The European Commission’s High-Level Group on sustainable finance is currently looking at the pros and cons of slapping “penalties” on fossil fuel assets that may end up being stranded as investors shift to low-carbon portfolios, Christian Thimann told EURACTIV in an exclusive interview.
Christian Thimann is Group Head of Regulation, Sustainability and Insurance Foresight at the French insurance group AXA. He was recently appointed Chairman of the European Commission’s High-Level Expert Group on sustainable finance.
He spoke to EURACTIV’s publisher and editor, Frédéric Simon.
The Task Force on Climate-Related Financial Disclosures (TCFD) issued its final recommendations on 29 June. What are your main takeaways from this report?
The contributions of the TCFD are threefold. First, to mainstream the notion of climate risk in the firm’s annual financial reports. This is new because in the past, firms informed about these risks and opportunities in integrated reports, corporate responsibility reports, brochures, and other separate documents.
The second contribution is consistency. The recommendations can be applied across G20 countries. This is new because we counted many different national and local reporting frameworks on these subjects – up to 400.
The third contribution is that the disclosures are forward-looking. So far, we often focused on CO2 emissions for example, which offer a picture of the present. What the TCFD gives you is a film of the developments going forward. This is especially due to the parts on strategy and scenario analysis that are recommended.
Do you find these recommendations meaningful enough or do you find them too broad or vague?
I definitely find them meaningful and precise enough. We have worked very hard inside the task force to give guidance for specific sectors, not just for companies in general. So we have sector-specific guidance for banks, for insurers, for asset managers, for asset owners, industry, energy utilities and so on. And we’ve really worked hard to give those firms a lot of guidance on how they can prepare these disclosures.
How many companies do you expect will actually follow these guidelines? Do you think policymakers should encourage them?
I think many companies will follow them because it is increasingly becoming a business issue.
Of course, some sectors are impacted more directly than others – I’m thinking of coal, oil and gas, and the energy sector – but also transportation, chemicals, and heavy industry. All these companies are affected by these issues. And finally, it affects asset managers and asset owners. So this is why I expect a large take up.
When it comes to policymakers, they have a strong interest in taking up these disclosures because it provides better information about these risks and allows a better steering of the economy.
Companies like Aviva have argued for making disclosure requirements mandatory. And indeed it would help level the playing field. What is your view?
The answer depends a lot on how the guidelines are applied across constituencies. If we had a G20 consensus with the United States adopting the Paris Agreement, this would have made the level playing field much easier towards compulsory implementation across the G20.
Now, we have to see what happens at the G20 and whether it endorses the recommendations or not. The European position is already clear, namely to confirm the commitment to fighting climate change, which is very welcome. And then we have to see how to best transpose them in a way that doesn’t disadvantage European companies in terms of commercial risk, reporting burden and legal risk vis-à-vis US competitors.
So you’re saying Europe shouldn’t move unless all the other regions move at the same time?
No, but let us first wait for the G20 outcome. If by surprise the G20 with the US endorses the TCFD recommendations and backs their inclusion into a statutory disclosure framework, then there would be a straightforward basis. If that’s not the case, one has to examine how we can most effectively advance in Europe while keeping a global level playing field for companies here. The good thing is that these recommendations are meant to help companies in their reporting about climate-related risks and opportunities and that many companies have already declared that they find them useful and will apply them independently of an official G20 position on the issue.
That’s assuming the US doesn’t endorse the recommendations.
Exactly. Then we would have to think what it means. Whether we still go for compulsory reporting or leave this as an industry-led exercise that is adopted by industry on a voluntary basis. Interestingly, we see take-up by US companies independent of the official US position on the subject.
You were appointed last December by the European Commission to chair a High Level Expert Group on sustainable finance to work on climate-related financial disclosure and other sustainability reporting recommendations. How will the work from that group differ from what the TCFD is doing?
It will be different in several ways. In the High Level Group, we work hand in hand with the regulator – the European Commission in this case – which provides the secretariat for the group. So that’s a big novelty – our secretariat is the Commission, not the industry.
Second, the scope is broader – we look at all sustainability issues. We focus now a lot on climate and the environment but we will eventually also look at social and governance issues. And third, we deal with other issues than disclosures. We look at things like a green ‘taxonomy’ (i.e. what activities are explicitly deemed to be green or sustainable), green bond standards, and the long term orientation of finance for the real economy.
Data formats and reporting need to be standardised in order for it to be comparable. So how far advanced are you in areas like standardisation?
We are almost half-way through. There will be a stakeholder event in Brussels on 18 July where the Group will present its interim report. We hope to collect feedback before our final recommendations in December. But we may have early recommendations already because we are so well advanced.
But how far do you aim to go in terms of definitions and standardisation of reporting?
This is something currently under discussion. This will come out on 18 July. We’ll see whether there is a recommendation but definitely we believe it is important to advance on the definitions and possibly also on standards. We need a clear taxonomy, we need standards in order to advance on this issue.
Some policymakers have suggested “penalties” should apply to assets in highly-polluting sectors like fossil fuels while other valuations like renewable energies could be rewarded positively with a kind of “bonus” system. Do you agree such a system is desirable?
I would agree that we have to look at it. But we have to assess the pros and cons very carefully. Valuations in the financial system are very much based on the ‘materiality’ of financial risks. So do we believe that there is a material risk that should be reflected in penalties or supportive factors? That’s very different from a general policy signal.
For example, green bonds are not necessarily less risky but some policy-makers might still want to give them a policy signal somehow, a kind of subsidy. These are two very different debates. So we have to see whether it’s warranted and what would be the right place for such penalties or subsidies to be included.
This is something that merits close attention and that we are putting on the table in the High Level Group on sustainable finance. We don’t want to jump too early to conclusions. We’re looking at the pros and cons but we feel we need to engage with stakeholders before coming up with recommendations.
Some have argued for higher capital requirements for investments in highly polluting sectors. Down the line, do you believe this is the obvious thing to do?
We call it the ‘brown penalising factor’, as opposed to the ‘green supportive factor’. And indeed it merits consideration when the risks are higher, not just for the financial sector. Think of stranded assets: maybe we are valuing oil reserves today that the world will never exploit and will therefore lose value. So we may be overestimating their financial value, and ignoring a risk which could be taken into account.
The question is whether capital requirements are the most effective way to steer investment. If policymakers want to phase out coal, the question is whether a capital charge differential that will impact bank lending is the appropriate and most effective tool to achieve that goal.
Is there a consensus building in the High-Level Group over what would be the most effective instrument?
We have a consensus that these issues merit attention, we want to list the pros and cons, and put the issue to debate. And this is why we’re having a stakeholder engagement process starting in July before moving to the recommendations phase in the autumn.
When do you expect climate-related risk and other sustainability reporting will become mainstream in the financial sector?
The process has started. AXA for example has already taken into account the TCFD framework to a large extent because we have been involved in the group very closely and we believe this is the right thing to do. 100 CEOs have signed the TCFD declaration because they believe it’s good for business to inform their investors and to have an internal discussion in the company.
This is something that is often overlooked. Reporting and disclosure engages the whole company because it has a big impact on management and strategy. By obliging firms to report on something you also impact the internal management.
And because it impacts financial flows considerably, it also hastens the pace of change in some sectors of the economy…
Exactly. As soon as senior managers see something as an issue, they start investing in measuring it, in understanding it, and in modelling it. The impact of disclosure goes far beyond the external readers of the annual report; they also have a deep impact on the internal management and strategies of corporations.
Have assessments been made of the impact to some sectors of the economy depending on how tough the disclosure requirements are?
No, that would be interesting. What we’re doing is trying to encourage companies to adopt these disclosures because we believe they are helpful.