Insights from COP26 – Finance Day
Following the two-day World Leaders Summit, where commitments were made by developed nations to provide public climate funding for climate mitigation and adaptation, attention turned to the private sector as we headed into Finance Day. And it was a day of big news, with several significant announcements that will have an impact for investors, companies, and their wider supply chains.
Net zero commitments from financial institutions
The Glasgow Financial Alliance for Net Zero (GFANZ) announced that it has calculated the capital committed to net zero by 2050 to be over USD 130 trillion. Included within GFANZ are the IIGCC co-founded Net Zero Asset Managers initiative (NZAM) and Paris Aligned Asset Owners group (PAII), along with alliances for other financial institutions and services providers.
These commitments come from over 450 firms in 45 countries – of which more than half are signatories to either NZAM or PAII – who have pledged to set ambitious, science-based targets to achieve net zero emissions by 2050, deliver their fair share of the 50% emission reductions required in the next decade, and review targets and report upon progress on a regular basis.
This comes following the publication of the NZAM Progress Report on 1 November, in which 43 asset managers set initial interim targets, disclosing that 35% of their assets are managed in line with achieving net zero by 2050 and subject to shorter term targets by 2025 or 2030. A number of PAII asset owners have also set their first interim targets.
In addition, the network partners that deliver NZAM have published expectations of signatories with regard to fossil fuel investments. Shared with signatories in September, these expectations set out positions relating to the phase out of thermal coal, expecting investors to adopt robust and science-based policies in relation to fossil fuel phase out and disclose their approach as part of their NZAM reporting.
UK move to mandate publication of net zero transition plans
Rishi Sunak, the UK Chancellor, set out plans for the UK to be the world’s first net zero-aligned financial centre. As part of this, the UK government intends to make publication of net zero transition plans mandatory for all financial institutions and listed companies.
Initially, this will require asset managers, regulated asset owners and listed companies to publish transition plans or provide an explanation as to why they have not done so. The government and regulators will incorporate emerging standards into the forthcoming Sustainability Disclosure Requirements and strengthen to encourage consistency and increased adoption by 2023. To help tackle greenwashing, a ‘gold standard’ for transition plans will be developed by a high-level Transition Plan Taskforce, who will set a robust standard for transition plans.
Transition plans are critical to ensure that the net zero commitments made in the run up to COP26 translate into real, tangible action. The aim is to increase transparency, accountability, and comparability, joining up regulatory and international work on sustainability disclosures.
Next year, the UK government will also publish a transition pathway for the financial services sector, setting out the transition to net zero by 2050 with new policies and key milestones. This announcement seeks to ensure the necessary financial flows to meet the goals of the Paris Agreement and builds on the publication of ‘Green Finance: A Roadmap to Sustainable Investing’ in October.
Formation of a new International Sustainability Standards Board (ISSB)
The International Financial Reporting Standards (IFRS) Foundation announced developments in its plan to establish a set of global reporting standards on climate and sustainability issues. It will be launching a new International Sustainability Standards Board (ISSB), which will develop standards to establish a common global baseline of disclosures, addressing the impact of climate and sustainability issues on company valuations. The standards will build on existing sustainability reporting initiatives, including the recommendations of the Taskforce for Climate-related Financial Disclosures (TCFD).
The ISSB will sit alongside – and work closely with – the International Accounting Standards Board (IASB), to ensure compatibility with the IFRS Accounting Standards, supporting greater connectivity between climate-related risks and opportunities and their financial impacts. The Carbon Disclosure Standards Board (CDSB) – a CDP initiative – and the Value Reporting Foundation (VRF) – which houses the Integrated Reporting Framework and SASB Standards – will also be integrated into the ISSB by June 2022.
Two sets of prototype standards have been published – one focused purely on climate and another which sets out general sustainability disclosure requirements. These are both structured around the four TCFD pillars of governance, strategy, risk management and metrics and targets, and are intended for informational purposes only until formal consultations have been undertaken.