you Um starting in alphabetical order with magnus billing who is ceo of electa an occupational pension provider in sweden then moving on to governor class knotts who is president of the dmb the dutch central bank and also vice chair of the financial stability board and then emily mazza karate who is global head of climate solutions at moody's And then lucrezia reichlin who is both professor of economics at the london business school and also a trustee of the international financial reporting standards foundation so bit of a mouthful there um so moving into the discussion so risk assessment is that is at the heart of managing the um effective transition to net zero world and to do this we need effective Disclosure which is an essential building block of developing this this this important data so since the creation of the fsb's um task force on climate related financial disclosures in 2015 we've seen significant interest in this area and a lot of momentum is developing at the moment earlier today we saw mark carney call for the cop 26 conference to be pressing for mandatory Tcfd disclosure so in the panel today we'll look at what we can expect in terms of the efforts in the coming years to lead towards greater harmonisation of disclosure and what it means to have effective and decision useful disclosure we have some of the driving forces of this change on this panel today so it's going to be a really interesting discussion And i'm keen that we have an interactive discussion so just to remind the audience that on your top left-hand corner you have a q a facility so please do um click on that and ask us some questions that we'll come back to to later on so we're going to jump right in so to set the scene and as a baseline for discussion i'd like to ask the panelists what assessment you make of the current Disclosure practices and frameworks and how these are being used i'd hand over first to class you will be able to give us a really great kind of global view of where we are thank you joe for this introduction and thank you also for your invitation here to uh to speak today so let me start a bit by setting the scene and describing the uh international efforts on setting common minimum standards for Climate related uh disclosures adequate climate-related financial disclosures are evidently an essential part of the transition to net zero after all they feed into better market pricing of climate risks and better investor decision making they are important also for a wide range of stakeholders including credit rating agencies financial authorities And the wider public now in this slide the financial stability board in short fsb established the task force on climate-related financial disclosures the tcfd already back in 2015 to develop industry-led recommendations for voluntary climate disclosures i think the tcfd work has gained enormous traction over the years but it has now been reaching the limits of what can be Achieved through a purely voluntary private sector initiative and the time has now come to take it to the next level therefore the fsb very much welcomes the initiative of the ifrs foundation with important support also from iosco the initiative aims to develop international sustainability reporting standards quickly initial focus on climate through the Development of a prototype that is built on the tcfd recommendations at the same time we are very cognizant of the fact that we need to deal with regional differences and that we need to have the flexibility to develop greater ambition over time therefore the fsb also welcomes the ifrs aim for what is called a so-called building block approach And in this approach a joint baseline will be set but jurisdictions will also have the flexibility to top up and that will for instance leave room for the eu to have a broader esg scope and to focus on double materiality rather than single materiality and i would emphasize here that the ifrs would set the global minimum standard But this would in no way prevent individual jurisdictions from going further or going faster if they wish to do so as part of a race to the top where they also should not be blamed for unlevelling the playing field regional and national efforts are also proceeding quickly and therefore it is important to bridge the period that ifrs reporting standards are being Developed and this way we can sort of prevent inconsistent requirements from being already hardwired into the system and thereby hard to correct later on the fsb is currently working on this bridge it identifies if possible good practices in national and regional approaches that promote the consistent use of tcfd recommendations as the basis for climate related Disclosures insights from these efforts will come together in an fsb report for the july g20 meeting and this report will address ways to promote consistent high quality climate disclosures in line again with the recommendations of the tcfd i believe that the fsb is uniquely placed to act as this bridge between the ifrs work on disclosure and Other important efforts that are ongoing at the national at the regional and at the international level in the run-up to cop 26 later this year the report requested by the g20 gives an opportunity to amplify the ifrs work and encourage support at the political level i can come back to the fsb's broader work on climate risk after hearing from the other panelists on this important topic of climate-related Disclosures and data so let me stop here joe thank you class that's a really great scene setter for the discussion we're going to have um so now look crazy i think you're going to give us more background on the work that you're doing at the ifrs as one of the trustees that is leading this work to create the sustainability standards board Thank you and thank you very much for the invitation of this great conference so very good initiative very happy to be part of it and let me start from what class said the tcfd has done very important work and this is uh you know the fsb has to be commanded for having you know encouraged information on the tcfd um but these are voluntary climate Disclosures so we need to move to the next step and what is the next level to move from recommendations or to recommendations to standards to implement just so from recommendation to implementation of the standards and maintenance also and development of the standards and let me say that in order to reach this goal which is very ambitious so it should not be underevaluated there Are three requirements for success the first one is that we have to recognize that there are already standards all over the place actually we we are in a situation in which in the past years several organizations have done a lot of work in the providing standards which companies have adopted In different degrees and so on and here i'm referring to the work of sas bcdp ctsb i mean there are all these acronyms that and apologize for that this has been very useful but actually one of the complaint from investors is that it's a very confusing landscape so we need to consolidate and in this you know without consolidation you know there will be green washing so the ifrs Has an important role in this consolidation process consolidation cannot just come bottom up so we are acting now as consolidating as a consolidator in a with a structure engagement with all these organizations and yeah we're actually form working groups in which we are working on prototypes that this uh that these organizations have Designed so we are enhancing these prototypes you know by you know discussing together with the input also key jurisdiction and important is input also of the ios and i will talk a little bit more about that later so this is the first requirement of of success consolidation in a structural way second requirement we need a clear architecture linking global standard to national standard in A coherent way and class has already talked about that but i want to put emphasis on this issue because although it seems you know simple it's not simple at all and there is quite a lot of confusion also about what we mean by achieving global standards so let me stress one thing at the national level for europe the eu but you know the you Know the jurisdictional level or the definition of sustainability reporting standards will be set inevitably in relationship with public policy objectives and these are you know related to a process which involves you know parliaments laws and so on and these inevitably will be national jurisdiction specifics So these standards will always uh be led by jurisdiction and therefore it will be inevitable to have different level of ambitions across jurisdictions and you know some heterogeneity across countries it is impossible to achieve the same sustainability standards everywhere at least you know not for a long long time however capital markets and climate change you Know are global capital markets are global capital and climate change is a global problem for this reason we need a common baseline and a common baseline at the global level and this can be provided by standards for sustainability related financial disclosure which are based on the financial impact of sustainability matters on companies cash flow Over time so this is our concept of the baseline the focus here will be on enterprise values rather than public policy because we would never be legitimate to you know set standards in relation to public policy objectives and by the way this focus on enterprise values is also the focus of the tcfd this is why there is a natural evolution from what the tcfd has done and what we are trying to achieve Now this distinction is at the core of this building block approach that we are proposing which is uh and i will return to that later okay so that's the second requirement of success the third requirement of success is credible governance so in particular we need you know a standard set a global standard setter which is independent which would provide trans you know standards in a Transparent way and could be accountable so now in the recent publication that the frs has issued which had an incredible number of responses what came out as a very strong message is that investor regulators companies want globally comparable standards they also want consolidation and they also think that this is urgent Most respondents also said that the frs foundation is well placed delivered is because of its governance let me stress what are the future of our governance first of all we have the oversight by public authority through a monitoring board which includes security regulators and minister of finance you know for some jurisdictions including the eu second independent trustees which You know were independent so they are the you know the the the guarantors of of this of the independents and the third the uh you know connectivity with financial accounting so that you know that the the frs foundation uh in these three tiers structures in which we have sorry the uh monitoring board the independent trustees and the technical standards Center board the isb um you know these three stars uh tier structures you know seems to be uh you know also the ideal structure if we want to add to the financial stability board to the financial accounting board uh also a sustainability board so this consultation therefore has inspired us to go ahead with this project and we we have set some targets so we we Would uh our objective is uh to form a new sustainability standard setting board to operate uh uh independent but connected way with this the isb and um but i mean i want to stress that we are demand driven we are responding to a consultation so you know we are aiming to form these boards in november but uh you Know we requirement for this will be of course you know convincing support by uh by you know the global financial institutions and regulators and the major jurisdictions thank you that's really helpful in fact i think now is a great time to move from the public to the private talking about financial institutions and to talk to Magnus and to talk to you really as both a data provider and a data user in terms of what you see at the moment in terms of climate disclosure and and the issues that we've been talking about so far so over to you madness well thank you very much for having me here today and it's a great privilege and i'm uh thrilled to to be part of this very Important topic and to discuss it uh just to correct that we are not providing any data we are an occupational pension fund we manage about 100 billion us dollars so i will take the investor point of view and if you uh bear with me i will start a little bit with the fiduciary duty from our point of view when we serve our three million Customers uh what is our fiduciary duty as an investor uh well in brief it is to deliver good pension and can provide for a decent life as a pensioner in 30 40 years in the future i think it's very important to underline the timeline here because it creates an opportunity for us to consider the sustainability and climate risk In both an opportunity point of view but obviously also from a risk perspective it's a possibility for us but it's also important to to ensure the value for our customers so this means that we are under an obligation to invest for the long term and in a manner that meaningfully contribute to an environment in which our customers enjoy a well-deserved good life as a pensioner and this obligation provides The opportunity for us as an investor and this opportunity we try to capture by using the competitive edge that we have by investing for the long term and leveraging the power of compounded interest we can thereby be reasonably unconcerned about the short-term market volatility which i think is a good feature also talking about The climate risk opportunities and risk connected to that and we are also able to invest with scale and hence create meaningful positive impact and the scalability of the investment is fundamental of fundamental importance for the creation of long-term customer value as long as it can be done in a cost-efficiently manner we know the significant depletion Effects that high cost and fees will have on the pension capital over a very long period of time and based on this this fiduciary duty and how we look upon it we have adopted an investment model rooted in fundamental analysis and in a nutshell we seek to identify investments in world-class companies that we believe have a future-proof business model or a concrete and trustworthy plan to transition into A future-proof business model that is able to generate strong positive cash flows in a sustainable way for a time period that matches the liability side in our balance sheet i.e around 30 40 years into the future this investment model that we have adopted and is by its nature very dependent upon fairly large portion of qualitative data and the Dependence upon quality data has significantly grown in the last five years i would say as focus has sharpened on climate risk and following also our promise to our customers to ensure a net zero portfolio by 2050. and despite our experience and knowledge of integrating qualitative data into investment process there are clearly challenges with qualitative climate forward-looking data Challenges that today hinder the proper integration of climate risk and opportunity consideration into the portfolio managers day-to-day investment work and the reason for this are predominantly the climate data features of inconsistency lack of consolidated harmonized standardization lack of reporting level and holds and also lack of comparability I'm therefore very encouraged to have listened to some of the speakers today and all the initiatives that have been mentioned and i'm a strong supporter of that next step of more regulatory and policy push towards towards improved quality of data to procure relevance reliability and comparability i believe strongly that it's paramount for us in order to ensure that the mainstreaming of pension funds Investment like electa for example uh be put in place in order for us to have a reasonable opportunity and chance to reach the net zero goal in 2050. thank you very much thank you magnus that's a really interesting insight i think it's interesting as well when we uh go over to emily who has clients that are very different in kind of scope and the fact that i think I believe you're both focused emily more on quantitative data and physical risk so we've got a nice balance here so i'll hand over to you so you can set up some of the challenges that you face in the work that you're doing with clients on disclosure at the moment thanks joe and and thanks for having me and i i will gladly take on the data provider in this instance to uh to talk a little Bit about um what it is that we see the market needs from the perspective of large banks uh insurers asset managers um and and the first thing that i'll um notice that the the most important thing that they need is what's been discussed globally comparable standards common international requirements if you think of banks or asset managers with large Diversified global portfolios if there isn't a common set of ways to report uh risk and opportunities related to climate change there is no way the asset managers and the banks themselves could fulfill their own disclosure requirements if they cannot aggregate the data from what they see in their in their in their own portfolio and so that speaks to uh standards and Also to comparable consistent quantitative metrics where um we're talking about banks that may be looking at portfolios of corporate loans with thousands dozens of thousands hundreds of thousands uh of of client now all of them may not be uh subject to the same reporting requirements there's a lot of smes But similarly for asset managers um the the ability to aggregate um and have this view of what the risk looks like from a portfolio standpoint is really important um and and that calls for more quantitative metrics as of course processing qualitative data in an intelligent manner at scale is very challenging and and that's not to say we don't need qualitative data we also need it but um we need a Good balance um the other thing that uh we think the market need and strive to provide is making sure that the data on related to planet risk and opportunities is directly integrated into the metrics that they use to do business to make decisions to select assets and and manage their their risk and develop new products so we're talking about Integrating uh a climate into for example probability of default into value at risk into a range of metrics so that the impact can be immediately quantified in terms of uh dollars or a concrete measurable impact on the risk profile in a way that maybe just aggregating carbon footprint for example wouldn't uh wouldn't give to uh to the entity um and and there's Strong data and models for transition i think we know there's also still a lot of work ahead to continue to get better understanding scope 3 emissions i think the needs are going to be evolving on the market as more and more companies and financial institutions take on net zero investments then the need for greater transparency on how that's going to be achieved is going to be evolving and so i think that's an important feature of Whatever international standard we put in place and truly president's point the governance is really critical because we need those standards to be alive and to continue to evolve with the market and then you you mentioned physical risk and this is one that i see as an aspect that maybe hasn't gotten as much attention and it was not an initial guidance released by the tcfd and that potentially leaves a lot of um Unidentified unquantified risk in portfolios which which worries me i think there's a common understanding at this point that climate the physical impacts of climate change is not a long-term uh not just a long-term thing we're already starting to see those impacts on portfolios and um the lack of disclosures on how these are affecting cooperation is a problem and One of the issue here is um a lot of impacts on cooperation at the facility level for example may not right it may not raise too low to the level of financial materiality at this time but those same impacts with greater intensity and frequency could become material but we we lack that visibility into how those impacts are manifesting today because they may not uh hit the materiality threshold so i Think there are things that could be done to help uh bring more transparency and that and i understand we'll uh we'll talk to that uh later in this panel thank you emily so i think we've got a very clear baseline we know where we are and i think you're all furiously agreeing with each other as well which is nice to see i guess the the next question is what's The next step and how do we maintain momentum and and start the reforms that are needed so perhaps if we go over to class to talk about what you think yeah i think thank you joe i mean in this context it's it's important to realize that the fsb's work to promote climate disclosures is actually part of its broader work to develop a coordinated roadmap A forward-looking roadmap to address climate-related financial risks and all this work will then feed into the g20 meeting in in in july now what this roadmap will do is it will try to leverage all the work that is currently being carried out by standard setting bodies standard setting bodies like bars or committee iosco etc and other international organizations The ngfs the imf the abyss and at the same time what it will also do is try to identify vulnerabilities and build consensus on ways forward making use of the broad range of financial authorities that are all gathered in the fsb membership remember the fsb is a broad church we have finance ministries we have supervisory authorities we have central Banks we have international organizations so i think that's one of its uh it's its strength which should also allow us to then to promote very quick progress and to make sure of course that we move efficiently toward our common goals we can do so by sharpening focus by amplifying important messages and by identifying areas where agreement Has been or can be is within uh reach the fsb's climate roadmap will cover four areas well the first what we already discussed is uh is disclosure and there i think the immediate steps are clearest it includes the work that i described on this rapid development of ifrs global uh reporting standards the need to promote consistent national and regional initiatives uh uh important in the Meantime to bridge the gap here but it will also have to include the important stage of implementation of standards which is often being overlooked where a lot of devil is in the detail but i think that should also be recognized here second area is data it's clear that the ngfs and the fsb are among those and that have worked underway to Identify data gaps that work will need to be built upon with actions to fill the identified data gaps and that is necessary to more effectively monitor micro and macro financial risks here also in july the fsb will publish a report on data availability and data gaps for monitoring financial stability risks and this roadmap will then act as impetus for filling in These identified data gaps and it will also help the further development of forward-looking metrics because if there is one thing we need in this area is of course that we need to have a sufficiently forward-looking approach third element is vulnerabilities analysis for the fsb we should consider developing a global monitoring framework for climate-related financial stability Risks as well as work on future scenario analyses we should ensure that the climate risk framework is also fully integrated into the surveillance framework for global financial stability risks that we already have and this roadmap once again will then cover work on surveillance at the sectoral but also At the national level fourth area is regulatory and supervisory practices and tools we will need to need these to set out in one place the work being done in individual sectors and to promote consistent and effective approaches across sectors it will also set out the plans for assisting in capacity building for instance from the imf And the world bank the forthcoming fsb roadmap will show how all these steps fit together and when looking at disclosure it's good to be mindful that the work will not stop after the development of a global set of standards but in many ways it will be only just beginning i would argue in order to build such a standard we will need the efforts not only from financial authorities but Also from all different sides of both the corporate and the financial sectors i'm confident that we will continue to work closely together with the other panelists and with many other representatives from the financial sector when it comes to implementing these globally harmonized climate related disclosure standards once they've been developed so let me stop here uh joe That's great thank you so lucrative perhaps you could give us some more detail about how you're going to move forward in terms of developing the standards and kind of what the the key points will be in terms of maintaining momentum as well because we know that there's a lot of momentum behind these reforms right yeah let me focus on disclosure which is just Which is our area just one piece of the puzzle um and let's you know we we have set uh we've been uh you know following the the consultation we have uh set up now a couple of working groups which in which we are engaging with other standard centers jurisdiction and uh you know the regulators and in particular with their yosco In order to provide a running start for the new board if this new board will be actually come to life and the the the timeline is november at you know glasgow cup 26 uh so and to provide a running start is very important although we have to be mindful of the fact that the new standard board the new board will have to act independently okay But you know we in we are aware of the fact that us we we this is an urgent matter so that you know we uh so we want to provide as much as possible to for the new board to build on so oh so the first strategic direction is that okay we're not starting from scratch we're building on existing work which has been important work a lot of knowledge around oh and so we're working on both Prototypes and also discussing about resources and financing and you know all the essential steps that we need you know to to get going now on prototype we are enhancing what had been issued already from the alliance of standard setters and you know we it's basically four blocks okay so we want disclosure on the go over on governance okay information to understand the governance process related to climate issues Uh strategy so that's the second okay so including information on the business model on how climate impact on the business model and on the plus and on the minus also the opportunities and of course the impact on the financial positions going forward so also the middle and long term horizon risk management is the third block and then metrics and targets and on metrics and targets i want to Reassure emily that we are also working on physical risk we are aware that this has been you know something lacking in previous in previous recommendations and also information on revenues by countries with more level of details in that in that area now um okay so this is uh this is the work that with the preference work that we're doing we're also doing preparative work in terms of Forming uh a consultative group which would continue to exist in the steady state uh which will give us the input of the jurisdiction and international organizations for what concerns you know the needs for broad stakeholders behind you know the address investors and companies okay so that's the first block the second one i think is the the in terms of our strategy Is trying to you know to define precisely what we mean by focusing on enterprise value so here there's been a lot of debate in this area about whether we should go for single major reality so the impact of climate on on the on the value of the firm or double materiality which is also the companies on on the environment so um so although we focus on information that is material to the decision of Investors investors lenders and other creditors our concept is a bit broader and we label it dynamic materiality and this recognizes the fact that um the impact of climate risk on future cash flows uh it's important but there is also an interaction between the company's impact on the planet and the planet impact on the value of The company i mean this is a little bit with you know micro and macro prudentials okay there is always an element of feedback and we have to be mindful of that um so in a way that this enterprise value perspective includes what somebody in this area has called the inside outside inside perspective so in other words the company's important Stakeholders in turn affect also its own risk and opportunity uh so there is a rebound effect now the other important key word here is dynamic and here it has to be to be recognized that the esg investing has grown over time and you know and actually the preferences of investors are shifting although in finance we think the preferences are fixed actually you know in this area Preferences have been moving and so that whatever is relevant for investor is cut is actually a moving target it's something that can is influenced by public policy and you know and so in that sense you know we you know we call this a dynamic materiality perspective and we think that uh you know that the the connection that there is a large overlap between dynamic materiality and uh and double materiality although The two concepts are slightly different because the double materiality respond also to public policy objective which is what i try to explain in the first round the third thing is this building block that that i have already mentioned um now so so the idea is this global baseline uh you know which would be the standard setters could be the frs Okay if this uh if this process gets a support um so that's in terms of issuing the standards but also be mindful here that there could be different models of integrating these global standards into the domestic standard setting process and this is very important okay and we have the experience also for financial Account where you know there is a variety of models of integration and some of these models also imply you know local consultations consultation at the national level and then on top of this okay there is this jurisdiction specifics responding to stakeholders to public policy objectives and so on but the important thing here is the Congruence is the nested nature of the log of the of the uh you know the global versus uh you know the jurisdiction specifically let me stress again achieving this is not easy uh you know this concept is supported by all of you in this discussion but it's not necessarily supported by the big jurisdictions uh which you know for obvious reasons Are afraid of losing control of this process so clearly we need to listen to everybody because some of these concerns are actually justified and you know but we have to be mindful that the objective i think is shared by everybody which is to achieve i mean to avoid fragmentation to avoid this kind of nightmare that both magnus enemy referred to which you know global companies you know Get bombarded by different uh by different standards which do not talk to each other we'll never have standardization but we have to have congruence and this is important so oh i mean we think that this should could be done by a global standard setters with this kind of uh top-up and in a governance which is legitimate Etc as i explained i don't believe that this is possible with a loser form or coordination with which some advocate but you know this will have to be a consensual process so let's see where we get to again i think that governance is the key and you know we have the experience of the financial accounting the frs in in the financial accounting uh which you know our standards have Been adopted by 144 jurisdictions via a mechanism which was actually a global standard sector organization okay so this seems to me that is a model which can be adopted also in the area of sustainability the other model is for example the us model with the gap standards for financial accounts and trying to see if everybody follows it hasn't been that successful okay so Most countries adopt the ifrs they don't adopt gap so i think this is food for thought okay so that uh but of course there are many ways to achieve you know possibly many ways to achieve the common goal uh obviously we uh we we support very much this idea of the of the building block uh so what are we doing now we are engaging with Jurisdiction you know through these different working groups the input of iosco is obviously very important representing the security regulators around the world and um you know in terms of timeline we uh we we want to uh you know announce the the board in november and we will be ready to go already from january we have already advertised the position for the chair and the vice Chair if you want to apply okay the post is out thank you and i think you're actually setting a new standard in terms of the the time to start up an international governance body i i fear many people will have to follow your timeline um so so far we've had lots of agreement uh i'd like to maybe test this a bit and hand over to emily and Talk about kind of practically what you want to see in terms of disclosure and i think it's probably building on what you said earlier in terms of the the issues that you face in the moment so over to you emily yeah thanks to i'm not sure if i'm gonna hit the bid in terms of disagreement here um i i i find the work that's happening really inspiring and uh and i'm glad that we've Made so much progress and that we have a path forward that will help us address a lot of those issues um i do want to i brought my my wish list in terms of physical risk and resilience and the type of of indicators and metrics that that might be considered in this process and and maybe also a couple of uh thoughts and recommendations that go beyond accounting and disclosure Strictly speaking um so i'll start by saying to look at physical risk and resilience but to understand exposure to the physical impacts of climate change one needs to understand where things are located geographic location is really the primary driver of exposure and so there are simple things and the criteria refer to some of them simple things that can be done that will Help bring more transparency in helping investors understand where companies operate where they do business where are their key facilities located where do they derive meaningful revenues from currently there's some information about that but it's um it's very uneven and that limits the ability to provide really robust analysis in terms of what the exposure is i also mentioned the lack of data on Current impacts of extreme weather events for example on financial performance at the facility level or for a firm because they may not hit that materiality threshold but as they become over time the the increasing frequency intensity might push those over and the lack of visibility in historical data in the current size of those events um Hampers the ability to calibrate models and really understand what that curve might look like in terms of cost so for um modelers risk risk management firms like like moody's this is something that we think would help bring transparency to the to the market um of course we'd like to hear from some companies themselves how they anticipate what kind of risk they project for their facilities and And have some of those data be shared as part of the disclosures and then supporting magnus's statement earlier qualitative discussion of how an entity is investing in adaptation and resilience included you know how much is invested into green or engineering uh based retrofitting into early warning preparedness uh how what kind of insurance Uh approach strategy a firm takes and it doesn't all have to be very uh detailed we're not asking for every detail of insurance contract but understanding the overall framework that a firm uses to manage those risks i think is uh is important so those are just a food for for thought um i want to expand a little bit uh going i can be on what what is within the realm of Disclosures or accounting but thinking a little bit about what are some of the other hurdles and how can we better improve our collective understanding of physical risk and resilience one of the big gaps that we have is a good understanding again of current cost of changes in weather and extreme weather events also at the macroeconomic level The data is reported in a very fragmented fashion there is no agreed-upon standards by which countries should report what kind of event and how those how those events may have affected economic outcomes and so that's something for us as a community of practitioners to think about is is there a way to better coordinate support provide standards around sharing this basic economic data in a Way that again will help us improve our collective understanding of the economic costs of climate change going going forward um and then last but not least what we need to do a lot more research and and effort towards is understanding what makes a company resilient what makes a city or country resilient what kind of adaptation investments Really pay off and there is a draw materiality or maybe a dynamic materiality component here as well because it's not just about protecting the farm and rising being erecting big walls to protect the a particular asset it's also how can a company be responsible in its adaptation uh and work with and with communities with its suppliers with its employees Um work to protect the environment uh to enhance social equity all of which will reinforce its own resilience by reinforcing resilience of society and so thinking about how we can over time develop standards for what it means to be resilient to be adapted how do we quantify the benefits of adaptation it can start simple there is work happening right now looking to establish Standards for buildings that's the most simple unit of course it's much more complicated when looking at a whole corporation and or city or country it's much more complex but this is from my perspective one of the big frontiers that's ahead um and that working towards the common understanding of what works and what doesn't and how we can represent Uh those positive impacts on adaptation is what will help make the world more resilient as well that's great thank you and magnus obviously we talked earlier about the fact that you are looking at it from more of a kind of qualitative perspective i just wonder whether you could say what you would be looking for in in terms of the the disclosure standards as they move forward Yeah i mentioned a little bit about the quality issues in my earlier statement and and i took the approach from bottom up from a portfolio management perspective but we are also doing it from top down we we're trying we're stress testing our portfolio on an annual basis based on a number of climate scenarios 1.5 2 degrees and so forth And and the conclusions that we draw from that is three things reporting level uh the quality of the data and a carbon price we we use to summarize it we we discount a carbon price from 2040 to today and obviously we get to different market value uh compared to what the market prices is showing today and for us that's a very Important stimuli to to work with engagement with the companies that we own that's part of our dna to engage with the company just to support them over a long period of time now if you look at the reporting level of these 100 companies that we focus on equities then it is if it's similar to what you see in the s p 500 today around 20 obviously that's an issue we need to Increase that level to to something else than the 20 level and i'm talking about scope 1 scope 2 scope 3 disclosure if you look at the quality i think the quality on scope 1 and scope 2 from the companies that are disclosing today it's it's useful useful uh we can work with that we can make assessment we can integrate that into investment process but as soon as you step into scope 3 the Quality is is it's too poor to do anything about so that's an area where where i think policy makers can can support us in in improving the quality and also supporting in increasing the reporting level that we talked about earlier um the second part or the third party is obviously the carbon price i mean today if you look at the research at least the way we interpret it You find a spread of somewhere between 140 us dollars per ton up all the way to 850 us dollars per ton if you're going to reach 1.5 degree that spread is not very helpful for practitioner investors if you're discounting that back from 2040 for example and if you look at the market price today in in europe the ets i think stands as something a little bit about 50 Euros today it's a significant increase but it's quite far away from the 140 or 850 us dollars that the researchers are is telling us that we need to use so that's a critical part for us to to get in place so that's the equity part and i think it's a little bit different story if you look at the credit side uh because the duration of these instruments is obviously quite short in its character And so you the impact on the environment on the specific instrument is difficult to measure i think and i think the credit agencies could have a role to play to extend the investor's view on these instruments in order to truly capture the impact that that financing have on the environment the third part the third asset class that i think is it's it's it's very important and and The reason why it's very important is that most pension funds like alexa will have to hold quite substantial part in government bonds in its portfolio i think the european level is well it's close to 50 of total portfolio and i would remain for a foreseeable future given the regulatory environment we operate into now i think the the governments that Issue uh government bonds uh could step up a little bit i think lucretia mentioned this to describe the investor community what are the proceeds to be used what is the plan to transition this country into a sustainable country and reach the net zero goal that would be extremely helpful for us and i think we're starting to see a trend in that in the green bond Market space i think the market has matured sufficiently it's grown in its size so the next demand from the investors would be we would need to see real impact reporting we will see we will need to see more details on what impact our proceeds are creating if we're going to be interested in investing into in those type of instrument so i mean i'm not Trying to be too negative clearly we can do a lot as an investor and we should continue to work despite the challenges with the data we can today work from bottom up and and support the portfolio managers to truly internalize this and integrate it into investment process and the decision making and we can push and set the tone from the top by working With stress testing and showing the impact that these scenarios will have thank you that's great thank you agnes um and i guess i mean all of this is building up to uh the disclosure is building up to effective risk analysis so i just would ask emily uh in terms of kind of what what analysis do you want to do but can't do at the moment because you don't have the right disclosure and And how quickly do you think you could get to that and and how decision useful would that be so the the work that we do right now is focused on integrating the impacts of climate change into existing models used by banks insurance asset managers right so into macroeconomic models into credit risk models to produce climate adjusted pds for the probability of default for a Range of asset classes uh into equity evaluation models um and and the piece i think and and i suspect that the panelists will agree with me um i think we're able to uh get a decent view of what the risk exposure is the sort of the gross exposure um the question is all about domiticans what's the company's strategy what is it Really putting in place of x capex uh other changes to the business model and the overall approach in terms of both transition and physical risk and and i think that's something that we're going to be constantly improving and looking to integrate better data and insights into the model so that we can fine-tune the view of how that will translate in terms of financial impacts that's great thank you we'll we'll go to Audience questions shortly so just a reminder that you can use the q a on the left hand side to ask a question um but before we do i just wanted to ask one question so from a policy perspective this work is about integrating uh disclosure at a global level but obviously one of the key points here with disclosure is effective audit So i just wondered what uh the panelists views are in terms of audit and where we need to go and what steps there will be to ensure that there's an effective audit process in place as well um class would you like to to take a stamp of that yeah thank you joe i mean it's pretty clear that i already mentioned that after these climate-related Disclosure standards uh would be finalized then of course the work is absolutely not on we need to continuously update them but it is also important that we arrive at at the important stage of uh of implementation which means that a number of specific actions will then need to be taken uh in order to help build confidence uh and and that confidence actually needs to be built even before We move to the uh to the stage of auditing i think that national and regional accounting standards should adopt these standards at the local level uh secondly securities regulators should incorporate these standards into listing and offering requirements and thirdly i think that financial regular regulators actions including also potentially covering Companies that are not publicly listed and then also steps may include also possible industry specific requirements for certain types of financial institutions and certain types of non-uh financial uh companies and then of course we will have the crucial additional step the delivery delivery of a comprehensive international auditing auditing and assurance framework but i would add As appropriate for sustainability disclosures and i emphasize the word as appropriate because not all sustainability disclosure may require the same level of assurance for instance financial disclosures may require a higher audit standard than some other types of disclosures and that's clearly something that needs to be further Examined but whether or not the exact audit requirements are the same it will still be important that some degree of third-party assurance exists exact steps here are still to be defined and we will need to consult with bodies like the international auditing and assurance standards board iosco to discuss the roles that they will have to Have to play but this is all part of this implementation stage of which i already remarked that it will clearly offer its own set of challenges as well that's great anyone else from the panel decrets here or yeah i just i mean i would just say that uh you know as trustees we have agreed that the aspiration should be to achieve the same Quality level of assurance that we have achieved for financial now for this reason we are already engaged engaging with the auditing community and with audit regulators uh in this property work that i have described and this is part of our our preparatory work and it's just at the beginning with the auditors but this is an essential part Of it i'll jump in briefly to say we're we're also supportive of assurance it's been certainly a something that's been criticized against sustainability uh reporting and disclosures in the past is the lack of assurance and uh and through the protein and classes point um very much needed to uh confirm that we reach a certain level of Of quality and reliability and i will note one thing is that there's a little bit of debate in the climate data practitioners community around how to use climate models what's the right way to interpret uh science scientific data with regard to impacts um financial impacts and i think that can assurance can also help address some of those issues in making Sure that the way those risk assessments are derived um incorporate and leverage best practices from a scientific standpoint and using period methodologies that's great thank you and magnus from a kind of an investor's perspective what kind of uh do you want to see in terms of the assurance process just echo what emily said uh some sort of insurance will be very important from The investor point of view and how that practically is done and achieved i don't have any good ideas on uh here now i also think it's important to have some insurance from the issue point of view actually because i and we're talking about forward-looking data to a large extent and the disclosure of them and i think that that There's some hesitance among so many issues to to do that today anyway and for the reasons of competition uh this goes into competitors sensitive information but also from a legal exposure point of view being a publicly listed companies and so forth so i think insurance could mitigate that concern a little bit from the issue point of view which i think is Valuable in this country thank you that's interesting so actually magnus i want to pick up on a point that you raised earlier about um carbon pricing as well and and i think you were talking about the importance of this for you and understanding kind of where carbon pricing is and i'm just wondering whether this will end up in the iff ifrs standards is is this going to be a Kind of key dynamic or is it going to be kind of broader and kind of more generic than going into the specifics of carbon pricing which is probably for lucretia but i'm just interested as well in magnus's views on this as well well i didn't see it as an ifrs or financial reporting point but i think i mean we see a very strong value from the issues that are shadow uh reporting on this Carbon price today uh i think also the initiatives or the discussion have been held within the european union about carbon water tax is encouraging but maybe mostly i'm encouraged to see the development in the marketplace today on the ets side i think if we can have that impetus increase over time then we will have you know a more long-term powerful incentive and impetus for Internalizing the externalities thank you it's helpful and we actually have a couple of questions that have um come in uh we so i'll i'll group these questions up and then you can choose how you'd like to take them so we have one actually from one of your colleagues um uh helen ray from the london business school who says what are the right metrics to pick the best practices for the Application of tcfd or more generally for reporting by corporations on climate risks so far so a metrics-based question and we also have a metrics session tomorrow as well for people that want to tune into that and then probably one more directed at emily which entities should collect and harmonize data from firms and what's your view on the status of how this is happening At the moment so should we start on the one on metrics kind of what metrics should be used and and how we should move move forward on metrics so i don't know maybe magnus or emily you want to start on that and then we'll talk to the others sure sure i'm happy to jump in um generally speaking we're big proponents of using the same metrics as much as we can right so climate is an exacerbator of a Number of known risks and those risks are managed through the set of existing metrics um and and models and systems whether they market risk valuation risk liquidity risk right credit risk and so to the extent possible expressing those in terms of the metrics that are currently used for decision making is the best way to guarantee the sound integration of climate into decision making Now that's easier said than done and to do that you also need transparency on the underlying metrics so the sort of the more simple accounting metrics around greenhouse gas emissions exposure to certain hazards and a quantitative translation of how a company cooperates strategy investment in mitigants against physical transition risk Will then affect the outcomes in terms of reducing the overall level of of risk thank you magnus any thoughts on that yeah two comments on that i think i'm i'm getting i'm really focused on you know scope one scope two three data that will take us a very long way uh so metric if i can call that metrics those three categories yeah And then i i hope that we will see a development on the taxonomy side that will put the history in a situation where the investor can analysis analyze the turnover line of an issue and assess what part of the turnover is uh eligible and compliant with the taxonomy that would be extremely powerful tool for investors and very important tool And that will serve as a very strong basis for engagement with the issuers on how to transform and support transition into the future proof the business model so those two comments are going to become the metrics thank you that's helpful so in fact we we have another question on uh scope three so this is probably one for you magnus uh somebody's saying very apparently very simply but i know this Isn't simple what's needed for better reporting on scope three and i know uh whole days could be taken in terms of understanding what scope three is but for you for you magnus and i guess for you emily what what would the steps be to to give you effective scope 3 data that you could use well the first step would be to have the issues to report on it to make an assessment of what what is The emission uh it's interesting to our experience when we do the stress testing we we were surprised to see that all of the companies that are disclosing uh scope 3 they are usually not not downplaying it they are trying to really to disclose the actual scope 3 emissions they have and we could see that some of the data providers estimations of scope 3 emissions were Significantly lower than what the actual issue were disclosing so i think that would be extremely helpful to just get the reporting level on scope free up uh and i think that would take us a long way and then we need to find a way to to ensure the double counting to to take out the double counting and maybe that's just the mythology of using a proxy for it I don't know if it's feasible to get to a point where we actually can assess the actual scope 3 and avoid double counting yeah that's that's a very very challenging issue the double counting um so reporting of course the one thing that i'll add that i think makes scope 3 very challenging for the reporters for the issuers themselves is understanding the complexity of Supply chains understanding what really happens and we see this for climate we see it for social issues labor rights child slavery mining environmental impacts right it's it's true of every uh esg aspect that you look at corporations don't always have a good understanding of what and who they do business with not only tier one but deeper in the in the supply Chain um a large corporation can have over a hundred thousand suppliers um they don't know each of them personally and so the work that corporates can do to focus on material suppliers again it doesn't have to be everyone but focusing on some of the key communities or goods or services that they depend on the the firms that they do most business With and really trying to pull the spread and i think this is where um as magnus was noting when companies do that very advanced work of looking at full life cycle analysis we see that there's a lot of emissions embedded into the supply chain um and and do we i think the question of double counting is also are we assigning full responsibility to every entity that Recognizes some some scope 3 emissions or is that a way to make sure that we get at every ton of carbon through a multiple faceted approach that will hopefully get us where we need to be in terms of reduction thanks that's great so we also had a question that is looking at uh basically what to do with the disclosure and whether there should be central Repositories i just wondered whether um both from the private and public sector you have views on that because obviously if the disclosure frameworks work we can have a lot more data but how can that be managed effectively i don't know who wants to to jump in here emily moss yeah i want to give a look right here it seems to to react as well she may have you i'll say briefly that You know that's our we'll collect the data and whatever form it's provided certainly um we're supportive of having the data uh in a common repository in tabulated form saves everybody a lot of time and helps focus on the analysis of what those means rather than on the connection and the scraping of the data which is not as interesting but i'm sure there's plans for how that will be handled And now i'm getting my heart of the frs out and i suggest i think that would be an obvious good idea i mean to have you know to put data in common and to but you know this is not for yeah and i also just wanted to return to a theme that you kind of raised earlier all of the issues around uh double materiality take us back to actually some of the issues that Led to the delay in moving forward with disclosure on materiality and concerns about disclosures uh often driven by uh disclosure council i just wonder whether you think now those issues have been addressed that things have moved on or as mark carney said that was one of the drivers of the tragedy of the horizon have we moved beyond that are we kind of in a in a world in which Corporate feel more comfortable disclosing these risks i i i guess that's open to all of you so maybe magnus is a question for the company is a question for the companies are the companies more more comfortable yeah the company is more comfortable i don't know i guess i think that i'm sure that magnus yes I'm not sure that i actually understood your question hopefully what it's about the the concerns that companies previously had about disclosing climate risks and the the risks that they would hit up against securities law issues but obviously we've moved on a lot in the last few years kind of the the investee companies that you talk to are they concerned about disclosing climate risks now or have They has that changed well i i think when we we hold about a little more than 100 companies in our portfolio so it's fairly few companies that we own shares in so we we become fairly large shareholders and the discussion we have with them is now they want to disclose and and i think that the reason for that is more and more cost of capital Uh they are concerned that they are not attractive enough to to to raise the capital for the business at a reasonable price uh so they wanna they wanna accommodate uh but there are uh i would say still some arguments that this it's complex obviously we talked about that uh it's difficult uh it's uh it takes a lot of resources from them so They they they also looking for standardization and simplifications uh and integration in the normal reporting cycles and processes they have and they some i would argue still are a little bit concerned about this forward-looking aspect what does it mean for them when it comes to legal exposures when it comes to disclosing uh maybe sensitive Information to competitors so but generally speaking they are they want to accommodate they want to disclose because they see the the drive towards a lower cash cap cost of capital if they are considered to be operating a sustainable business model thank you i can maybe add a little bit to that um one of the issues uh used to be and i Think continues to be a little bit the first move or disadvantage of being the first to disclose might actually uh increase uh the risk of being penalized right for transparency um i also think we're moving towards a world where it's then if you do damn if you don't right if you don't disclose then you're laggard and then that creates all kind of other issues with that with investors Who are going to be pushing for greater disclosure so i think we're seeing companies try to move across a sector around the same pace so that they can try to set the standard for that sector and avoid having one stand out and maybe suffer from that first mover disadvantage but all of that takes us back to Uh the need for standards and common agreed uh requirements so that we remove those those issues and focus on getting the right metrics and information out that's great we're actually i think that my experience i mean from the feed sorry so my experience from the feedbacks we got in the process of the consultation I don't know there is a delay should i go sorry okay okay my experience from the consultation and uh you know the feedbacks we received is that actually i mean the you know companies are moving and uh there is stigma touch you know if if you don't move on the other hand there is a variety of Opinions around there and also or you know some backlash has you know we we also had recently you know some negative noise a preoccupation for example that the global standard would move too much towards a double materiality concept which could be heavily politicized uh so i mean this is not surprising that uh you know since some quarters of uh you Know these preoccupations uh is voice um and so this is i mean it goes back to this issue of legitimacy because uh you know there are legal issues here and that the standards have to be uh so enterprise value it's one concept but you know double materiality linked to public policy objectives is a different concept and you know besides behind You know some jurisdictional specifics uh standards that the danger would be you know to you know that you your issue standards which lack legitimacy so i mean i think there are subtle problems there and that we need to be mindful of these issues especially legal thank you that's really helpful so we're actually approaching the end of the the discussion it's been a really interesting discussion but Before we finish i just want to uh take the the moderator's prerogative and ask you in one sentence to kind of set out what one action would be most kind of decisive and useful in this area um shall we start with class yeah i can be well maybe more than one sentence but my one sentence would be avoid fragmentation in this i mean this is an area of an emerging Risk i know from earlier life how difficult it is to harmonize incumbent risks where different approaches are already out there but i think it would really look bad on the international regulatory community if even for this emerging risk we would not manage to get one global standard and rather have the unfortunate uh fragmentation So that i think we should all take as a joint assignment thank you and moving around my screen uh magnus well i talked about the reporting level and maybe this sentence is a little bit of a contradiction but mandate the disclosure but make it simple for the issuers and emily sure i'll say leverage existing processes and systems um don't reinvent the world where it Doesn't have to be used right by the write the hotel of existing reporting systems that's great and last but definitely not least uh lucrezia yeah so leverage on existing processes that build the governance for this uh you know for for an infrastructure that would allow us to avoid fragmentation and uh so it should not be i think the infrastructure Is needed okay minimum infrastructure is needed for that thank you that's great i think we've managed to get to the end of this panel session and have no fragmentation amongst our panelists which is very good so i think that's it i just have to tell the audience that um first of all thank you to our panelists for a really interesting discussion uh and that the next session begins at 17 45 and this session is best viewed on youtube not on the event platform so thank you and thank you to the panelists again thank you thank you very much thank you thanks thank you thank you bye bye bye bye

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