COP26 ended with the unanimous adoption of its final text, the Glasgow Climate Pact. Now, asset managers, banks, investors and insurers are asking: how will this impact financial services?
What are the key takeaways from COP26? What are its implications for the FS sector, and what are the next steps its leaders should consider now?
The tangible impact of the Glasgow Climate Pact will be complex and difficult to predict. But what is clear is that COP26 has been a catalyst for galvanising the low carbon transition across the economy. In particular, it has gained significant attention from the financial services sector. Firms should now look to capitalise on this moment. They need to collaborate across their value chains and achieve their decarbonisation goals.
We believe there are four key considerations for finance leaders as a result of the Glasgow Climate Pact.
In the UK, the Chancellor of the Exchequer, Rishi Sunak announced that listed and financial services companies in the UK will have to publish credible climate transition plans by 2023. In doing so they will need to set out how their organisations will deliver on their greenhouse gas emission reduction targets. Such plans will then be reviewed by expert panels to minimise greenwashing. It is likely that other countries will follow the UK’s lead with similar measures.
Climate transition plans can only be effective when carefully integrated into wider strategic and capital planning and budgeting. Companies that conduct the transition planning exercise successfully will put the finance function at the centre of this exercise. Finance leaders should move quickly to engage internal stakeholders across the business in this exercise, integrating climate considerations into the annual planning and budgeting processes.
Sustainability disclosure requirements are increasing. As well as government regulation, both investors and consumers are now scrutinising organisations’ preparedness for the low-carbon transition. Major steps were taken at COP26 to consolidate international sustainability reporting frameworks. Is saw the launch of the International Sustainability Standards Board (ISSB), which merged the Value Reporting Foundations and the Climate Disclosure Standards Board. Investment firms should be ahead of the curve on regulation by engaging with the ISSB’s prototype standard.
Governments now expect to deliver trillions towards financing climate change mitigation and adaptation efforts. In doing so, Governments will look to mobilise and leverage a significant amount of this capital from the private sector. Financial Services firms should begin to take steps to target investments into the sectors, products and services that are best placed to capitalise on the transition to low-carbon.
The key focus for finance functions when it comes to climate change is data, data, data. Measurement of both the current-state climate performance of a portfolio or a loan book, and their likely future trajectory, will be important considerations for financial services firms. Central to the announcements coming out of COP26 were the increased requirements for disclosure on climate change. Both are dependent on reliable and robust data sets and analytic capabilities.
Finance leaders need to be certain that they have access to more reliable, precise and up-to-date data on the emissions and transition plans of their firms’ clients, investees and insureds. To assist, finance teams should look to assess and understand the environmental, social and governance (ESG) data provider landscape, who are best placed to help them build their data sets?
Focused consideration from finance teams is needed to determine key data and information needs and quickly pivot to develop the necessary data architecture and processes to inform their businesses wider climate strategy, reporting requirements and capital allocation commitments.