Paul Walsh is Practice Lead, Digital Transformation, and Head of European Consulting for Capital Markets at Treliant. He is an accomplished change leader, with more than 25 years’ experience and a proven track record of delivering large-scale transformation programmes across business and technology in complex global banking environments. He has…
As the World Economic Forum said of COP26, “Outcomes aren’t satisfying, but they should leave us hopeful.” What does that mean for the target of minimising climate change to 1.5 degrees Celsius?
From the summit’s resulting Glasgow Climate Pact, the following are crucial steps forward:
- There was an explicit call to phase down coal and fossil fuel subsidies for the first time. Though this was a major achievement, it was watered down as the drafts were reviewed and fell short of the initial target to phase out subsidies entirely.
- There was critical progress on Article 6 of the Paris agreement, providing positive clarity on the role of carbon markets. Work remains to put in place strong guardrails ensuring the integrity of these markets across the globe.
- Over 400 financial institutions committed over $130 trillion in assets to help transform the economy to net zero by 2030.
- US President Joe Biden announced a commitment to decarbonise industry with the launch of the “First Movers Coalition,” a partnership between the World Economic Forum and the US government, incentivising innovation and aiming to create markets for emerging clean energy technologies.
- For the first time, nature was recognised as core to tackling climate change, as signalled by several commitments, including the “Leaders’ declaration on forest and land use” and some of the largest commodity traders committing to more responsible supply chains consistent with a 1.5-degree C pathway.
Some critical targets were deferred and will no doubt be revisited later:
- Depending on whose analysis you read, current commitments put us on anything from 1.8 degrees C to 2.5 degrees C, leaving us a long way short of the 1.5-degree C aspiration.
- Developed nations kicked delivery on climate finance down the road, indicating they would not meet the $100 billion goal until 2023 at the earliest. This target remains critical to ensure a fair climate transition.
- And some major emitters’ 2030 targets are very weak (notably China, Brazil, Russia, Australia, and Saudi Arabia) and do not offer credible pathways to achieve net-zero. The intention to continue to ratchet up commitments will bring focus here, and world leaders will push for increased commitments.
Overall, it is clear the mood has changed, and people are now poised for positive action.
What are the major themes to look out for in 2022?
Publicly-traded corporations are responding by improving their ESG reporting and credentials. Around the globe, the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations are becoming more popular and are being incorporated into corporate reporting requirements. However, there are still many data gaps, a lack of consistency, and differences across asset types.
Financial institutions are asking companies to disclose more information about their exposures to climate risks and their climate-action plans. A company’s first impulse may be to disclose only the minimum required, but a more open approach is likely to be beneficial long term. This would involve closer monitoring of value chains—an approach that digital technology can enable. Based on the experience of leading companies, it appears that sustainability management will become the next big challenge for digital transformation.
The EU Taxonomy regulation came into force on 12 July 2020, with the first disclosure obligations applying from 1 January 2022. EU financial market participants that offer financial products (as defined in the Sustainable Finance Disclosure Regulation) and non-EU financial market participants that offer financial products to EU investors are obligated to make disclosures in line with the Taxonomy Regulation from 1 January 2022. This applies to the first two environmental objectives (climate change mitigation and adaption).
Market observers expect the US Securities and Exchange Commission to endorse mandatory climate disclosures in 2022 with a potential implementation target of 2023-2024
It is also likely that the International Sustainability Standards Board (ISSB), a body announced by the International Financial Reporting Standards Foundation at COP26, will release a global sustainable disclosures draft paper for financial markets early in 2022. This would position it well to become a global standard for ESG related disclosures, assisting with much-needed alignment across jurisdictions and regulatory authorities.
HSBC, Deutsche Bank, and Swiss Re support the ESG Book, a new ESG data platform launched on 1 December to disrupt the market with a free public good service for companies and investors. The ESG information sector has become a money-spinner as asset managers increasingly rely on providers of such data to avoid greenwashing and to meet demand from sustainability-focused investors.
COP15, the COP26 biodiversity equivalent, received much less attention in 2021. That could change this year as the second phase of COP15 is expected to take place in China from 25 April to 8 May.
Given all the above, we see five key topics for 2022:
- Meeting early regulations on disclosure and stress testing
- Drive for ESG available funds
- Better collaboration on carbon markets
- More scrutiny on greenwashing