Beyond Disclosure: Managing Sovereign Climate Risk

Investors and regulators around the world are increasingly looking to understand how climate change could cause financial and economic harm. They are most concerned about the systemic financial risks associated with large-scale investments being held in assets which will be impacted by the climate crisis and its concomitant economic transitions. However, to date, the steps taken by industry groups and government to manage climate risks have focused on information disclosure from corporate actors (such as the Taskforce for Climate-related Financial Disclosure - TCFD). The logic of these initiatives is to create greater transparency and to enable capital markets to ‘price-in’ climate risks.

But corporations are only one type of actor involved in investment markets. Governments have borrowed money for centuries from private and public lenders. Indeed, government debt is at historically high levels at present. How should investors, regulators and governments themselves manage climate risks associated with such sovereign lending? To date, investors and governments have been emphasising disclosure as a mechanism for managing sovereign climate risk. But governments are structurally different to corporate entities, and many of the risks they face cannot be managed by disclosure itself. Indeed, disclosure may lead to significant ethical implications for countries. If not disclosure, what other approaches could sovereigns, investors and regulators take to manage such risks? In this talk we elaborate why sovereign climate risk is important and set out an initial framework for moving beyond disclosure in managing sovereign climate risk.