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COP26: Finance Day, 3 November 2021

  • Global
  • ESG - Sustainable Finance
  • Financial services and markets regulation - ESG
  • Energy and infrastructure - Clean energy
  • ESG

04-11-2021

Wednesday’s events at COP26 saw finance ministers from across the globe set out their domestic and international commitments to divesting from the fossil fuel industry and financing a green economy with transparency at the heart of the pledges.

Key Announcements and Pledges

  • Companies will be forced to demonstrate their green credentials as a new worldwide adoption of climate standards is to come into effect in 2022.

    With the formation of a new regulatory body that will oversee global sustainability disclosure standards in a bid to tackle greenwashing. The International Financial Reporting Standards Foundation said that it would form the International Sustainability Standards Board (ISSB), which will be tasked with creating a single set of standards “to meet investors’ information needs”.

    With investors facing huge pressures to place capital into green firms with demonstrable credentials, the Board is designed to ensure that large organisations are meeting their required disclosure obligations on the amount of greenhouses gasses that they produce or are directly financing (both domestically and abroad). Chair of the International Financial Reporting Standards, Erkki Liikanen, has said that “investors require high-quality, transparent and globally comparable sustainability disclosures that are compatible with the financial statements”.

    There is general consensus that although the Board will be operational at some point in 2022, without domestic nation-state legislation or sustained investor pressure, it will take some time for there to be a worldwide adoption of the Board’s standards.

  • In an expected announcement from the Chancellor, on Wednesday Rishi Sunak, outlined that big UK firms and financial institutions will be forced to reveal how they plan to meet the UK’s climate change targets of net zero by 2050.

    The Treasury confirmed that by 2023, firms caught within the scope of these new climate rules will have to set out detailed publicly available plans. Again seen as a bid to combat greenwashing, an expert panel will determine the national standards that the published plans need to meet.

    Though the publication of detailed and transparent climate action plans will be mandatory, the implementation of these commitments will not be mandatory or enforced by a regulator. The Government themselves have stated that "the aim is to increase transparency and accountability" not to make “net zero commitments mandatory". Off the back of his announcement, the Chancellor highlighted that he wanted the UK to be leading the world in becoming the "first-ever net zero aligned global financial centre". This is coupled with the Treasury’s pledges to issue more sovereign green bonds than any other global economy.

  • At least 19 countries and financial institutions have reached a deal to end the financing of fossil fuels abroad. Signatories include the US, UK, Denmark, Finland and some ‘developing’ countries, including Costa Rica, Ethiopia, Gambia. With the European Investment Bank being one of the larger financial institutions involved.

    The agreement, while not binding, will mean that the countries and financial institutions involved will vow to halt all financing for fossil fuel development overseas, diverting an estimated $8billion per year into green energy. Though the deal will allow for unspecified exemptions in limited set of circumstances.

What is clear from these package of announcements is that the financial sector is set to face a huge amount of regulatory work, with a global emphasis on ‘green disclosure’ and ‘carbon transparency’. Many business will be looking to their advisors in the coming months to ensure they are prepared for the suite of measures due to enter the market.

 

Michaela Walker comments: “These are ambitious plans that will put the UK ahead of other jurisdictions in terms of the breadth and scope of the disclosures that will be required. The Roadmap (published a few weeks ago) was very high level, but it is clear that a lot of thinking has gone on behind the scenes."

“We particularly welcome the fact that the FCA has decided to publish a Discussion Paper at this stage, which recognises the challenges that firms will face in implementing the proposals and is seeking industry views before publishing more detailed plans. It is evident that the FCA has grasped some of the key challenges that firms face: the need for information to flow down the value chain, starting with companies in the real economy and filtering into the financial sector, as well as the need to reconcile the different initiatives on disclosure that firms are having to deal with."

“The FCA seems committed to limit duplication and build on existing regimes such as TCFD and other global initiatives such as the standards being introduced by the International Sustainability Standards Board.”

 

Phil Spyropoulos adds:

“The proposed product labelling regime is broadly described as covering the ‘full range of investment products available to retail consumers’ which would certainly cover the usual packaged products (like funds). However, it isn’t clear at this point if it will cover wealth services and model portfolios. Although it is retail focussed, the proposals centre very much on product manufacturers. The FCA has however indicated that it is exploring the role that financial advisers will play."

“The product classifications have clearly been sensitively considered and the FCA has taken care to explain why the lines in the sand are drawn where they are. Firms will no doubt have their own opinions as to whether the FCA’s approach is correctly calibrated.”