- With the UK releasing massive requirements for sustainability-related disclosure on public markets, Biden is set to come back from COP26 with tangible guidelines for fueling the US green finance landscape.
- As stated by Guido Giese, executive director at MSCI Research, the data shows how stocks with better ESG scores tend to generate better earnings than those with lower ESG scores.
- Over the next five to 10 years, the climate will have financial consequences for most industries and business models – many large corporates are starting to embed sustainability in their core strategy.
“In the wake of the coronavirus pandemic, the tectonic shift toward sustainability-focused companies is accelerating. More and more people understand that climate risk is investment risk,” said Larry Fink, Chairman and CEO at BlackRock.
This month, the city of Glasgow in Scotland has been filling up with global leaders and business executives coming from all around the world to outline their climate commitments at COP26, the United Nations Climate Change Conference.
As Biden stated on Monday, at the summit: “None of us can escape the worst that’s yet to come if we fail to seize this moment”.
The difference between this COP and past ones is that we’re already living in a world where financial regulation on climate is tightening each day across global financial markets.
Last month, the UK released a massive package of disclosure requirements aimed at “enabling every financial decision to factor in climate change and the environment”. One of the significant measures is that all firms offering financial products will be required to disclose all the finance activities’ environmental impact publicly.
The UK sees this as a competitive opportunity to become the best place in the world for sustainable investing. It knows it as the future of general investing, and it wants to keep the advantages of being a global financial centre.
Several months ago, the EU announced the Sustainable Finance Disclosure Regulation (SFDR), a set of rules to make the sustainability profile of funds more comparable and better understood by end-investors. This also happens to be the most significant piece of EU legislation since World War II.
Also Read: COVID-19, the environment, and the tech ecosystem: what opportunity is available out there for us?
Taking ESG requirements to the next level
You haven’t seen much yet, because the real deal is about to come through the Task-Force for Climate-Related Financial Disclosures (TCFD).
TCFD is a framework for public companies to disclose their climate-related risks and opportunities. It has become mandatory in the UK. Recently, the other G7 countries announced that they would implement it too. Singapore, Switzerland and other nations followed suit.
I see the complexity of implementing TCFD as a public company through the work we do at Top Tier Impact Strategies. This is because disclosing risks and opportunities requires scenario planning that considers a multitude of data and factors ranging from geopolitics to global supply chain intricacies.
Climate risk is investment risk
As Larry Fink, Chairman and CEO at BlackRock, wrote in his annual letter to CEOs earlier this year: “No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”
More recently, BlackRock explained that the practice of quantifying climate risk on individual investments and portfolios is still in its infancy, but “it is something at which we will all need to become adept.
“Institutional investors, such as BlackRock’s clients, already seek to understand how the risks associated with climate will affect the assets they manage.
According to BlackRock, reporting on climate risk is a duty that “is expected to trickle down to smaller funds over the next few years.”
Measuring green finance in the new normal
At Top Tier Impact, we believe that a proactive approach to understanding, measuring, and reporting climate risks is a crucial investment factor that will differentiate leaders from laggards in the coming years.
Also read: Banking on a green future of finance: How to bridge sustainability and profitability
The upcoming regulatory requirements are the first part of a larger plan since the drafts of TNFD are already following TCFD (similar disclosures but focused on nature) and a set of rules about water.
For executives and investors with long-term ambitions, this is a very helpful ringing bell. It opens their eyes to how they can be proactive industry leaders and increase value by navigating a science-based “New Normal” that is here to stay.
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