Six years ago, when global leaders gathered in Paris to tackle climate change, private financial markets were not a serious part of the conversation.  Now, Day 3 of COP26 is focused on the financial sector. To limit global warming in line with the Paris Agreement target of 1.5 degrees Celsius, or well below 2, the public and private sectors must work together.  On Wednesday we heard a lot of promises and commitments from the finance world. With a history of unfulfilled commitments and contradicting practices (hello fossil fuel investments), will the financial sector rise to the challenge of the net zero transition?

Empty promises from the public sector

It is no secret that the wealthier, developed countries are responsible for a disproportionate amount of carbon emissions as compared to the ones in the Global South. Yet these nations will suffer the harshest impacts from the climate crisis. In 2009, at the United Nations climate summit in Copenhagen, the wealthiest countries pledged to provide $100 billion annually by 2020 to developing countries.

Fast forward to 2019, only $80 billion was contributed to climate finance in the targeted states and while the figures for 2020 are not yet in, we know that $100 billion goal was not met. Wednesday at COP26, the public financial sectors made new promises – do we believe them this time?

Developed nations now estimate this goal will be met by 2023 with some countries including US, Germany, Canada, and Spain committing to grow their climate finance contributions. With no clear plan on how this goal will be met, Canada and Germany are now tasked with developing one, there is little reason to believe this promise will be different.

$130 trillion from the private sector – too good to be true?

In the light of public financing shortcomings, governments called on the private financial sector to do more of the heavy lifting when it comes to financing the global transition to a net zero economy, and the private sector answered.

Yesterday, the Glasgow Financial Alliance for Net Zero (GFANZ), made up of the world’s largest financial players across 45 countries, committed over $130 trillion of private capital to transition to a net zero economy by 2050. While the sheer amount of capital committed is impressive, it is almost more impressive to know that in April 2021 when GFANZ was created, the total amount of committed capital was $5 trillion. This shows us that companies and financial institutions all over the globe are feeling the pressure and opportunity to transition to a net zero economy.

GFANZ believes that private financial channels will fund more than two-thirds of the cost to transition to a net zero economy and the $130 trillion of capital committed is a great start. However, there are questions about the authenticity of these commitments. Those who have joined GFANZ are not required to understand or disclose their environmental impacts and can still lend to non-aligned sectors including fossil fuel companies. For GFANZ commitments to be credible, there must be government and regulatory intervention in required disclosures standards and universal targets.

Simplifying the ESG ‘alphabet soup’

The International Financial Reporting Standards Foundation (IFRS) announced the formation of a new International Sustainability Standards Board (ISSB) to develop universal sustainability disclosure standards to meet investors’ information needs and tackle greenwashing.

In the ‘alphabet soup’ that is ESG reporting standards and metrics, ESG data lacks consistency, credibility, and comparability. ISSB aims to tackle this confusion by creating a comprehensive, global baseline of sustainability disclosure standards to ensure information is comparable across industries and financial markets. Without this, businesses are able to hide behind undefined and opaque terminology and ‘standards shop’ for which suits them best leading to greenwashing in the financial markets.

ISSB published two prototype standards which are built on the existing sustainability reporting frameworks, such as Task Force on Climate-Related Financial Disclosure (TCFD). ISSB looks at sustainability more generally, not just climate standards, but those that could have a material effect on the value of a company. To do so, the standards will follow the four pillars TCFD approach: Governance, Strategy, Risk Management and Metrics and Targets. This approach has been welcomed by the UK government, who recently announced its upcoming Sustainability Disclosure Requirements (SDR) will use standards developed by the ISSB.

Bringing it home

UK Chancellor Rishi Sunak announced plans to make the UK “the world’s first net-zero aligned financial centre” including mandatory net zero transition plans for UK financial institutions and listed companies. These institutions and companies will be required to publish transition plans by 2023 that detail how they will adapt and decarbonise with interim goals between now and 2050.

As the only country currently to announce a net zero aligned financial centre, the UK is looking to lead the way in a net zero world and businesses that are not part of the transition will have to deal with increasingly harsh regulations, increase costs and lose a competitive advantage as a result.

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