How can businesses boost climate disclosure and green investment in line with changing demands?
Investors and consumers alike are demanding more information on business-related climate risks and whether corporates are spending significant sums on decarbonisation - and this trend is likely to accelerate because of Covid-19. So, what is best practice on investment and disclosure, and how should businesses implement these approaches?
These were the key discussion points of edie’s most recent webinar sponsored by UL and featuring expert speakers from ING, Tideway, and BlackRock Investment Stewardship.
The hour-long session, which took place on Wednesday 29 July and is now available to watch on-demand, connected the investor community with sustainability leaders to explore the role of green finance and climate-related financial disclosure in recovering from the coronavirus pandemic.
The green finance sector had been growing exponentially pre-pandemic. As of June 2019, at least $30.7trn (£23.8trn) was held in investments marked specifically as ‘sustainable’ or ‘green’ – and increase of more than one-third in three years. While the majority of businesses are decreasing their overall investments as a result of Covid-19, the social impacts of the pandemic have led to a fresh wave of interest in ESG and a growing desire to eliminate greenwashing from this space.
Similar trends were already underway with climate disclosures. The Task Force on Climate-related Financial Disclosures (TCFD) surpassed 1,000 supporting organisations in February, while CDP charted an eightfold increase in corporates requesting suppliers’ environmental data within a decade.
With the pandemic placing further pressure on corporates to disclose their climate and nature-related risks and to go beyond incremental targets and investments on low-carbon technologies, the webinar provided best-practice advice for organisations of all sizes and sectors looking to get ahead of the curve and contribute to a truly green recovery.
Here, edie outlines five of the speakers’ key pieces of advice.
1) Know your frameworks
When it comes to climate-related target-setting and disclosures, there are swathes of frameworks which businesses can choose to report in line with; bodies they may choose to disclose through, often in the hopes of topping a benchmark; and resources which can be used to inform target setting.
On target setting, UL’s ESG advisory and global solutions lead Chris Cattermole emphasised the importance of science-based targets, given that the Paris Agreement is an “aggressive and clear pathway” used by most investors. He noted that, while net-zero targets may garner much media attention, they won’t earn the favour of investors without proof that they are 1.5C-aligned.
BlackRock Investment Stewardship’s VP Jessica McDougall and ING’s global head of sustainable finance Leonie Schreve agreed, noting that engagement with firms in sectors where 1.5C pathways have not yet been developed is typically a more complex process.
As for reporting and disclosure frameworks, UL’s Cattermole highlighted the importance of the TCFD recommendations and the Climate Disclosure Standards Board (CDSB) requirements. Following the former will help investors understand climate-related risks and opportunities in full, while the latter provides a fuller materiality picture.
Both TCFD and CDSB will help corporates as the EU’s Green Finance Taxonomy comes into effect and as the Sustainability Accounting Standards Board (SASB) deepens its work with the Global Reporting Initiative (GRI), Cattermole explained.
Cattermole concluded: “With any framework, you have to think practically about how you’re going to support [it]; what data is required? What else do you need to report to them?”
2) Understand that disclosure is not the end of the journey
BlackRock made headlines earlier this summer with the publication of its first quarterly voting action report. The report revealed that it took voting action against 53 companies on climate grounds in the first half of 2020 and had placed a further 191 “on watch” for potential voting action.
McDougall, when asked to elaborate on BlackRock’s process for engaging with laggard companies, said that the 53 firms “highlighted climate risk within a variety of different documents… as material to their business, but had not implemented risk-mitigating factors over the past year or had been very reticent to discuss a realignment of their portfolios to transition to a low-carbon economy”.
In other words: A one-off disclosure is not sufficient for investors. They want to see that the business is using data and science to inform its target-setting, its processes and its decisions about capital allocation and business models.
3) Prepare for investors to ask how you’ll achieve your climate goals
Building on the above point, McDougall, Schreve and Cattermole highlighted the fact that investors will no longer be impressed by lofty targets unless businesses are sufficiently allocating capital and changing processes to achieve them.
Speaking of businesses for which the SBTi is yet to create a 1.5C pathway, McDougall said: “We’re trying to understand the rigour of the goals that companies are putting in place. If they are not science-based, are they Paris Aligned? If not, why not? What does the company see as the limit of possibility in both the short-term and the long-term?” McDougall also said that investors are keen to see whether businesses are allocating capital in a way which matches their sustainability PR. For example, many oil and gas majors with strict climate targets poured more than 95% of their CAPEX in 2018 into projects which may undermine their delivery.
For businesses and sectors which are struggling to envision how they can align with the Paris Agreement due to a lack of technological solutions or policy supports, investors are likely to be sympathetic – but will ultimately require continued, honest communication, the speakers concluded.
McDougall said that BlackRock will only take voting action against companies when there are “roadblocks” to “ongoing dialogue”. Shreve said that while ING is divesting from sectors which will ultimately never be Paris-aligned, like coal, some firms are putting off alignment because they are given “leeway” by their investors and by policy at present – which will be eradicated in the coming decades.
4) Narrow your focus to avoid greenwashing
In the Q&A proportion of the webinar, speakers were asked how the investor community is using the UN’s Sustainable Development Goals (SDGs), given that more than 10,000 organisations have voiced support for the framework and that many consumers want their money invested in an SDG-aligned manner.
ING’s Schreve said that SDG-aligned disclosures and targets are not required in order for the bank to back a business, but that they are taken into consideration and seen as positive. UL’s Cattermole said he has seen many investors taking this approach because the framework was not designed specifically for investors or businesses and, as such, quantifying progress in many fields remains a challenge.
Schreve and Tideway’s head of sustainability Darren White agreed that the SDG-aligned strategies which are most relatable to investors are those which focus on the most material goals to the organisation, rather than purporting to address the entire 169 targets and 231 indicators. Tideway is notably focusing on SDGs 6, clean water and sanitation, and 11, sustainable cities and communities, and embedded these goals in its green bond.
“A lot of organisations seem to say they can solve everything and then when you really look into the detail, you see there’s not too much substance behind it,” White said, adding that investors find businesses who accurately disclose impacts “in their realm” “a lot more credible”.
5) Showcase potential rewards as well as risk
When it comes to climate and nature-related risks, the figures are staggering. The WEF claims that $44trn – more than half of global GDP – is exposed to risks from nature loss. WWF estimates that £8trn will be wiped off the global economy by 2050 as the planet warms and natural resources degrade.
The speakers concurred that it is important for businesses to properly quantify this risk – in physical, transition and reputational terms- not only to communicate properly with investors, but to build internal motivation to transition their business models and to engage with policymakers. As has often been said, you cannot manage what you cannot measure.
However, the importance of framing the opportunities of the transition to a low-carbon, circular economy was also highlighted by the speakers. Investors will be keen to know what value your business could reap from, for example, the alternative proteins market; the renewable energy or energy flexibility markets; repair, refill and resale models; electric vehicles or alternative fuels.
“We believe firms should think about when communicating with investors, climate change as a source of value or competitive advantage,” Cattermole said, noting that doing so will require any firm to go beyond the requirements of existing frameworks and to envision a future in which their sustainability strategy is based on transformation, not incremental improvements.
“It’s important to consider how you integrate some of the non-financial data into how you think about product development, energy efficiency, and so on, to get to that value creation angle,” he added, going back to the importance of disclosure as a starting-point.
You can watch the webinar on-demand here.
edie's Sustainable Investment Digital Conference
edie is launching its first bespoke sustainability conference focused on green finance, with experts from ING, BlackRock, BNP Paribas and more set to discuss investment and the green recovery at the Sustainable Investment Digital Conference on 7-8 September 2020.
The two-day digital event will feature a myriad of expert panel discussions, breakouts and deep dives into key green finance themes - plus opportunities to network virtually with delegates.
For further information, sponsorship inquiries and registration, click here.