A Climate for Change, but How?

The current debate and the search for solutions around the climate change crisis and the need to accelerate progress in finding those solutions are becoming more urgent as COP26 and our combined commitments rush towards us.

The world is expected to breach the 1.5C ceiling within 12 years or less and to hit 3C of warming by the end of the century. The “what” is now very clear; not quite so clear is the “how”. The profound risks and impacts this crisis promises are beginning to manifest themselves in tangible ways and can no longer be ignored. Governments are preparing for COP26 and polishing up their commitments, but they cannot do it alone.

We may yet still have an opportunity to head off the worst of the effects, and a responsibility to future generations to do so. There is a real sense of urgency that this time we must be ahead of the curve!

"The time to address it is now!"

While climate change needs a united community stakeholder response, business definitely needs to take a leading role in driving this effort. Since they are wholly dependent on customers, investors, financial institutions and the communities within which they operate, businesses are recognising the growing importance of their climate leadership role and committing to  It is only through a collaborative effort that includes business, that there is genuine hope of limiting our carbon emissions to an acceptable target.

The Covid pandemic, as deeply distressing as it is, is undoubtedly accelerating this process by demonstrating that the global community is inexorably interlinked and interdependent. The natural world and our economic and social constructs are also interdependent; planetary and human health are intertwined, and when many parts of an ecosystem work together, success occurs.

We critically need vibrant, enthusiastic collaboration of all parts of the financial ecosystem, including business. The crisis has potentially severe financial implications for all parts of the financial ecosystem, and what is emerging is a social, economic and financial movement which markedly distinguishes this crisis from any financial crisis in years gone by.

If we recall recent global crises: the Dotcom bubble, the Asian Financial Crisis or the Global Financial Crisis, each primarily required regulatory and public policy decision makers to take action. The events had significant effects on businesses, market participants, investors, consumers and communities. Disappointingly actions were only taken after the damage to investors, businesses and others was done.

This crisis is different. The climate change crisis has not yet reached its peak, but is recognised as a clear and present danger by leading scientists. It is foreseeable that there will be significant and direct financial, social and economic consequences unless we all take action. As an example, the effects on weather in bushfires and flooding are already taking an enormous social and economic toll around the world. Nevertheless, the implementation of solutions is fraught with challenges, not least because some businesses recognise the opportunities presenting themselves whereas others actively resist or oppose the changes.  Alignment and collaboration are necessary. The actions we take now really matter, today and tomorrow.

As Blackrock’s Larry Fink stated in his recent letter to investors, “the pandemic has presented an existential crisis – such a stark reminder of our fragility – that has driven us to confront the global threat of climate change more forcefully. We must consider how, like the pandemic has, climate change will alter our lives”. He also reminded investors that climate risk is investment risk!

The good news: the climate transition presents a historic investment opportunity.

Never before have I seen such a force for collaboration emerge, it is happening right now!  Groups of thoughtful dedicated people, previously working separately and independently to address aspects of climate change, are rapidly coalescing and aligning to solve the climate problem. There are several promising business examples emerging:

In 2020, the World Economic Forum (WEF) expressed serious concern about climate change. They identified that climate change poses an urgent threat, and that the pace of progress to address it has been unacceptably slow. It established a Climate Ambition Team to deliver a net-zero economy. WEF linked the importance of COP26 and intends to raise global ambitions to accelerate climate action through multi-stakeholder partnerships. Hopefully, COP 26 will see some developments further encouraging financial institutions to report on their judgements about the way companies they fund are being managed to contribute to a net-zero solution.

The WEF Strategic Intelligence website enables curated collaboration by linking and integrating climate change ideas from thinkers around the globe.

Business Europe also supports climate change initiatives. It states: “climate change is a global challenge requiring global actions”. It is committed to and aware of the challenges that climate change presents as well as the human activity impacts. This is why the Paris Agreement, which reflects the long-term objective of limiting global warming below 2°C, was welcomed.

The US Business Roundtable, representing over 27% of the US Stock market capitalisation, in September 2020 published “Addressing Climate Change, Principles and Policy”.  In this comprehensive paper, it suggests that corporations should lead by example, support sound public policies and drive innovation to address climate change. The report concludes that the consequences of climate change on global prosperity and socioeconomic well-being are significant, and unaffordable if not remedied now.

Financial institutions play a key role in the global commitment, which the regulatory community recognised from the outset of this discussion. Under Mark Carney’s leadership, as Chair of the Financial Stability Board, he recognised the importance of protecting financial stability through climate changes, and established the Task Force on Climate related Financial Disclosures (TCFD).

It provides an early sentinel for financial institutions, including banks, insurers, and asset managers amongst others, to reflect climate change risks and opportunities on their balance sheets. These standards and procedures unleashed a financial industry chain reaction of measurement, reporting and scenario analysis showing residual gaps and risks not previously identified. In many cases, financial institutions went further, requiring their clients to also undertake such analyses, often using an open-source toolkit built on PACTA’s Paris agreement Capital Transition Assessment.

The financial institution analyses have set the bar for corporates – a challenge to assess their climate change risks and opportunities. Corporates grasp quickly their stakeholder community needs. Stakeholders, including consumers, investors and funders, increasingly demand information to understand how business models are evolving and responding to climate change challenges. Users want sustainability information integrated into corporate financial reporting. The request is for more credible, granular, comparable, meaningful information explaining clearly the risks and opportunities related to climate change. The voices are coalescing and becoming deafeningly loud.

Another challenge is the plethora of alternative sustainability standards developed. It creates confusion about which set of standards companies should consider adopting, leading to a lack of comparability and measurement.

Sustainability reporting has risen to this challenge. The five leading global sustainability standard setters, namely: the Carbon Disclosure Project (CDP), Integrated Reporting Council (IIRC), Sustainability Standards Board (SASB), Global Reporting Initiative (GRI) and the Carbon Disclosure Standards Board (CDSB), have forged an exciting alliance with a common vision for sustainability corporate reporting. This vitally important collaborative work is facilitated by the Impact Management Project (IMP).

These reporting organisations, coinciding with the December 12^th (2020) fifth anniversary of the Paris Agreement, brought their shared vision to life through a prototype climate-related financial disclosure standard. This prototype is a major contribution to the discussion, by providing a real-life example to counter the doubters of global standard-setting for sustainability standards. As a beneficial byproduct, it ensures any new global standard-setter could hit the ground running with a climate standard.

The collaboration has not stopped here. The IIRC recently announced it was merging with SASB. This merger will result in a single global framework and a set of global standards for corporate value creation reporting, and sustainability reporting. Other members of the sustainability reporting alliance could join this coalition.

In another important development, the International Financial Reporting Standards Foundation (IFRS) consulted on whether it should form a separate sustainability reporting standards board. A majority of the more than 500 consultation responses enthusiastically supported the idea and timing for the IFRS Foundation. Respondents cited the global reach, due process credibility and wide acceptance by the corporate and investor community as reasons that the IFRS Foundation is the right home for a global Sustainability Standards Board. Further, IOSCO has publicly supported this position.

Following the consultation, the IFRS Foundation announced its decision to create a sustainability board, prioritising climate disclosures and information material to investor, lender and other creditor decisions. The new board will be built upon the well-established work of the Financial Stability Board's Task Force on Climate related Financial Disclosures (TCFD), as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value. The Trustees will consider the alliance prototype approach to climate-related disclosures as a possible basis to develop its climate-related reporting standards. A recently announced working group has been set up to further develop the prototype and to accelerate convergence in global sustainability reporting focused on enterprise value.

This is good news for businesses already using the sustainability standards developed by the alliance members, and promises the development of a truly globally adopted set of sustainability standards, with a viable path for jurisdictional adoption around the world.

The International Organization of Securities Commissions (IOSCO) has further seized upon the opportunity to establish a Sustainable Finance Taskforce. This Taskforce is developing a pathway to mandate global standards in this area (on a comply or explain basis). It recognises that in the absence of credible global sustainability standards (such as those through the IFRS Foundation), it’s difficult to ensure global adoption and enablement of value creation reporting. It further hampers the ability to audit and assure this reported information, all of which are important issues for confidence in and stability within the financial ecosystem.

Government and policy maker adoptions of TCFD requirements on climate change are contributing to the positive momentum around the world. The UK and NZ governments are leading the charge, with both mandating disclosures for banks, insurers, large asset managers, and large companies. The target dates in the UK are from 2021 onwards, and in NZ no later than by 2023. Other governments are expected to adopt a similar approach for their major corporate reporting entities, and financial institutions. These government policies are influencing business behaviour, and that of their financial backers.

Measurement and comparability continue to challenge us. How can we provide accurate comparable data to ensure progress is being made with the UN SDGs, including climate change? The World Benchmarking Alliance (WBA) is working with corporate stakeholders assisting them to measure their progress towards reaching the UN SDGs including gap identification and relative industry group ranking.

Technology innovations have transformed corporate reporting with securities market regulators requiring digitised corporate regulatory compliance reporting. It is clear that digitisation needs to be done concurrently with the standard-setting process to ensure faster adoption. IMP recognises the importance of technology in this work and brings together technology, transformation and ESG subject matter experts to aid in integrating modernised regulatory tech requirements with sustainability standard-setting processes. The result: IMP is currently facilitating a workstream project on the digitisation of sustainability standards. This work is aimed at providing a taxonomy registry (akin to an intelligent library) to achieve interoperability of the different taxonomies of standards currently in use.

The power of technology, information and markets working together are available now to begin the transformations necessary. As Mark Carney pointed out recently ( New Scientist 20 March 2021), with financial tools, some pricing mechanisms and importantly information, the financial market will pull forward the adjustments that are needed, recognising that net-zero is a core political goal, that the engineering technologies exist to advance it, and this is where people want to invest. This is just beginning to happen at scale.

There is much room for optimism.

I believe that never before have so many parts of the global ecosystem showed such willingness to work together to solve a global problem. The confluence of climate change with the technology revolution offer hope to the optimists among us. Hope that technology will help accelerate meaningful progress towards addressing climate change challenges. While we cannot hope to rely on innovation alone to solve all climate change challenges, improved technology clearly will assist whether in disclosure, in energy production, in infrastructure, in transportation, or in fact in every aspect of life. For instance, the adoption of ESG strategies by stock exchanges focused on financial products which assist the climate change transformation of other businesses such as the Singapore Exchange’s FIRST (Future in Reshaping Sustainability Together) is such a strategy. It is a platform that facilitates ecosystem collaboration to sustainably catalyze change and deliver growth.

The increasing collaboration and innovation in the global financial ecosystem and the role business is playing in encouraging and adapting to change is promising and accelerates progress.

Climate change is unavoidable, but its effects are far from inevitable! Business has a significant role to play in recalibrating their business models to tilt them to climate recovery. The risks of climate change also offer huge opportunities for businesses to demonstrate to customers, investors, suppliers, employees and the communities they serve, that the answer to climate change challenges lies in a combined effort within an interdependent and interlinked world.

The time to do that is right now!