The U.S. Climate Finance Working Group, which comprises ISDA and 10 other trade associations, published principles for a U.S. transition to a sustainable low-carbon economy. The principles are intended to serve as a useful framework, offering perspectives from the full spectrum of the financial services industry including banks, investment banks, insurers, asset managers, investment funds, pension funds, and other financial intermediaries. The key principles include fostering international harmonization of taxonomies, data standards, and metrics; promoting more robust climate disclosure and international standards; and ensuring that climate-related financial regulation is risk-based.
The principles are as follows:
- Set science-based climate policy goals that align with the Paris Agreement. Climate goals should be based on the best available science and climate scenarios. Goals should have a clear timeline. Policies and standards should be data-driven, based on available and accessible information and supported by rigorous research and analysis, which will provide certainty to market players across industries.
- Increase and strengthen US international engagement. The U.S. should engage proactively through international forums that are shaping global climate policy and frameworks to help orient the financial system’s response to climate risks.
- Provide clear long-term policy signals that foster innovation in financial services. Effective long-term policy will enable development of the new financial and environmental commodity products sought by our customers—including for example environmental, social, and governance (ESG) bonds and green mortgages. Harmonization of definitions and labels, including recognition of market-based standards and principles, would help achieve the necessary scale in climate investment.
- Price carbon and leverage the power of markets. Deep and liquid U.S. capital markets are critical to mobilize the cross-border capital flows needed to finance lower-carbon solutions and climate-resilient infrastructure. To drive capital investment, the Working Group supports the use of market-based mechanisms, including a price on carbon that supports long-term decision-making.
- Foster international harmonization of taxonomies, data standards, and metrics. Widely accepted standards for data and climate risk metrics across sectors will support sound risk assessment and effective disclosure. Shared standards are also key to supporting the market-based solutions that will properly account for the costs of climate change. However, alignment of standards should allow for a degree of regional variation, where needed, to accommodate differences in economic structure, policy goals, and pace of transition in different jurisdictions.
- Promote more robust climate disclosures and international standards. Good disclosures are critical for effective climate risk mitigation and capital allocation from the financial services industry. Information about risk and opportunity allows lenders and investors to effectively price and manage risk and allocate capital to achieve desired financial returns.
- Ensure climate-related financial regulation is risk-based. Financial regulation should remain dedicated to ensuring the resilience and stability of the financial sector.
- Build capacity on climate risk modeling and scenario analysis. While good progress has been made, climate risk assessment and scenario analysis efforts are still at early stages worldwide. Financial regulators and industry risk professionals should work together to develop climate risk modeling—supported by rigorous analysis—that can be flexible across different jurisdictions but aligned in approach to avoid fragmentation, with a common set of broad climate risk assumptions, scenarios, and guidelines such as those being developed by the Network for Greening the Financial System or NGFS.
- Strengthen post-disaster recovery, risk mitigation, and adaptation. Risk finance instruments that strengthen climate resilience and enable better disaster recovery for customers and local communities are a critical channel through which the insurance sector can help mitigate physical climate risks. Market-led, customer-centric innovative financial solutions from insurers and reinsurers, lenders, and investors should be paired with a policy and regulatory environment that supports associated commercial opportunities. Additionally, development of ESG derivatives will enable better hedging of climate-related risks.
Keywords: Americas, US, Banking, Insurance, Securities, Climate Change Risk, Low-Carbon Economy, Taxonomy, Disclosures, ESG, Sustainable Finance, NGFS, ISDA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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