Climate change is an issue of global concern; more and more prominent investors,
businesses and institutions are calling for the incorporation of climate-related financial disclosures — and the US financial sector is uniquely positioned to take action.
In the era of climate change and greater public engagement on topics such as
corporate governance, environmental stewardship and social impact, the role of
finance in enabling a climate-centric economic model is vital.
It is not surprising therefore that the topic of sustainable finance has been
gaining traction over the last
decade.
Sustainable finance can be defined as the integration of environmental, social
and governance (ESG) factors into traditional financial planning and investment
decisions. Global challenges are driving the public sector, private sector, and
civil society to work together to leverage the potential of all available
resources to address growing issues such as climate change. How we leverage
finance is crucially important; and at South
Pole, we have been working with stakeholders across
these sectors to initiate discussions and facilitate decisions through platforms
such as the Nordic Platform for Mobilising Climate
Finance.
Fig 1. Total Global Climate Finance
Flows
2013-18.
The US context
The US is the world’s largest capital market. It has an important role to play
in scaling up the practices of sustainable finance and encouraging ESG
disclosures. Sustainable finance is not a completely new concept for the US
market — a recent biennial
report
about sustainable investing in the US finding that the total US-domiciled assets
under management using sustainable-investing strategies grew 42 percent from
$12 trillion in 2018 to $17.1 trillion in 2020. To underscore this trend,
BlackRock CEO Larry Fink stated in his 2021 annual letter to
shareholders
that “no issue ranks higher than climate change on our clients’ lists of
priorities. They ask us about it nearly every day.”
Regulation, finance, and the environment: An alliance decades in the making
“Emitting carbon dioxide into the atmosphere does allow you to produce
electricity more cheaply, but there’s a whole other set of people who are being
punished or penalized. It’s a poor idea of economics.”
— Michael
Greenstone,
Milton Friedman Professor of Economics at the University of Chicago and the
director of the Energy Policy Institute of Chicago
When specifically looking at the environmental aspect of ESG issues, it is clear
that regulatory and market pressures must come to terms with the fact that
business as usual has a negative impact on the natural
world.
We have been brought to the brink of catastrophic climate change as a result of
an economic system that has failed to account for externalities that have
negative environmental impacts. Without straying too much into the discussion on
the viability of free market
economics,
it is not difficult to see that both market actors and government both have a
role to play to correct this problem.
The new US administration has realigned the country’s political views on
business and the environment. Just four months into its tenure, we see that the
government is again closely aligned with the global attitude towards climate
change — a global crisis that needs the coordinated support of major governments
and markets across the world. While the implementation of policy so different to
that of his predecessor may take some time, the Biden administration’s early
decisions are encouraging from an environmental perspective. It is now time for
market actors to follow suit; and the US must now take a pivotal first step in
the establishment of climate-related financial disclosure regulations if it is
to take a prominent role in the global fight against climate change.
Climate-related financial disclosure in the US
When it comes to mature climate-related financial disclosure regulations, the US
is suffering from its time spent away from climate-focused policymaking. For
example, the Securities and Exchange Commission (SEC) — in charge of
regulating the federal financial disclosure requirements for US public companies
— has been constrained in its adoption of climate-related financial disclosures,
especially in the last four years. Recently, however, Acting SEC Chair Allison
Herren Lee requested public
comments
on potential climate-disclosure policies and was also planning a broader
mandatory ESG-disclosure regulation, as current voluntary frameworks are not
meeting investors’ information demands.
To accompany promising regulatory actions like these, the market is also showing
positive trends. Some of the key trends in sustainable finance that are already
impacting the private sector in North America include:
-
Sustainability performance data: As stakeholder pressure, regulatory
requirements and a general market-wide push for more transparency in
ESG-associated accounting rises, organizations are scrambling to gather
relevant, consistent and trustworthy data. -
Sustainable bonds and loans: These financial instruments direct the
proceeds raised towards the (re)financing of environmental and/or social
projects. More and more organizations realize that debt financing their
“green” projects is a safe way to meet climate targets and achieve positive
reputational and financial outcomes. -
Transparency and corporate reporting: Standards are gathering around the
efforts of the Sustainable Accounting Standards Board (SASB) to
define
materiality
and accounting rules for sustainability data. Agreement on global reporting
standards will likely lead to making reporting mandatory. In the EU,
regulators have already published an outline of a reporting framework, as
well as an approach to climate-related disclosures. It is expected that the
US will release its own set shortly.
Given the trends and the speed with which the current US administration is
moving to bring sustainable finance regulations to the fore, the US can very
quickly become a leader in sustainable finance and climate-positive regulation.
Indeed, in recent
discussions
with European law makers, US climate change envoy John Kerry
suggested
that a development of a common US-EU Green Taxonomy would be a natural next step
in establishing baseline regulations on sustainable finance and low-carbon
activities.
Task Force for Climate-related Financial Disclosures (TCFD)
Frameworks such as the TCFD and the
CDP
questionnaire — along with standards such as the Global Reporting Initiative
(GRI) and the EU Sustainable Finance
Disclosure Regulation
(SFDR)
— are slowly being adopted across the world and becoming a mainstream reporting
requirement.
In the near future, reporting guidelines will be mandatory in many regions
across the world — some countries have already taken this step. Within this
context, the TCFD has become a benchmark and the
global standard for climate-risk disclosure. The Financial Stability Board
(FSB), the body responsible for the creation of the TCFD, seeks to improve
climate-related financial
reporting
and provide financial markets with transparent data about the impacts of climate
change. To this end, the development of the TCFD has been crucial in helping
governments and policy makers across the world create their own regulatory
frameworks or indeed adopt the TCFD itself directly.
Broadly, the TCFD makes recommendations across four areas:
Globally, almost
1,700
organizations have already declared support for the TCFD, including many major
financial institutions. While the disclosure requirements started off as
voluntary, many countries are now adopting the standard as mandatory. New
Zealand has already made the TCFD a mandatory standard from 2023, while large
pension funds and financial institutions in the UK will need to do the same
by 2025. Hong Kong is in the process of making mandatory climate disclosure
regulations, and the EU’s SFDR and Taxonomy is derived largely from TCFD’s
suggestions. While the US begins to consult on the issue, it’s neighbor to the
north, Canada, has not only tied pandemic-bailout funding to TCFD-aligned
disclosures,
it is also in the process of developing its own Green
Taxonomy.
Prominent
investors,
businesses and institutions are calling for the incorporation of climate-related
financial disclosures. It’s safe to say that with global alignment on
climate-related disclosure, it is a matter of when — not if — climate-related
standards are adopted by US regulatory bodies.
How South Pole can help
With over 15 years of expertise, South Pole is helping the financial sector on
its path to becoming climate resilient. As we help you navigate through the
veritable storm of regulations, metrics and targets, it is important to know
that meeting your net-zero
targets
is a journey and not simply an end goal.
To do this, it is important to first set the context. What this means is that by
aiding you in measuring and identifying the requirements for TCFD-based
reporting and portfolio alignment with the Paris Agreement goals, South Pole
will help set the context for your organization’s climate journey. Once this is
clear and a baseline climate strategy is defined, our team will help you achieve
your net-zero ambitions and SDG
goals,
and stay prepared for future climate risks and opportunities.
Net-zero expectations are here to stay and climate-related financial disclosures
such as the TCFD are the first step in starting your climate journey. South
Pole’s Sustainable Finance
team’s
expertise in working with investors across the world enables us to help you
build climate-resilient portfolios that cover your risks and leverage your
opportunities.
