The December 2015 Paris Climate Change Agreement came into effect on November4th 2016, following the decision by 55 countries and the European Union to act longbefore its originally expected ratification in 2020. It set in motion a global action plandesigned to avoid the worst impacts of climate change by targeting net carbonneutrality by the second half of the century. It allows nations to implement their ownplans, to co-operate in cutting greenhouse-gas emissions, and to review effortsperiodically in order to “ratchet up ambition”.

Recent research has indicated that there is only a 50% probability of staying belowthe Paris temperature target1—demonstrating the “tragedy of the horizon” describedby Mark Carney, the governor of the Bank of England (BoE) and chair of the FinancialStability Board (FSB), in which the need for action becomes apparent too late toprevent disaster. “The catastrophic impacts of climate change will be felt beyondthe traditional horizons of most actors, imposing a cost on future generations that thecurrent generation has no direct incentive to fix,” he said ahead of the Paris ClimateConference (officially known as the 21st Conference of the Parties, or COP21). “Onceclimate change becomes a defining issue for financial stability, it may already be toolate.”

Recognising that climate change is a systemic risk to financial stability—and in order tostand a chance of sticking to the Paris target despite the US administration’s decisionto withdraw its support—there must be more than just disclosure of emissions. TheJune 20172 recommendations by the FSB’s Task Force on Climate-related FinancialDisclosures (TCFD) provide a framework for businesses to make consistent climaterelatedfinancial risk disclosures that can be aligned with investors’ expectations andneeds. With consistent disclosure, both the business and the investor community shouldbe able to make more informed decisions to take steps to reduce their emissions andcreate greater business resilience. However, the recommendations are voluntary—they are reliant on market demand to drive adoption. Historically, the response tovoluntary recommendations has been mixed. International, regional and nationalsupervisors, regulators and standard-setters should therefore make climate-changerisk disclosure and reporting mandatory, otherwise the process risks being extended,reducing the likelihood of meeting the Paris target. Although not currently explicit inthese institutions’ respective mandates, there is definite scope for expansion of thesemandates because climate-change risk is considered by many, including the FSB, tobe a financial stability risk. As the BoE, a national regulatory body, has stated: “Forminga strategic response to the financial risks from climate change helps ensure the Bankcan fulfil its mission to maintain monetary and financial stability, both now and for thelong term.”