The world of global climate policy hit a significant roadblock Monday as the Financial Stability Board (FSB), the G20’s influential financial watchdog, effectively paused its work on climate risk guidance amid growing international divisions. This development signals a troubling shift in global cooperation at a time when climate-related financial risks continue to mount worldwide.
The FSB, originally established to prevent another 2008-style financial crisis, announced it would not proceed with finalizing recommendations for financial firms and supervisors on managing climate-related financial risks. Instead, the organization will step back to “take stock” of ongoing initiatives, reflecting deep fractures among the world’s largest economies on how to address climate change through financial regulation.
Having covered financial markets for nearly two decades, I’ve rarely seen such a clear public acknowledgment of policy deadlock from a major international body. The FSB’s decision arrives against a backdrop of mounting political pressures and shifting priorities in key member nations.
“This reflects the reality that different jurisdictions are moving at different speeds and in somewhat different directions,” said Adair Turner, former chair of Britain’s Financial Services Authority, in a conversation with me last week. Turner, who has been vocal about climate-related financial risks, described the situation as “inevitable given the political complexities.”
The timing is particularly significant coming just months after the U.S. Securities and Exchange Commission (SEC) dramatically scaled back its climate disclosure rules for public companies following intense industry pressure and legal challenges. The original proposal would have required detailed reporting on greenhouse gas emissions and climate risks, but the final version eliminated many key provisions, including mandated disclosure of indirect emissions.
Federal Reserve Governor Christopher Waller recently made the U.S. position even clearer, stating the central bank should focus on its core mandates of price stability and employment rather than climate issues. This represents a marked shift from the Fed’s previous approach under Chair Powell, who had acknowledged climate change as a potential financial stability risk.
Market analysts I’ve spoken with point to deeper dynamics at play. “We’re seeing a fundamental recalibration of the global consensus on climate finance,” explained Maria Demertzis, senior fellow at Bruegel, the Brussels-based economic think tank. “Countries are increasingly viewing climate policy through the lens of national competitiveness rather than global cooperation.”
The data supports this assessment. According to the Climate Policy Initiative, while global climate finance flows reached a record $1.3 trillion in 2022, this remains far below the estimated $4-6 trillion annually needed to meet Paris Agreement goals. The investment gap is widening precisely as regulatory cooperation falters.
The FSB’s retreat also follows intense pushback from some member countries that have argued climate policies could hamper economic growth, particularly in developing economies still heavily dependent on fossil fuels. Saudi Arabia and other oil-producing nations have consistently resisted efforts to accelerate the transition away from carbon-intensive industries.
The European Union, meanwhile, continues to forge ahead with its ambitious European Green Deal and related financial regulations. The EU’s taxonomy for sustainable activities and corporate sustainability reporting directive represent the world’s most comprehensive regulatory approach to climate finance, creating a growing policy divergence with other regions.
“What we’re witnessing is a fragmentation of the regulatory landscape that could ultimately increase costs and complexity for global financial institutions,” noted Javier Solana, senior lecturer in financial regulation at the University of Glasgow. Financial firms increasingly face the challenge of navigating inconsistent rules across jurisdictions.
The implications extend beyond regulatory compliance. Climate-related physical risks – from hurricanes to droughts – continue to grow, with insured losses from natural disasters reaching $140 billion in 2023 according to Munich Re. Meanwhile, transition risks associated with the shift to a lower-carbon economy remain substantial, particularly for carbon-intensive sectors.
Central banks and financial regulators have increasingly recognized these risks. The Network for Greening the Financial System, a coalition of central banks and supervisors, has expanded to 129 members and observers since its founding in 2017. However, their ability to implement consistent policies now faces significant political headwinds.
The FSB stated it would continue working on analyzing climate-related financial vulnerabilities, while “reconsidering the timing and approach to its climate-related work.” This diplomatic language masks what sources close to the discussions describe as fundamental disagreements on both the scope and necessity of climate risk regulation.
For international investors, the policy divergence creates both challenges and opportunities. “Markets hate uncertainty, but they also reward those who can navigate regulatory complexity,” said Rebecca Henderson, professor at Harvard Business School who specializes in sustainable business strategy. “The firms that can adapt to this fragmented landscape will ultimately gain competitive advantage.”
As global financial policymakers gather for upcoming meetings, including the IMF-World Bank annual meetings in October, climate finance will remain a contentious topic. Whether the current impasse represents a temporary setback or a more permanent fracturing of international cooperation remains to be seen.
What’s clear is that the challenge of addressing climate-related financial risks hasn’t diminished – only the coordinated global response has weakened. For the financial system, this regulatory uncertainty may ultimately prove to be its own form of climate risk.
