Towards Climate-related Statistical Indicators

The European Central Bank (ECB) recently published its first climate-related statistical indicators. As the accompanying report explains, they are collectively intended to “improve transparency” on climate-related matters.

They also bring the ECB “in line with its mandate” by measuring the development of green financing and quantifying the financial sector’s exposures and contributions to climate risks. The three sets of indicators cover sustainable debt instruments, carbon emissions and physical risk.

The report also states that while publication of the indicators is a watershed moment and a sign of “significant progress”, they are nevertheless a “work in progress” due to serious issues in data quality.  However, the authors anticipate improvements in in the coming months, as EU instruments – such as the sustainable finance disclosure regulation, the corporate sustainability reporting directive and the taxonomy regulation – take effect.

The first set of indicators cover the issuance and holding of sustainable debt instruments, and are useful for improving market transparency and informing monetary and financial policy. The second concerns carbon emissions and financial institutions. This includes both the financing of and exposure to emissions, building double materiality into the analytical framework.

The third captures the physical risks of lending portfolios, and how vulnerability, exposure, hazards and geo-location interact across seven kinds of hazards, namely coastal and river flooding, windstorms, subsidence, landslides, water stress and wildfires. They express risk as a percentage of the portfolio to enable comparison of disparate physical risks.

The report also considers indicator limitations and proposes areas for improvement:

• Sustainable debt instruments: the indicators can use a loose assurance level, by accepting self-assessments and not discerning between levels of assurances, such as certification. The EU’s green bond initiative is expected to bring in more stringent standards.
• Carbon emissions: corporate emissions data and balance sheet information are only available for 47% of outstanding debts. Data also does not capture emissions along the value chain, obscuring outsourced production. Future work should include scope 3 emissions and scope 2 emissions for single entities, as well as harmonisation to address differences in samples and data availability.
• Physical risks: indicators do not consider co-occurring natural hazards, chronic climate issues or broader economic risks, meaning physical risks may be underestimated. Collateral infrastructures, adaptation measures and insurance coverage are also not considered, meaning risks may be overestimated in cases with adaptation infrastructures. Future work should incorporate collateral value in risk assessments and provide the granular data required for including insurance coverage.

Finally, the paper notes that while the experimental sustainable finance data are “sufficiently reliable” for economic analysis and monetary policy, both the carbon emissions and physical risks data do not meet ECB quality standards and are published only as analytical indicators.