Could it be that we’re at the end of the beginning for the climate transition?
The U.K. became one of the first major countries to get specific about putting good intentions into practice. Earlier this month, it released a detailed “Net Zero” strategy — a roadmap of how the country plans to be in a situation where it no longer adds to the total amount of greenhouse gases in the atmosphere come 2050.
Boris Johnson and Sir David Attenborough at the launch of the COP26 UN climate conference. Source: U.K. government, via Flickr
As a result, several new acronyms might become as well known in finance as FTSE, GDP and the SEC.
Of particular interest to asset managers: the SDR, or Sustainability Disclosure Requirements. A key burden — and opportunity! — in the future world of investing will be the requirement that companies, especially the “premium” London Stock Exchange equities that have advanced reporting requirements to qualify for the FTSE 250 and 100 benchmarks, align their reporting with the Task Force on Climate-Related Financial Disclosures.
That’s the second acronym. The TCFD, co-founded by former Bank of England and Bank of Canada Governor Mark Carney, was created in 2015 by major economies and central banks with the aim of developing consistent climate risk disclosure for the financial world. Lest we forget, Carney has sounded the alarm about stranded, climate-unfriendly assets becoming a risk to financial stability as their value deteriorates.
London’s market isn’t just about the U.K. economy. The LSE is home to global companies and British-based multinationals that get a small fraction of their income from their home market. Those non-U.K. issuers see value in the imprimatur of a listing in one of the world’s top two financial centres, home to one of the most influential regulatory regimes outside the U.S.
London has one of the biggest pools of capital in the world, and the British government is hoping to retain the financial centre’s post-Brexit relevance by becoming a leader on the environment. Appropriately, one of the policy papers released Oct. 18 is called “Greening Finance.”
“The government would like to support and encourage organizations” as they develop their transition plans, the report says. That phrasing might be a case of British understatement.
Financial market participants will need to set out the impact of the activities they finance.
The TCFD gives an example of what it wants to see from multinationals: a granular transition plan and decarbonisation “glide path” for Nestle, which the world’s biggest food company released in February. Its specific measures include cutting “virgin” plastic packaging by a third, come 2025; by 2030, half of the Swiss giant’s key ingredients will be sourced “through regenerative agricultural methods.”
A Nestle factory in Dubai (source: Nestle, via Flickr)
The SDR, for its part, fleshes out some of what asset managers will face. Page 14 of the Greening Finance paper shows the direction of travel for disclosure requirements. Here’s what’s coming:
“Processes used to identify, assess, and manage sustainability-related risks, opportunities and impacts” and “metrics and targets used to assess and manage relevant sustainability-related risks, opportunities and impacts.” These will apply to an organization’s overall operations, as well as individual investment products, like an ETF or an actively managed fund.
After that, less British understatement, more of a direct order.
“Detailed, credible transition plans… can support markets in monitoring progress towards a net-zero economy. They are also essential for the effective exercise of market discipline, and investors’ ability to hold investee company boards and management to account. The government therefore expects to see the publication of transition plans become the norm across the economy.’’
The government wants the SDR to be a fully integrated regulatory regime, and says the nation’s Treasury department will get heavily involved in making that happen. Their message is clear: build your data collection and disclosure capacities — and do it now.
Prime Minister Boris Johnson had good reason to push his environmental team to release a substantive plan now. Over the coming weeks, the U.K. hosts the much-hyped COP26 — the United Nations climate-change conference — in Glasgow.
The Scottish city gives an initial to yet another acronym: GFANZ — the Glasgow Financial Alliance for Net Zero. This is a banking sector-driven initiative aimed at crystallizing the next concrete steps — the “best practice” in reporting and climate data. GFANZ principal signatories include CEOs Shemara Wikramanayake of Macquarie, Jane Fraser of Citigroup, Larry Fink of BlackRock, Brian Moynihan of Bank of America, and Ana Botin of Banco Santander, S.A.
Firms focusing on solving that transition planning & analytics challenge have a lot of opportunity and hard work ahead.