Section I describes the substantial initiatives currently under way globally to expand the mandatory-disclosure framework in a way that provides meaningful perspective on exposures to climate-related risks. Many of the public policy shifts have been under way for years, particularly in Europe. The policy process achieved critical mass globally in January 2020, and is not likely to peak before 2023.

Section II assesses the state of the debate concerning risk measurement in the climate-change context. Real and difficult issues exist for corporations and financial institutions. The stakes here are high. Mismeasurement can create material adverse consequences for economic activity. It is much too soon to know what the “right” answer might be, or even if a “right” answer can be identified. Section II, therefore, merely outlines the key issues for purposes of facilitating fact-based discussions.

Section III assesses the range of monetary policy challenges associated with expanded central-bank engagement to support climate-related initiatives.

The key findings and recommendations cover a wide range of issues.

1. Taxonomies and Disclosure Policy (Securities and Accounting Regulators): Regulators and standard setters should accelerate their efforts to define concrete, comparable mechanisms for measuring and disclosing exposures to climate-related risks so that investors can exert market discipline on issuers.
2. Scenario Analysis (Financial Regulators): Financial regulators (including central banks) should intensify their use of climate-scenario analysis to explore potential exposures—and potential measurement mechanisms—within financial firms.
3. Regulatory Capital (Banking Regulators): Banking regulators should identify how climate-related risks are already incorporated into either the operational-risk paradigm or the credit-risk paradigm.
4. Financial Stability (Macroprudential Regulators): Policymakers should provide more clarity regarding whether and how climate-related risks generate financial-stability issues that require official-sector engagement.
5. Green-Bond Holdings (Central Banks): Central banks should provide clear disclosures regarding the scale, scope, and standards they use to purchase green bonds.
6. Green-Collateral Policy (Central Banks): Central banks should provide clarity concerning whether and to what extent green bonds will be accepted to meet collateral requirements for overnight liquidity operations.

Policymakers around the world are beginning to take steps in many of these directions. The recommendations in this paper seek simply to encourage policymakers to intensify their engagement and provide clarity. Capital markets and climate advocates will require decisive action from policymakers faster than the traditional international consensus-building process typically allows. Clarity concerning direction, priorities, taxonomies, and standards in the near term can help mitigate financial-stability risks driven by uncertainty.

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