Claire Elsdon: Calling for data and policy alignment

In the lead up to COP26, pressure continues to grow for governments, corporations and investors to take urgent action to reduce carbon emissions and tackle the climate crisis.

We are reaching a critical inflection point for environmental action, but despite some encouraging progress, the world is not on track to meet the goals of the Paris Agreement limiting warming to well below 2°C. And time is running out for us to do so – the IPCC’s latest report warned that our corridor to stay within 1.5°C is quickly narrowing. 

Organisations across all sectors globally, and policymakers, must step up their commitment to environmental transparency and action if we are to avoid the worst effects of climate change, limit global warming and protect biodiversity. COP26 presents an invaluable opportunity to drive this global transition to a sustainable economy.

Co-ordinated response
Ahead of COP26, we must lay the foundations for systemic change. Companies, regulators and capital-markets actors all have a role in facilitating a smooth transition that ensures risks from climate change are managed and their impacts on people and planet reduced.

The response should be co-ordinated at the international level and between jurisdictions such as government departments, financial regulators and quasi-regulators such as stock exchanges.

Given the urgency of the crisis, regulators should move decisively by mandating companies and financial institutions to report on their environmental performance and put in place time-bound transition plans supported by science-based targets. 

Reports on environmental performance need to be consistent, comparable and updated annually in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

Central banks’ mandates should be updated to clearly include environmental issues, given the widely accepted systemic nature of these risks. This would allow the banks to take a stronger position through their monetary-policy activities. In addition, economy-wide climate stress tests should be undertaken. This is already taking place in the EU, France, the UK, Australia, New Zealand, Canada, Brazil, Singapore and Hong Kong.

Financial institutions also play a pivotal role in managing risk through their existing Prudential and fiduciary requirements with physical and transition risks already affecting balance sheets. Lenders and investors have influence over the companies in their portfolios and are in a unique position to finance the transition, enabling first-mover advantages for leading companies to not just future-proof their businesses but to thrive. 

With many financial institutions committing to net-zero targets, they have signalled an intent to reduce financed emissions, which implies that there will be climate metrics integrated into risk models and financial products when dealing with companies in the real economy. 

However, a critical missing piece is the consistent access across the board to high-quality, comparable and annually updated reporting direct from companies on their current emissions as well as broader environmental impacts. Science-based targets are also essential as they project the rates of reduction and understanding of how this will be achieved in terms of materiality and approach.

“Regulation around environmental disclosure is not sufficient to ensure that risk and impacts from economic activities are correctly estimated. We expect that in the run up to and during COP26, more countries and regions will regulate for mandatory environmental disclosure”

First step – data
The transparent sharing of data is the critical first step in all environmental performance. We are seeing significant momentum in action – in 2020 a record number of financial institutions disclosed their environmental data through CDP. However, we have also seen a disconnect between what is reported by institutions and what their actual impacts are. 

The climate impact of financial institutions’ investment and lending is over 700 times their direct impact on average, according to CDP research. Yet, for many institutions that is not where the focus is – only 25% report the emissions associated with their portfolio and 49% are not analysing their portfolio’s impact on climate at all.

Current regulation around environmental disclosure is not sufficient to ensure that risk and impacts from economic activities are correctly estimated. We expect that in the run up to and during COP26, more countries and regions will regulate for mandatory environmental disclosure with financial institutions among some of the first organisations required to disclose. 

This must be done with urgency and enforced stringently across all regions and sectors such that full compliance to consistent, comparable, TCFD-aligned reporting is not a matter of choice.

This regulation, largely based on the recommendations of the TCFD, is set to pave the way to wider and more advanced environmental disclosure. To fully support the shift of financial flows towards the goals of the Paris Agreement, the 2030 Agenda for Sustainable Development, and the upcoming Global Biodiversity Framework, high-quality mandatory disclosure regulation must be implemented. This regulation is also expected to include financed emissions from financial institutions, forward-looking metrics, and emissions-reduction targets.

Above all, what we must see at COP26 is international co-operation, which will be instrumental in tackling climate change and environmental degradation, and in achieving a thriving economy that works for people and the planet in the long term. 

Claire Elsdon is joint global director of capital markets at CDP