Why Banks Need To Be More Upfront About Climate Risk

Michael Bloomberg and England's chief central banker have a message for the financial industry.

Banks can't fully think about risk without thinking about climate change. And banks that don't properly consider risk are failing their customers, clients, shareholders and regulators.

That was the message Michael Bloomberg, the former mayor of New York, and Mark Carney, the head of the Bank of England, delivered at the Paris climate talks on Thursday.

The specific way to implement that broad idea, Bloomberg and Carney said, is through voluntary disclosure based on industry-developed standards. That's a process that stakeholders are familiar with and that financial institutions prefer, although critics say that self-regulation in the financial industry leaves too much room for misconduct.

In the case of climate change, there is unlikely to be any progress on standardized disclosure that isn't industry-led, because the U.S. Securities and Exchange Commission recently moved to narrow corporate disclosure requirements rather than expand them.

The new initiative will be led by a task force of the Financial Stability Board, an organization of central bankers, finance ministers and international bodies like the World Bank and the International Monetary Fund. "Access to high quality financial information will allow market participants and policymakers to understand and better manage those risks, which are likely to grow with time," Carney said in a statement.

The task force, led by Bloomberg, will aim to provide specific proposals within a year.

"While the business and finance communities are already playing a leading role on climate change, through investments in technological innovation and clean energy, this Task Force will accelerate that activity by increasing transparency," Bloomberg said in a statement. "And in doing so, it will help make markets more efficient, and economies more stable and resilient.”

The move comes amid a push by Carney -- unusual for a central banker -- for financial institutions to take a more active role in combating the worst effects of climate change.

In September, Carney urged the U.K.'s biggest insurance companies and investors to take steps to protect against the financial shocks that could be triggered by environmental disaster.

"While there is still time to act," he said then, "the window of opportunity is finite and shrinking."

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