Regulators Urge Banks to Hire External Auditors to Verify Climate Data
According to a report released recently by the Financial Stability Board, regulators may require banks and other financial firms to hire external auditors to verify the quality of their climate data.
As part of the government's efforts to fulfil net-zero economy targets over the coming decades, financial firms will be obliged to explain how climate change affects their company.
However, data checks are sporadic and discretionary, boosting the potential of 'greenwashing' or inflated climate-friendly claims to entice investors.
FSB report said,
"Where appropriate within jurisdictions’ legal and regulatory frameworks, supervisory and regulatory authorities should consider the need for third-party verification to strengthen the reliability of climate-related data. Third-party verifications could play an important role also in avoiding greenwashing risks."
After trillions of dollars have flowed into the environment, social, and governance (ESG)-related investments based on a patchwork of disclosures and checks, regulators have become increasingly concerned about greenwashing.
The Financial Stability Board (FSB) consists of financial regulators, central bankers, and treasury officials from the Group of 20 economies, and it establishes regulatory standards that they pledge to follow.
One of the key obstacles to regulating climate-related reporting by financial institutions, according to the paper, is the lack of sufficiently consistent, comparable, granular, and credible climate data given by financial institutions.
The FSB also stated that banks should assess whether a system-wide "macroprudential" capital buffer is required to cover climate risks that could jeopardise the financial system.
The FSB added,
"As climate change is likely to represent a systemic risk for the financial sector, potential macroprudential tools or approaches would complement macroprudential instruments. G20 members are encouraged to expand the use of climate scenario analysis and stress testing of financial firms to gauge the extent of this systemic risk."