The principles are intended to guide the industry’s engagement with policymakers concerning the ongoing economic transition away from carbon.

By Paul A. Davies, Jason C. Ewart, and Edward R. Kempson

The US Climate Finance Working Group, a group of leading financial services trade associations, has published “Financing a US Transition to a Sustainable Low-Carbon Economy” — a set of principles for how the financial services industry can play a role in addressing climate change.

The principles, not meant to be exhaustive, are intended to serve as a useful framework for the industry’s engagement with policymakers to find practical, market-based solutions to the challenges and opportunities related to climate risk and the ongoing economic transition away from carbon. The working group noted that while individual institutions can play a significant role in the global effort to address climate change, policy must provide a critical foundation for driving the transition.

The US Climate Finance Working Group’s recommended principles are to:

  • “Set science-based climate policy goals that align with the Paris Agreement” (based on the best available science and with a clear timeline set)
  • “Increase and strengthen U.S. international engagement” (on forums such as G20 and the Network for Greening and Financial System)
  • “Provide clear long-term policy signals that foster innovation in financial services” (to enable the development of new financial and environmental commodity products)
  • “Price carbon and leverage the power of markets”
  • “Minimize costs and support jobs in the transition” (utilizing mechanisms such as carbon offsets and via targeting job creation, especially in low-income communities)
  • “Foster international harmonization of taxonomies, data standards and metrics” (to support sound risk assessment and effective disclosure)
  • “Promote more robust climate disclosure and international standards” (allowing lenders and investors to effectively price and manage risk and allocate capital)
  • “Ensure climate-related financial regulation is risk-based” (without restricting finance to companies most in need of support for the transition)
  • “Build capacity on climate risk modeling and scenario analysis”
  • “Strengthen post-disaster recovery, risk mitigation and adaptation”

The working group also further stressed the need for better climate disclosure and convergence towards an international disclosure standard to effectively mitigate climate risk and allocate capital from the financial services industry. The working group noted that progress has been made through voluntary environmental, social, and governance (ESG) disclosure initiatives; however, in its view, further improvements to climate disclosure are still needed so that lenders and investors can effectively price risk, manage risk, and allocate capital to achieve desired financial returns.

The working group members emphasized that policy measures should be proportionate, risk-based, and informed by consultation and rigorous data-driven analysis. The group sees an important and clear distinction between requirements intended to mitigate potential risk to the financial system, and requirements intended to advance broader economic and social goals.

The working group also highlighted the global nature of climate risk and the interconnectedness of the financial system by further emphasizing the need for active US engagement in international climate policy discussions. Such involvement would allow the US to serve as an advocate for transparency in policymaking. Further, the US would be better positioned to promote solutions that are compatible with its highly sophisticated capital markets regime, as well as to help share international standards under development. The working group noted that the financial services industry aims to facilitate such engagement by working with the new administration and Congress to establish a shared vision for US climate policy.

Latham & Watkins will continue to monitor publications and releases from the US Climate Finance Working Group and its members.