Central banks call for transparency on green finance

An organisation of 114 central banks and supervisors said today that market transparency surrounding green and energy transition objectives must improve, green taxonomies should be interoperable and efforts on climate disclosure must redouble.

The Network for Greening the Financial System (NGFS) said environmental, social and governance (ESG) practices require further assessment and scrutiny as they increase, and resulting green objectives should be understood by policymakers and investors. Transparency is key "both to enhance market functioning and preserve financial stability," including around the risks of so-called stranded assets, it said.

It noted the private sector dominates the market for "green external review" and there is growing demand for "an evaluation of the environmental impact not only of green finance instruments, but also of their issuing entities."

Transition frameworks and green taxonomies must be comparable and interoperable, to avoid "divergent green assessment outcomes," the NGFS said. They currently differ considerably and must be designed to work for both advanced economies and emerging and developing economies, it added.

"Taxonomies and climate transition frameworks are at their most effective when they have clear objectives and science-based net zero targets," the NGFS said.

Although there have been a raft of recent positive progression reports on sustainability from oil majors, these are generally based on targets set by the companies themselves and are often not aligned with Paris Agreement goals. The majority of listed companies are still not committed to temperature and net zero targets, and "ensuring the efficacy of market products for environmental impact and climate transition alignment to net zero is increasingly urgent," according to the NGFS.

It is concerned the lack of standardisation and transparency across ESG rating methodologies — something the OECD and international regulators organisation IOSCO has also highlighted — is providing a false sense of security for investors. ESG rating frameworks are "not well aligned with climate emissions, intensity, or evidence of reduction in intensity," but are instead "aligned with the mere act of disclosing well-crafted climate transition strategies," the NGFS said.

Founding NGFS member Banque de France this week joined global non-profit CDP as a capital market signatory, meaning it will request corporate environmental data disclosure through CDP's platform.

There are around 680 current capital market signatories, with over $130 trillion in assets, that request disclosure through CDP. Listed companies totalling 10,400, with a combined market capitalisation of $106 trillion, were asked to provide climate change, forestry and water security data via CDP this year, it said.

By Georgia Gratton