To assess these risks and support the transition to a low-carbon economy, investors and other players in the financial world need information. For example, they may want to know if a company’s assets are physically vulnerable, how much greenhouse gas it emits, and what its plans are to reduce emissions.

Additionally, heightened geopolitical risks, including from Russia’s war in Ukraine, and deteriorating global economic prospects could make the transition to a low-carbon economy more complex, costly and messy.

Banks, pension funds and other investment firms need better climate data to assess risk.

Energy policy decisions could also be affected by the degree of carbon lock-in – which occurs when fossil fuel-intensive systems perpetuate, delay or prevent the low-carbon transition – that is generated in the short term, including by delayed elimination of thermal carbon.

Data gap

Currently, however, financial market participants face a lack of high-quality, reliable and comparable data needed to effectively assess climate-related risks and avoid greenwashing – misleading attempts by financial or non-financial companies to improve their environmental credentials.

This data deficit constitutes a serious obstacle to the energy and ecological transition, which requires a migration of capital towards low-carbon industries and massive new investments in mitigation and adaptation. It is also more difficult for financial supervisors to assess risks to financial stability given the uncertainties and challenges associated with quantifying climate-related impacts. Therefore, policymakers must urgently ensure that better climate data is made available.

A new report from the Network for Greening the Financial System takes an important step. It includes a directory that assesses available climate data, identifies gaps, and offers practical, concrete ways to fill those gaps.

The report, produced by a working group co-chaired by the IMF and the European Central Bank, strengthens what we call the climate information architecture. This has three building blocks: high-quality comparable data; global disclosure standards; and climate alignment approaches and methodologies, including asset and activity taxonomies.

The report makes three contributions. First, it highlights that, despite substantial progress on the climate data front since COP26, challenges remain, including:

  • Insufficient coverage in the declarations of unlisted companies and small and medium-sized enterprises
  • Limited availability of comparable, science-based forward-looking information, such as targets, commitments and emissions trajectories, which is needed to assess physical and transition risks
  • Auditability is necessary to build trust and improve data quality, but it is limited

Second, the report makes concrete policy recommendations:

  • Drive convergence towards common and consistent global reporting standards, for example by increasing the availability of granular emissions data and improving the reliability of reported climate-related data
  • Increase efforts towards common principles for taxonomies, for example by increasing the links between taxonomies and disclosures
  • Develop well-defined metrics and methodological standards, for example by better harmonizing forward-looking metrics and strengthening public and private cooperation to improve methodologies
  • Make better use of available data sources, approaches and tools, for example by improving the use of new technologies

The third and most important contribution is the Climate Data Directory, which lists available data based on the needs of the financial sector and how the information is used.

For example, banks, pension funds and other investment firms apply scenario analysis and stress testing to analyze the climate-related risks of individual securities and the companies themselves, in combination with ratings. credit. They need climate-related data to assess vulnerability to these risks at the sector, firm, household and state level, and to assess the determinants of physical and transition risks.

Policymakers may need more data to determine whether a sharp drop in asset prices could hurt the balance sheets of financial companies, jeopardizing financial stability.

Directory of climate data

The climate data repository can shape evidence-based conclusions about key data gaps. For example, it shows where raw data is not available to construct metrics such as exposure to sectors relevant to climate policy or the share of assets such as coal-fired power plants in energy portfolios. It lacks accounting data and the exact geographic location of assets, as well as data on greenhouse gas emissions and impacts related to biodiversity, forest depletion, floods, droughts and storms.

Although it does not provide direct access to the underlying data, the repository is a public good, a living tool aimed at better disseminating climate-related data and offering practical solutions to fill data gaps. . It is designed to help finance professionals identify relevant sources to meet their needs, facilitate access and better disseminate existing climate data. It can play a decisive role in driving progress on the four policy recommendations outlined above.

The report’s findings and accompanying policy recommendations align closely with the IMF’s work on climate data, disclosures, taxonomies, and other methodologies aimed at aligning financial portfolios with the goals of the Agreement. Paris.

Metrics and methodologies

For example, the Fund’s Climate Change Indicators Dashboard, a statistical initiative to meet the growing need for data used in the analysis of macroeconomic and financial stability, can benefit from the improved measures and underlying methodologies of the directory.

The IMF is also leading a joint project to provide guidance on the Group of Twenty high-level principles for taxonomies and other approaches to alignment with sustainable finance. This work is particularly relevant for emerging and developing economies, which face considerable challenges in reducing greenhouse gas emissions and attracting private capital to finance the transition.

The IMF participates in the International Financial Reporting Standards Foundation’s new standards board on sustainability and climate reporting, which plays a key role in this work. He also co-leads the Financial Stability Board’s Vulnerabilities and Climate Data Working Group to integrate climate into the organization’s regular vulnerability assessment.

These efforts aim to address areas of concern in climate vulnerabilities, measurements and data based on their materiality and cross-border and cross-sectoral relevance. Finally, the IMF has started to include climate-related risk analysis in its financial sector assessment programs.

Late last year, the IMF dedicated its annual statistics forum to assessing climate change and discussed with other international bodies how to fill data gaps on climate finance. And in October, we will publish an analytical chapter of the Global Financial Stability Report that takes a deeper look at financial markets and instruments for developing private climate finance in emerging and developing countries.