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Climate x FinReg Roundup:
April 8th

This weekly news roundup highlights noteworthy developments at the intersection of climate change and financial regulation.

Intergovernmental Panel on Climate Change

The IPCC released the third part of its Sixth Assessment Report (AR6) on Monday. The newest entry in AR6, which is subtitled “Mitigation of Climate Change,” dedicates a full chapter of its 3000-plus pages to synthesizing much of the literature on climate finance. Among the report authors’ key takeaways:

• “Tracked financial flows fall short of the levels needed to achieve mitigation goals across all sectors and regions. . . Scaling up mitigation financial flows can be supported by clear policy choices and signals from the international community. (high confidence)”

• “Mitigation investment gaps are wide for all sectors, and widest for the [agriculture, forestry, and other land use] sector in relative terms and for developing countries. (high confidence)”

• “Clear signaling by governments and the international community, including a stronger alignment of public sector finance and policy, and higher levels of public sector climate finance, reduces uncertainty and transition risks for the private sector. Depending on national contexts, investors and financial intermediaries, central banks, and financial regulators can support climate action and can shift the systemic underpricing of climate climate-related risk by increasing awareness, transparency and consideration of climate-related risk, and investment opportunities. . . (high confidence).”

Securities and Exchange Commission

The SEC’s proposed climate risk rule is driving demand for enterprise software that can help issuers calculate their greenhouse gas emissions. Carbon accounting startups are growing rapidly and competing for market share as the SEC moves closer to requiring GHG emissions data from public companies.

• One such startup, Persefoni, aims to be the “Turbotax of greenhouse gas reporting.” Robert Eccles, the founding chair of SASB and an advisor to Persefoni, argues that a “software solution” is cheaper, less labor intensive, and more accurate than current approaches to carbon accounting.

• Another survey of corporate executives conducted by Deloitte found that 92 percent of respondents said their organizations needed to “invest more in technology to address demand for consistent and reliable measurement, reporting, and disclosures.”

• However, more will need to be done to harmonize the range of greenhouse gas accounting methodologies that already exist. Although the SEC will make clear what types of information public companies must disclose, “observers do not expect the agency to develop or release accounting standards that guide how companies should go about collecting and calculating that information.”

• Addressing these issues may ultimately fall to international sustainability standard-setters like the ISSB. Once harmonized carbon accounting standards are established, startups like Persefoni will need to ensure that their software aligns with best practices.

Freddie Mac

A new report by Freddie Mac on sea-level rise in coastal Florida “shows no evidence that [sea level rise] risk is affecting current home prices,” meaning that homebuyers are continuing to pay premiums for houses in areas vulnerable to flooding.

• The report shows that homes that are vulnerable to sea-level rise tend to sell for slightly less than homes outside vulnerable areas. However, researchers showed that this discount “applied only to the vulnerable homes that also were in a flood zone where homeowners face a federal requirement to have flood insurance.”

• “Homes that were vulnerable to sea-level rise—but not in an area that requires flood insurance—saw no price discount. In fact, those homes had a ‘price premium’ of 3.5 percent, Freddie Mac researchers found.”

• Researchers concluded that the cost of flood insurance—not the actual vulnerability to sea level rise—drove the real estate prices down.

• The literature on climate change and coastal properties is mixed: another book by two researchers at Georgia State similarly found that rising sea levels have had little effect on the South Florida housing market, while other research has found that property values do fall in the counties where more people believe that climate change is occurring.

State Legislatures

On Wednesday, the conservative American Legislative Exchange Council released a model policy to block state pension funds from selecting investments based on environmental, social, and governance factors.

• Echoing the Trump-era Department of Labor rule that limited consideration of ESG factors, the ALEC proposal says that retirement plan fiduciaries should make decisions “based solely on pecuniary factors that have a material effect on the return and risk of an investment.”

• “[T]he Alec Proposal would go even further than [the Trump administration’s] rule by, for example, expanding the definition of what constitutes a material financial risk to exclude uncertain events in the future—which might include climate change.”

• Advocates for public pensions—such as the National Association of State Retirement Administrators—have suggested that the proposal would improperly narrow the scope of a fiduciary. “As far as I know, ESG is within the realm of a fiduciary,” said Keith Brainard, research director at NASRA.

Other Items of Interest

A new working paper by Jeremy Kress argues that the U.S. banking system is uniquely susceptible to climate risk because “a little-known statutory provision that prohibits U.S. regulators from relying on external credit ratings in their bank capital requirements . . . will likely incentivize ‘brown’ companies to borrow more from U.S. banks, intensifying the banking system’s exposure to climate risks.”

• The paper argues that policymakers must act swiftly to address this vulnerability by repealing the relevant statutory provision and/or implementing “various forms of climate-sensitive capital rules that would likewise introduce climate risk sensitivity into the U.S. capital framework.”

The Canadian Government’s budget proposal, which was released yesterday, specifies that “The federal government is committed to moving towards mandatory reporting of climate-related financial risks across a broad spectrum of the Canadian economy, based on the international Task Force on Climate-related Financial Disclosures (TCFD) framework.”

• The budget proposal says that the Canadian Office of the Superintendent of Financial Institutions will use a phased approach to require the disclosures starting in 2024.

• The budget also pledges $8 million over three years to fund the Montreal office of the ISSB.