Finishing the pre-COP series by considering how significant the net-zero objective has become for the finance industry, and what’s needed to make this a credible game changer going forward.
In the first two blogs in this series, I wrote about the UN Principles for Responsible Banking (PRB) and the ongoing dance between the private and public sector
that is ratcheting up sustainability ambitions. Today, I finish up this
pre-COP series by considering how significant the net-zero objective
has become for the finance industry, and what’s needed to make this a
credible game changer going forward. Of course, I’ll also opine a bit
more on the criticism that the net zero alliances have been receiving,
some certainly deserved and some maybe less so.
Let’s be clear; net zero is not a financial objective, in and of
itself. It’s an environmental objective, an externality in conventional
interpretations of business value. But convention is changing, quickly.
As I wrote earlier, the real significance of the PRB framework is the
focus on aligning a bank’s business with societal goals such as
financing the climate transition. But let me focus on the investment
sector, which has made the first move here.
The day after the PRB was launched in 2019,
also in New York, the CEO of Allianz, Oliver Baete, announced that his
organization and 11 other insurers and pension funds were establishing a
Net-Zero Asset Owner Alliance.
This coalition of the willing, now 60 strong and managing USD 10
trillion in assets, became in April a founding part of the Glasgow
Financial Alliance for Net Zero (GFANZ) led by Mark Carney and COP
Champions Nigel Topping and Gonzalo Muñoz. GFANZ now includes many other
coalitions from across the finance industry working voluntarily to
fully decarbonize their investment portfolios by 2050 along a 1.5C
pathway.
Looking back on the eve of COP26, the launches in 2019 of the PRB and
AOA may have marked a turning point in how sustainability would
henceforth be addressed by the finance industry. Sustainability is no
longer about just managing risks, but also about portfolio alignment.
Alignment and enterprise value inextricably linked.
Ever since the launch of the Freshfields report
and the subsequent launch of the Principles for Responsible Investment
in 2005/6, responsible investors have come to see environmental, social
and governance (ESG) factors as financially material to investment
decision making. The legal interpretation of an investors’ fiduciary
duty to factor ESG issues in has evolved from ‘can, to should, to must’
with the EU and increasingly other jurisdictions now moving towards
mandatory inclusion and disclosure requirements.
However, the notion and legal interpretation of what is, or isn’t,
material has also been evolving with the push towards double-materiality
that includes both the risks of environmental and social externalities
on business value, but also the impact of the business on people and
planet. The World Economic Forum have posited the idea of dynamic
materiality, whereby ‘inside out’ impacts like carbon emissions will
eventually come back around ‘outside in’ to affect enterprise value and
therefore are material and need to be considered in company accounts.
This new focus on impact has led the International Financial Reporting
Standards (IFRS) foundation to consider establishing an International
Sustainability Standards Board (ISSB) to sit alongside their
International Accounting Standards Board that currently sets financial
reporting standards for most jurisdictions.
UNEP FI
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