TCFD: A global perspective

In conversation with Ashley Alder, Chair of the International Organization of Securities Commissions (IOSCO) and CEO of the Securities and Futures Commission (SFC) of Hong Kong

 

We spoke with 
Ashley Alder

to learn more about how regulators are prioritizing climate disclosure and what further steps can be taken to finance the transition to a net-zero carbon economy. Here’s what he had to say…

Ashley Alder is the Chief Executive Officer of the Securities and Futures Commission (SFC) of Hong Kong and Chair of the International Organization of Securities Commissions (IOSCO)

How can TCFD help progress climate disclosures in Hong Kong and in the broader Asia Pacific region? With regard to disclosures, what is the key priority for securities regulators in 2021?

Climate disclosures are an incredibly important part of the effort to direct investments to sustainable uses and reach net-zero targets. Where these disclosures are consistent and comparable — and therefore of real use to investors — we need to agree on a set of common reporting standards, which apply across the board.

The TCFD recommendations are a great starting point and it is essential that they be widely adopted. The next step will be crucial: to build more specific disclosure standards around the core TCFD elements, which are mainly to do with governance, risk management and strategic decision making.

Here in Hong Kong, the size of our capital markets means that what we do has global significance. We want to take a leadership role in this effort. Working through a cross-agency steering group, the Hong Kong government and all the local financial regulators have committed to mandatory TCFD-aligned disclosures by 2025. New Zealand has also committed to this, and we hope other countries in Asia-Pacific will follow suit.

With regard to disclosures, what is the key priority for securities regulators in 2021?

A top priority is to work with the International Financial Reporting Standards Foundation (IFRS) on its proposal to set up a sustainability standards board similar to the International Accounting Standards Board. The IOSCO Board strongly supports this effort, and, in fact, IOSCO played a similar role in the initial development of the IFRS international accounting standards in 2000.

By September, the IFRS Trustees will have announced a definitive proposal, roadmap and timeline so that the establishment of the new board can be considered at COP26 in November.

A lot of work still needs to be done to ensure the new board provides a solid system architecture for sustainability-disclosure standards. The outcome will need to be scalable and deliver actionable information to investors.

Another welcome development is the climate-disclosure prototype put out by an industry-driven initiative, which brings together five major international standard-setting organizations. It incorporates what are so far the most widely accepted sustainability standards that use the TCFD framework as a base. This could speed up the standard-setting process and give the new sustainability standards board a running start.

What advice do you have for regulators who are still in the early stages of their sustainable finance strategies or perhaps, are yet to begin?

Ideally, the process should be evidence-driven from the outset, both in terms of the science and the economics of climate change. You need to understand the potential impact of climate- and sustainability-related issues on investments within your jurisdiction, including the financial and social costs of failing to deal with climate risks.

A sharp focus on transition risks is also important. As more governments and investors make net-zero pledges, we can expect to see the roll-out of concrete climate policies to steer the economy towards net-zero. Expectations around carbon pricing and trading will also be a major driver for the disclosure of transition scenarios.

At the early stage, regulators should consider how to leverage the regulatory tools currently available to them so that climate risk can be addressed as a financial risk. They can then look at how the introduction of climate- or sustainability-specific rules could provide more transparency and improve investment-management practices in this area.

Important issues around investor protection will also need to be addressed, particularly those stemming from greenwashing. Regulators should set clear expectations for sustainability-related disclosures by asset managers and for green and sustainable investment products.

How can policy makers and regulators play a role in supporting private sector financing in the transition to a net-zero carbon economy?

The bottom line is that the major investments needed to fund the transition go well beyond what the public sector can provide. There has to be a collaborative effort to reallocate capital to innovation and sustainable growth in the economy.

That is why sustainability-related disclosures are so important. They can provide both institutional and retail investors with visibility over the impact of their investments and how resilient their portfolios are to climate-related risks. These disclosures will also be critical for financial regulators to better understand and manage the risk that climate change presents to the financial system.

We are now consulting on ways to integrate climate risks into asset management and make climate reporting mandatory for asset managers in Hong Kong. This would not only cover financially material climate-related information — we also want to get at the relationship between business activities and carbon emissions through the disclosure — at the portfolio level — of weighted-average carbon intensity, which is an indicator of the volume of emissions being financed.

Taxonomies will also have a big role to play by helping the market define what is green and what is not. The financial regulators in Hong Kong plan to adopt the ‘common ground’ taxonomy now being jointly developed by the EU and China. This will place Hong Kong in a leading position to intermediate global climate finance between these two large economies, both of which are committed to achieving the net-zero target.