While the first few days of the 2021 United Nations Climate Change Conference (COP26) saw a significant focus on environmental pledges, the second half of the week – particularly “Finance Day” on November 3 – saw a greater focus on the finance industry’s role in reducing emissions, including potential impending reporting and regulatory requirements. Kelly Hagg, Global Head of Product Strategy and ESG, summarizes key announcements and their implications for the asset management industry.

Wednesday, November 3 was designated COP26’s Finance Day, during which a number of banks, investors, regulators and other businesses from the global finance community pledged to ever larger commitments. This took place as protests against (not entirely unfounded) claims of greenwashing at both the government and corporate level escalated around the events in Glasgow. As the second week of COP26 begins, the finance world ponders the potential implications from commitments made in week one while waiting to see what developments arise during week two.

Following is a summary of key Finance Day announcements and events from the second half of week one and our expectations of what they could mean for the asset management industry.

In what could be considered a reaction to China’s and Russia’s (two of the world’s largest carbon emitters) noticeable absence at COP26, as well as the fact that the U.S. climate plan has reached a political stalemate, a great deal of focus has been put on channeling private capital into the fight against climate change.

And business leaders have already begun to answer that call: Amazon CEO Jeff Bezos announced a $2 billion pledge to tackle climate change as part of his Earth Fund, while Bill Gates called for a green revolution, pledging $315 million to support innovations that help smallholder farmers adapt to climate threats, and has launched a €1 billion green technology fund with the EU.

If governments fail to establish clear and cohesive climate change policy, we anticipate mounting pressure from global officials and society at large for business leaders and the finance industry to lead the way in the years ahead.

In response to the need for systematized climate-related financial disclosures, Erkki Liikanen, Chair of the International Financial Reporting Standards Foundation (IFRS) Trustees, spoke at the Finance Day Presidency event. In a panel titled “A Financial System for Net Zero,” he announced three significant developments to provide the global financial markets with high-quality disclosures on climate and other sustainability issues:

• The formation of a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.
• The IFRS Foundation will complete consolidation of the Climate Disclosure Standards Board (CDSB, an initiative of CDP) and the Value Reporting Foundation (VRF, which houses the Integrated Reporting Framework and the SASB Standards) by June 2022.
• The publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group (TRWG), a group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB.

The G20 Leaders and the Financial Stability Board have both welcomed the IFRS Foundation’s work to develop global baseline standards for sustainability disclosures. This marks a major step toward the establishment of unified and globally consistent sustainability related corporate finance disclosures. The proposed disclosures, which are being built on the foundation of the Task Force on Climate-Related Financial Disclosures (TCFD) framework, further cement our expectations that additional environmental, social and governance (ESG) reporting requirements will be forthcoming for the asset management industry, providing investors with more insightful and meaningful metrics to analyze sustainability initiatives in their investment opportunity sets.

Climate activists also took a stand on Finance Day, protesting in the streets of Glasgow. Among them, Greta Thunberg denounced perceived “greenwashing” measures and called attention to the dangers of relying on carbon credits to compensate for emissions. Currently, no global oversight or common standards exist for the carbon offsets market. This lack of oversight and standardization, coupled with an abundance of low-quality offsets, suggest that offsets have little impact on global warming and have the potential to harm local communities when executed improperly.

Also on Wednesday, banker-turned-climate-activist Mark Carney spoke on behalf of the Glasgow Financial Alliance for Net Zero (GFANZ)². Carney revealed that banks and asset managers representing 40% of the world’s financial assets have pledged to meet the goals set out in the Paris Climate Agreement. However, skeptics continue to question the underlying terms of these commitments as well as their general efficacy.

United Nations Secretary-General Antonio Guterres said in a recent speech, “There is a deficit of credibility and a surplus of confusion over emissions reductions and net zero targets, with different meanings and different metrics.” For that reason, Guterres said he plans to establish an expert panel “to propose clear standards to measure and analyze net zero commitments from non-state actors.”

We expect global regulations to be proposed for the Carbon Offset market and, longer-term, potentially a move away from offsets altogether. Furthermore, the general sentiment at COP26 and the attacks on greenwashing reaffirm our expectation that the U.S. Securities and Exchange Commission will follow in European regulators’ footsteps and crack down on ESG labeling and the use of environmental credentials for investment products.

As the momentum on net zero commitments continues to build, being part of a net zero alliance will likely be a foundational requirement for asset managers. However, we side with U.N. Secretary-General Guterres’ comments, believing that clearer standards will need to be established to ensure that the commitments made by finance organizations and other entities are measurable, verifiable and consistent.

 

¹ “Yellen to Urge Finance CEOs to Put More Funds Into Climate Fight.” Bloomberg. November 2, 2021.

² An alliance consisting of the Net-Zero Banking Alliance, the Net-Zero Asset Managers initiative, the Net-Zero Asset Owner Alliance, the Paris Aligned Investment Initiative, the Net-Zero Insurance Alliance, the Net Zero Financial Service Providers Alliance, and the Net Zero Investment Consultants Initiative.

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