Climate finance and disclosure for institutional investors: why transparency is not enough

Abstract

The finance sector's response to pressures around climate change has emphasized disclosure, notably through the recommendations of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD). The implicit assumption-that if risks are fully revealed, finance will respond rationally and in ways aligned with the public interest-is rooted in the "efficient market hypothesis" (EMH) applied to the finance sector and its perception of climate policy. For low carbon investment, particular hopes have been placed on the role of institutional investors, given the apparent matching of their assets and liabilities with the long timescales of climate change. We both explain theoretical frameworks (grounded in the "three domains", namely satisficing, optimizing, and transforming) and use empirical evidence (from a survey of institutional investors), to show that the EMH is unsupported by either theory or evidence: it follows that transparency alone will be an inadequate response. To some extent, transparency can address behavioural biases (first domain characteristics), and improving pricing and market efficiency (second domain); however, the strategic (third domain) limitations of EMH are more serious. We argue that whilst transparency can help, on its own it is a very long way from an adequate response to the challenges of 'aligning institutional climate finance'.

Low‐carbon transition risks for finance

“…In particular, researchers have criticized too strong a focus on disclosure and the expectation that it will lead to an “efficient market reaction to climate change risks” (Carney, 2015, p. 12). For instance, Christophers (2017, p. 1124) contends that “there is something fundamentally awry with expecting enhanced disclosure to miraculously provide financial systemic safety.” Ameli, Drummond, Bisaro, Grubb, and Chenet (2019) argue, based on interviews with investors, that disclosure by itself is insufficient to change investment behavior, as the argument rests on the unrealistic efficient market hypothesis (that financial markets price in all information). Monasterolo, Battiston, Janetos, and Zheng (2017) note the difficulty of disclosing supply‐chain carbon exposure.…”

Mobilizing private finance for coastal adaptation: A literature review

“…Further, institutional investors with long‐term liabilities, that is, pension funds and insurers, have investment horizons that match the long time horizons of coastal adaptation projects. Due to their need to match investments and liabilities (Andonov, Bauer, & Cremers, ), pension funds and insurers, who control a large share of global assets, approximately $92 trillion in 2013 (OECD, ), could be a significant source of private finance for coastal adaptation (Ameli, Bisaro, Drummond, & Grubb, ).…”

Transformative narratives for climate action

“…A second set of papers address the cross-cutting issue of financing WWS, exploring questions regarding the role of international and sectoral policies for increasing the flow of finance for the sustainability transition. Ameli et al (2019) question whether the current regulatory emphasis on disclosure of climate risks for financial actors is sufficient for shifting institutional investors (i.e. insurers and pension funds) towards the green investments needed for a sustainability transition to meet the Paris Agreement targets.…”