Abstract
Different sets of actors recognize that effective implementation of the global Paris Agreement and the Sustainable Development Goals requires changes in finance and risk management. These actors have requested that financial decision-making consider the negative externalities, by inculcating the goal to achieve 1.5°C as the upper limit for global warming (Basel Committee on Banking Supervision, 2021; UNFCCC, 2022) while also ensuring that this is accompanied by emissions reductions, particularly by corporates, that is sufficient to avert climate change. Given the emission targets that corporates are required to meet, volatility in carbon prices presents a new risk and requires further consideration on how this affects green financing opportunities for and by corporates. Despite the various scientific studies on the climate crisis, there are still limited scholarly works that discuss these two concepts in a practical way and how they are applied in the private sector, public sector and within the international development space. In this book, Mr Ezroj draws inspiration from his experience as a practitioner, public servant and lawyer to examine the under-studied theme of carbon risk and green finance opportunities.
The book’s narrative format takes the reader through a historical trajectory of climate-related issues, the use of various tools, techniques and standards to analyse or assess climate risk and green finance opportunities with illustrations from different jurisdictions. It is presented across eight chapters, with the first and last providing an introduction and concluding insights. The second chapter focuses on the reporting frameworks, while the following five chapters are on various analytical tools covering Carbon Footprint, Brown Taxonomies, Green Taxonomies, Scenario Analysis and Stress Testing. Throughout the book, Ezroj discusses ‘what’, ‘when’, ‘how’ and ‘why’ of the various major tools or issues for carbon risk management with some vivid descriptions which could aid readers in cross-checking the tools themselves given the rapid changes evidenced in this space.
Given the recent developments in harmonization by the establishment of the International Sustainability Standards Board (ISSB) in 2021, this book focuses on climate change just before a global harmonization process has been initiated. The book generally argues that the current climate science reporting regimes across the world are just at experimental stages, characterized by an ‘alphabetic soup’ of standards either solely focused on climate change or as part of broader sustainability standards. Ezroj provides a historical discussion of carbon risk and green finance reporting frameworks at the global level while providing illustrations from existing organizations, state institutions, governments and global actors. This covers the Kyoto Protocol of 1997, the Task Force on Climate-Related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP), the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB), the Sustainability Accounting Standards Board (SASB) and United States (US) Securities and Exchange Commission (SEC) requirements, among others. Some specific scenarios were picked from some actions by the State of California, the members of the European Union (EU), the French Energy Transition Law, and some examples from China, Singapore and the Netherlands.
Most of the chapters focus on the various analytical and technical tools used for carbon risk and green finance analyses across the world. Under carbon footprint calculations, the author focuses on both the Kyoto Protocol and the Greenhouse Gas (GHG) Protocol discussing the six GHGs and the three scopes (Scope 1 for owned and controlled GHG sources, Scope 2 for indirect GHGs and Scope 3 for value chain emissions). Among the various frameworks, Ezroj discusses how the TCFD has permeated all and gained increasing alignment from other emerging frameworks. The book touches on the role of carbon footprint calculations with new tools for evaluating investments either using a top-down GHG analysis or a bottom-up analysis. The author also reflects on the problems with the computations especially with Scope 3 while recommending the disclosure of more granular data on these emissions to enhance decision-making and investment portfolio analysis. The book also provides a discussion of some technical climate finance issues such as brown and green taxonomies, the carbon bubble hypothesis, the Climate Risk Carbon Initiative and the Global Coal Exit List. In both contexts, Ezroj discusses progress in the use of unique identifiers of debt and equity assets, as well as the involvement of third-party data providers with possibilities to use automatic analysis to provide alternatives that can be relevant for decision-making. The book also discusses how the use of scenario analysis and stress testing is emerging within the financial sector and gives a vivid discussion of the simulation exercises done in climate finance. Ezroj further discusses how these approaches can be used in the banking and insurance sectors.
The book is written to appeal to both a technical and a non-technical readership, covering people in practice, policy, diplomacy and academia. This seminal book takes the reader through a step-by-step discussion of the various standards, frameworks and tools based on examples in the US, Europe and some of Asia. However, most of the discussions presented are more US-centric. This could be attributed to the US-based experiences of the author. One would have expected that given the adverse negative impact of climate change on Africa, the book should have captured some of the best practices from the continent. For instance, South Africa has a relatively improved reporting regime and has organization and national examples which if included could provide relevant insights. The book could have captured some of the notable progress in the areas of carbon risk assessments and disclosures and green finance initiatives in the African continent as well as issues relating to the current state of Climate Monitoring, Reporting and Verification efforts which apply to national climate action. Other themes missing from the book are the application of assurance and auditing principles regarding climate disclosures and the materiality and financial implications of carbon risks.
Despite these, I would recommend this book because climate change risks will continue to increase, and a resilient post-pandemic global outlook will drive green finance opportunities. This book provides explanatory discussions of some of the fundamental issues in a simple, practice-styled manner with strong research quality and is a must-read.