Green money makes the world go round

Mark Ling
29 November 2021

No one reading this will have missed the news over the last month, warning us of the threat of an imminent climate catastrophe. The kaleidoscope has twisted and a new image of global finance has emerged, coloured blue and green.

What began as a slow shift towards the view that a company’s activity could have a negative impact on the planet and recognising that businesses have a role to play in reducing carbon emissions, has quickly accelerated to become a new all-encompassing net zero reality. The financial world has changed definitively, and the world’s financial systems now find themselves placed in the front line of the fight against climate change.

At the COP26 conference in Glasgow, the Financial Alliance for Net Zero, championed by Mark Carney, announced that 450 firms from all parts of the financial industry across 45 countries and representing $130 trillion in assets had agreed to make a climate finance commitment. Described as “historic” and a “milestone moment”, 40 percent of the world’s financial assets have now pledged to meet the goals set out in the Paris climate agreement.

Governments, financial institutions, financiers and management teams are all coalescing and this is creating many new opportunities for companies and investors.

Last month, the Gulf state of Qatar and Rolls-Royce announced a partnership to launch a new fund that will invest billions in green engineering projects with the aim of creating five “unicorn” companies by 2030 and up to 20 by 2040. JCB has announced a deal to buy green hydrogen from Fortescue Future Industries to help make green hydrogen a viable solution in the heavy transport and industry sectors. It is also investing £100m on a project to produce hydrogen-powered engines for its own range of machinery.

The path to achieving net zero promises to be paved with green cash. But the swiftness of this fundamental refocus has taken law makers on the hop.

A year ago, the Financial Reporting Council in its “Climate Thematic” report said that both Boards and auditors need to do more to test and challenge assessments of the financial statement implications of climate change, and the think tank, Carbon Tracker’s report “Flying blind: the glaring absence of climate risks in financial reporting”, found that: “Over 70% of some of the world’s biggest corporate emitters failed to disclose the effects of climate risk in 2020 financial statements” and that “80% of their auditors showed no evidence of assessing climate risk when reporting.”

To combat such shortcomings, in October this year, as part of its “Net Zero Strategy”, the UK Government published legislation to make it mandatory for Britain’s financial institutions and largest businesses, including listed-companies, banks, insurers and private companies with over 500 employees and £500 million in turnover, to disclose their climate-related risks in line with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations. Subject to Parliamentary approval, it will become law and come into force from April 2022.

The Treasury also published its “Greening Finance: A Roadmap to Sustainable Investing” which includes sustainability disclosure requirements for asset managers and owners, as well as extra measures aimed at companies. At an international level, the IFRS Foundation announced the creation of a new standard-setting board - the International Sustainability Standards Board (ISSB) - to help meet the demand from global investors for high quality, transparent, reliable and comparable climate and other environmental, social and governance (ESG) reporting, and at COP 26, the Chancellor, Rishi Sunak, announced plans to make the UK “the world’s first net zero aligned financial centre” by introducing new reporting rules for financial institutions and listed companies that, amongst other things, will require the publication of detailed transition plans by 2023 setting out how they will reduce carbon emissions to reach net zero by 2050.

However, it will take time to set-up the Chancellor’s Transition Plan Taskforce which will comprise industry leaders, academics, regulators, and civil society groups, and longer still for it to agree on their “gold standard” reporting guidelines to mitigate “green-washing”. The new mandatory climate-related reporting, which is expected to affect 1,300 UK-registered businesses and financial institutions and cost over £130million, according to the government’ impact assessment report, is no quick fix.

In the meantime, the demand for ESG information from companies, financial institutions, investors, the media, organisations and the general public, continues to grow exponentially at the same time as climate organisations and campaign groups scrutinizing the various regulatory proposals and guidance point to a lack of consistent principles, definitions, metrics and evidence, or strategies to meet targets.

While there is no doubting the government and regulatory authorities’ good intentions, the regulatory overlap, lack of consistent rules and guidelines, and interplay between voluntary and mandatory disclosures, is, unsurprisingly, leaving the market confused about what should be reported and how.

Considering the speed of the global financial industry’s realignment around climate change goals, it is natural for there to be a period of uncertainty before the industry reaches the requisite level of understanding and develops a coherent set of expectations. It will also take time for all parties, including advisers, to increase their knowledge of relevant climate change issues, as well as for new regulations to work out their kinks. In the interim, the market faces a challenging 2022, as the financial industry forges ahead without clear checks and balances.

Acknowledging this reality doesn’t bring a ready solution to the problem that management teams, their investors and advisors are grappling with today. Without a conceptual framework all parties are left to find their own way forward. That said, there is no doubt that the proposed regulations and guidance that has already been published and which has been added to over the period of COP 26, gives us a clear indication of the direction of travel.

The market needs to continue to step-up to the challenges ahead in good faith, with all parties working together, openly and collaboratively, to shine a light on the intersection between climate change reporting and financial audits. The rewards of taking positive action are potentially great. The Chancellor’s ambitions, if they can be realised, could create a huge opportunity for the London market to lead the way by establishing best practice on achieving net zero targets, as well as profiting from the explosion of new investment opportunities.