05 Feb Finance and Policy driving climate action for businesses
Sustainability professionals have experienced difficulties when attempting to integrate CSR into a business, but the rise of ESG investing is likely to provide a helping hand in the green recovery.
The impacts of the global pandemic have had significant economic implications, with the FTSE suffering its worst performance since 1987 and projections from the UN stating that foreign direct investment could fall from anywhere between 5 and 15%. Amid this financial fall, hope in a green recovery has emerged. Over 100 NGOs and 1 million European residents have shown their support in the shape of the European Corporate Leaders Group and the Climate Change Committee and focused on delivering an economical green recovery, capable of standing against the threats related to climate change. The UK and EU have committed to investing further into green markets as part of the extended “build back better” policy.
One of the most significant sections of this green recovery agenda is with investors, with many diversifying their traditional portfolios and looking to reduce risk and remain resilient against further economic disruption. The pandemic proved how disruptions could materialise if we fail to act on scientific information provided. Similar economic and social implications could be experienced and heightened by the impacts of climate change.
At the Sustainability Leaders Forum, several green finance experts provided their opinions on what they believed would be the future drivers of capital markets. The discussion suggested that investors are focusing more on ESG risks, something which presents a significant risk to corporate businesses that fail to respond to climate and social issues.
The issuance of ESG bonds increased by 272% year-on-year during certain times of 2020 as investors took the necessary steps to react to the pandemic. While the shift towards ESG investment is positive, it doesn’t necessarily mean the economy is meeting the requirements needed for a low-carbon and resilient future.
Financial experts emphasise that all of us have a part to play in delivering the sort of change we require. We require financial services that will offer change for our world, investing in businesses that are making a difference and using our voices to take decisive action.
Fossil fuels have been the traditional money earner for most investors. In 2019, the oil and gas industry generated 24% of dividends from the FTSE Index. Studies report that £2.2 trillion has been invested in fossil fuels since the Paris Agreement. The financial markets are now experiencing massive change and ESG has become more a mainstream investment option.
Mark Lewis, the Chief Sustainability Strategist at BNP Paribas, explains that divesting from businesses that show no sign of improving their environmental performance has proved to be successful in corresponding with financial markets with low-carbon deliveries. Mr Lewis suggests there are limitations to how much the asset management industry can do, but believe they have been successful in focusing corporate leaders on the necessity of net-zero.
More policymakers are implementing net-zero targets, which will force businesses to make the necessary changes, whether they planned to or not. These measures place further pressure on businesses to adapt and align their strategies or face going out of business.
As we witness a rise in low carbon markets, the fossil fuel market is predicted to decline by over 60%, adding further economic implications to businesses, financial markets and other regions failing to address the importance of low carbon technology. Carbon Tracker has reported that oil and gas producers attempting to return to “business as usual” activities could potentially risk losing more than $100 trillion in profits. Businesses within the fossil fuel industry make up around a quarter of the global equity market value. The main difference with renewables is that the cost is predominantly based on the infrastructure, and this is where costs have declined considerably in the last few years.
Investing in low-carbon isn’t a simple process and while investors like BlackRock have announced plans to divest from businesses failing to show climate action, defining what is sustainable in the corporate world can be challenging. A key barrier related to the investor and corporate engagement is clarity over what is sustainable. Studies have shown that investor engagement on environmental and sustainable issues has grown, but the issue of greenwashing has also risen. Existing sustainability measures include a lot of greenwashing, and as a consequence investors are requesting for more ESG related information through core frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD).
David Harris, head of sustainable business for the London Stock Exchange Group believes another concern is that businesses don’t have the complete picture in terms of how the investment is changing and why it is so important that corporates provide more detailed data. Mr Harris believes the change in financial markets and investments is significant, but there is a lack of real understanding between each side of finance and investment. Climate change represents one of the biggest challenges, and many businesses have little visibility on the extent of change in these markets. Companies lack clarity on how sustainability data is collected and how it’s connected to investment decisions.
From 2023, all publicly listed UK businesses with premium listings will need to comply or provide details based on the requirements of TCFD’s. Rules are predicted to get stricter and extend beyond 2025. Many parts of the UK finance industry will be affected by these requirements, including pension schemes, life insurance providers and asset managers.
Globally, the TDFD status report indicated that commitments towards its recommendations have increased by over 80% in a year. Over 1,000 organisations, including banks, pension funds and other businesses have committed to implementing the frameworks. Yet studies suggest the gap between talk and action remains. Frameworks like the TCFD will reduce concerns regarding corporate greenwashing and ensuring investor portfolios are green and sustainable.
What else can businesses do to accelerate the transition to a green economy?
Former UK energy minister, Claire O’Neill, highlights the importance of businesses focusing on net-zero targets and other goals with regular and transparent reporting. Often forgotten side of corporate reporting is the financial make-up of stakeholders supporting the business.
At the end of last year, Pensions provider Scottish Widows confirmed plans to divest more than £440 million from businesses that have failed to meet ESG standards. Their exclusion policy will support the divestment from companies which focus more than 10% of revenue from coal and tar sands, two high-carbon forms of fossil fuel extraction.
Businesses promoting sustainability are continuing to rise consistently, but, it seems, how organisations engage with investors via transparent data that will indicate which are capable of securing the financial benefits of a green recovery.