Requiring financial institutions and businesses to disclose the risks of climate change will lead to huge shifts in capital investment across the world, said U.S. Special Presidential Climate Envoy John Kerry, adding that US President Joe Biden planned to issue an executive order on the matter soon.
Kerry, speaking on a panel with Kristalina Georgieva, head of the International Monetary Fund (IMF) on Wednesday, gave no details of the executive order and the White House had no further comments. Kerry noted that the European Union has already adopted such requirements.
“This will change the allocation of capital. Suddenly people are going to be doing assessments taking into account the long term risk of investing based on the climate crisis, ”Kerry said.
Georgieva said the IMF is working closely with major economies and Group of 20 (G20) central banks to standardize risk reporting, working with central banks, and then testing the global financial system for its response to these. risks.
The changes come amid an increase in global activity to address climate risks following Biden’s inauguration and his decision to reinstate the 2015 Paris climate accord abandoned by his predecessor, the 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 indicator dashboard”, which will inform economic policy decisions by collating data on greenhouse gas emissions, economic activity, trade in environmental goods, green finance, government policies, and physical and transition risks.
“We need to make the invisible visible – the transition risks that banks bear because they invest in high carbon activities which over time will be phased out, and the physical risk, investments in coastal areas very vulnerable or in agriculture that could be affected by floods or droughts, ”she said.
One of the main concerns is that companies could end up with stranded assets – holdings that prove to be worthless as a result of changes associated with a shift 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 in a virtual meeting on Wednesday that it was “increasingly urgent” to do more to tackle climate change and promote environmental protection.
According to her, an IMF analysis found that climate risks were not sufficiently taken into account in stock valuations, an issue that could lead to economic losses. She said investment managers overseeing some $ 25 trillion in investments were also demanding more transparency about risk.
“The new IMF dashboard will help fill data gaps, so that policymakers can undertake the macroeconomic and financial analysis that underpins effective policies,” Georgieva said.
Kerry said increased risk disclosure and new tax incentives would result in “significant amounts” of new investment to help tackle climate-related issues.
He added that the demand for new technologies in batteries and alternative fuels, among others, would likely lead to an increase in the activities of venture capitalists.
Kerry drew parallels with the telecommunications boom in the 1990s, which quadrupled the existing market.
“ Fundamental overhaul of finance ”
The United States Securities and Exchange Commission reported last month that companies will need to disclose more to shareholders about the effects of climate change on their businesses. The agency said it would seek public comment on potential policy changes.
Many Wall Street companies have spoken out on the risk of climate change under pressure from shareholders and activists, as well as concerns about its financial effect.
Larry Fink, CEO of BlackRock Inc, the world’s largest asset manager, has warned US companies that climate change will bring about a “fundamental overhaul of finance.”
U.S. Treasury Secretary Janet Yellen spoke on Tuesday about the Biden administration’s general plan to align tax policy with climate change goals. This includes a shift to carbon-free sources of electricity by 2035.
Yellen said the administration would encourage companies to align their portfolios with the Paris climate agreement.