Smith Brain Trust / October 20, 2021

Finance Themes to Watch for During COP26

Finance Themes to Watch for During COP26

As global leaders and business leaders convene in Glasgow for the 26th UN Climate Change Conference of the Parties (COP26), Maryland Smith’s Clifford Rossi will be watching the headlines. He’ll be searching for potential policy decisions and contemplating the possible implications for climate change finance and risk management in both the private sector and public sector.

Here are some of the themes he’ll be watching for in particular:

Climate-related financial disclosure requirements: “I’m interested in seeing the further development of the Task Force on Climate-Related Financial Disclosures,” says Rossi, Executive-in-Residence and Professor of the Practice at the University of Maryland’s Robert H. Smith School of Business, referring to the entity created by the Financial Stability Board. “This is starting to pick up steam from different quarters of the regulatory community, so I’ll be watching what guidance comes out for financial companies and corporations around climate-related reporting and implementing those disclosure recommendations.”

Green project financing: He’ll be listening closely to discussions about how companies might secure investment partnerships for large-scale initiatives that will help them transition to a new, greener economy. He will specifically be interested in seeing what mechanisms and financing vehicles will be leveraged, such as the role of carbon markets, expansion of green bond financing, and climate derivative products. And he’ll be watching for signals about what multilateral development banks (MDBs), such as the World Bank and International Monetary Fund, might do to facilitate investment in developing countries to achieve net zero emissions.

Rossi has developed a new climate derivative product that could be leveraged by credit investors in mortgage securities and loans. As he surveys the developments from COP26, he will be looking to see what enhancements to the structure and pricing of carbon markets might be considered in promoting efficient market-based incentives for transitioning to a greener economy.

Climate stress testing: “Are there going to be discussions about what’s in store for climate stress testing in particular? It’ll be interesting to see if there’s any discussion that comes out of the U.S. to see if this takes the Federal Reserve down a path to perform similar financial stress tests to those of the biggest banks,” he says. Rossi recently testified to Congress, where he said the climate models, the large socio-economic models and data used to set climate scenarios for banks are incompatible with current bank stress test processes. He said they are of limited value to banks for making long-term strategic investment decisions.

A role for global entities: Rossi says he’s also looking forward to greater insights into the role that public entities, governments, and multilateral development banks like the World Bank and IMF can play in addressing climate change. In particular, he says he’s intrigued by learning how they can help identify climate risk vulnerabilities in certain areas around the world that don’t have the same viable investment and financing solutions. “It gets back to things like figuring out ways to prevent something like rain forests from being burned down using economic incentives and financing vehicles,” says Rossi. “Seeing different forms of incentives and disincentives, whether it be in the form of taxing, public grants or subsidies, will be significant towards adaptation and resilience.”

He says that for climate change to establish itself as a priority for Wall Street, it will require greater linkages between scientists and finance practitioners, something Rossi is actively working on with faculty from UMD’s College of Computer, Mathematical, and Natural Sciences, and from the School of Public Policy in an interdisciplinary initiative on climate change finance and risk management. Partners in the initiative include the National Institute of Standards and Technology (NIST), the National Oceanic and Atmospheric Administration (NOAA), NASA and the Joint Global Change Research Institute.

What’s most important to take away from COP26, Rossi says, is the interconnectedness of climate change and the economy.

“There is somewhat of a disconnect between climate science which focuses on multi-decade physical impacts to the planet and the generally shorter-term focus by financial institutions on financial performance,” says Rossi.

Related: Rossi, as academic director of the Maryland Smith Executive Risk Academy, will join Professor Tim Canty from UMD's Department of Atmospheric & Oceanic Science for a webinar, "A Scientist's Take on Climate Models and Risk Management Applications," at 10 a.m. November 17, 2021.

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