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Regulators call for external checks on bank climate data

Regulators could force banks and other financial firms to hire external auditors to check on the accuracy of their climate data, the Financial Stability Board said in a report on Friday.

Financial firms are being required to spell out how climate change is affecting their business as part of government efforts to meet net-zero economy targets over the coming decades.

Checks on the data, however, are voluntary and patchy, raising the risk of ‘greenwashing’ or exaggerated climate-friendly claims to attract investors.

“Where appropriate within jurisdictions’ legal and regulatory frameworks, supervisory and regulatory authorities should consider the need for third-party verification to strengthen the reliability of climate-related data,” the FSB said in a report.

“Third-party verifications could play an important role also in avoiding greenwashing risks,” it said.

Regulators have become increasingly worried about greenwashing after trillions of dollars globally have flowed into environment, social and governance (ESG) related investments based on a patchwork of disclosures and checks.

The FSB comprises financial regulators, central bankers and treasury officials from Group of 20 economies and set outs regulatory principles they commit to applying.

It said the lack of sufficiently consistent, comparable, granular and reliable climate data reported by financial institutions is one of the main challenges for regulating climate-related reporting by financial firms.

There is also a need to consider whether a system-wide “macroprudential” capital buffer is needed for banks to cover climate risks that could undermine the wider financial system, the FSB said.

“As climate change is likely to represent a systemic risk for the financial sector, potential macroprudential tools or approaches would complement microprudential instruments,” the FSB said.

G20 members are encouraged to expand the use of climate scenario analysis and stress testing of financial firms to gauge the extent of this systemic risk, it added.