With climate change top of mind, the demand for financial institutions to take action on ESG issues is stronger than ever. While governments in the US and around the world are taking progressively bolder actions, now is the time for market actors to get involved in earnest. Not doing so will mean missing a huge opportunity, or worse, being caught unprepared by the rapid changes taking place with respect to sustainable finance.
The concept of sustainable finance has been steadily gaining traction over the last decade. It can be defined as the integration of environmental, social, and governance (ESG) factors into traditional financial planning and investment decisions. Global challenges, climate change in particular, are pushing the public sector, private sector, and civil society to work together to leverage the potential of their shared resources. South Pole has been working with stakeholders across these sectors to initiate discussions and facilitate decisions through platforms such as the Nordic Platform for Mobilising Climate Finance.
The US, the world's largest capital market, 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 American market, with 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 $12.0 trillion in 2018 to $17.1 trillion in 2020. This hasn't gone unnoticed by market stalwarts like Larry Fink, the CEO of BlackRock, who 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.
When specifically looking at the environmental aspect of ESG issues, it is clear that regulatory pressure and market pressure 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 a negative impact on the environment. Without straying too much into the discussion on the viability of free market economics, it is not difficult to agree both market actors and government both have a role to play to correct this problem.
...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, the Milton Friedman Professor of Economics at the University of Chicago and the director of the Energy Policy Institute of Chicago.
The change in administration in the United States has realigned the country's political views on business and the environment. Just four months into its tenure, we see that the government is now 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 to solve. While the implementation of policy so different to that of his predecessor may take some time, President Biden and his administration's early decisions are encouraging from an environmental perspective. It is now time for market actors to follow suit, and the US now needs to 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.
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), which is 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. Prior to the nomination of Gary Gensler as Chair of the SEC, the Acting Chair of the SEC, Allison Herren Lee, requested public comments on potential climate disclosure policies. Lee was also planning on creating a broader mandatory ESG disclosure regulation, as current voluntary frameworks are not meeting investors' information demands. More recently, Gensler expressed that he had "asked staff to put together recommendations on mandatory company disclosures on climate risk and on human capital."
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:
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, the US climate change envoy, John Kerry, suggested that the 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.
Frameworks such as the TCFD and the CDP questionnaire, along with standards like 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, while 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.
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, but 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 the American regulatory bodies.
This will affect each and every business/financial institution, and as with climate change itself, those that are prepared will fare better in the end. Organizations that take the issue seriously can start by a) understanding how the coming changes will affect them, b) making internal changes that will better prepare them for the future regardless of the final shape of the impending regulatory measures, and c) communicating their efforts to strategically place themselves ahead of the curve and taking advantage of being leaders in bringing sustainable finance to the forefront of US climate action.
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 2050 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 as well as stay prepared for future climate risks and opportunities.
Net Zero is 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. Find out more about what we have to offer on our webpage.
