Comment: Paul Simpson of CDP says financial institutions and investors need to engage with companies to drive a widespread transition to a net-zero, nature-positive and resilient economy
COP26 in Glasgow was an important milestone on the path to a net-zero economy, but there is an urgent need to increase ambition and translate commitments into action.
The Glasgow Climate Pact provides a crucial building block to the Paris Agreement and will help stimulate action in the real economy. It now needs to be followed by science-based targets and credible transition plans if we are to halve carbon emissions by 2030 and reach net-zero by 2050.
While progress made by governments at the conference was significant, including commitments to end deforestation by 2030 and pledges to shift away from coal, it was clear non-state actors are also vital to pursuing the Paris Agreement goal of limiting global warming to 1.5C.
CDP analysis of a third of the global fund management industry showed 60% of funds are aligned with warming of 2.75C
Regulators, companies and capital markets have a vital role to play in facilitating a rapid managed transition, which ensures impacts and risks from climate change are minimised.
Financial institutions in particular need to engage with companies as they work to decarbonise their portfolios – using their influence to drive a widespread transition to a net-zero, nature-positive and resilient economy.
In September, 220 institutions holding $29tn in assets called on the highest impact companies to set science-based emissions targets, and it was encouraging to see a groundswell of net-zero commitments from corporates and financial institutions around COP26. But there is a long way to go.
CDP analysis of a third of the global fund management industry showed only 158 funds, worth 0.5% of total assets, have a temperature pathway in line with the Paris Agreement. By contrast, 60% of funds are aligned with warming of 2.75C, which is simply not sustainable.
The work of former Bank of England governor Mark Carney and the Glasgow Financial Alliance for Net Zero (GFANZ) has been significant in establishing emissions-cutting initiatives for a wide range of participants across the investment chain. Some 450 financial institutions with more than $100tn of capital committed to transforming the economy for net zero.
It is now crucial that those commitments are translated into action and credible climate transition plans are developed and published enabling organisations to demonstrate their strategy to transition to a 1.5 degrees pathway.
To do this, there needs to be better transparency, tracking and accountability to ensure institutions deliver on their pledges, and we will drive towards this as part of our work with GFANZ and other commitments. We have also developed a discussion paper setting out six guiding principles to help companies develop a credible climate transition plan, and in 2022 will produce further material to provide support and guidance on this subject.
In two decades of catalysing environmental data disclosure, we see the necessity and value of setting goals with annual progress reporting
With transition plans an emerging field in a rapidly evolving space, their quality and completeness will need to be independently assessed. CDP will continue to conduct high-level analysis to assess the quality of key climate transition plan metrics and explore opportunities for climate transition planning through updates to scoring and producing insight pieces for relevant stakeholders.
In two decades of catalysing environmental data disclosure at CDP, we see the necessity and value of setting goals with annual progress reporting. For example, companies with science-based targets have reduced their emissions by 25% since 2015. Furthermore, by 2025 the Science Based Targets initiative will require companies to review and, if necessary, revalidate their targets every five years from the date their target was first approved, in order to ensure it remains aligned with the most recent climate science.
The establishment of the International Sustainability Standards Board (ISSB), in response to investor demand for a unified baseline for sustainability disclosures, is also a welcome development – it will help to increase transparency and accountability within global financial markets.
Alongside the ISSB, the UK’s announcement that financial institutions and listed companies will be required to publish net-zero climate transition plans from 2023 is a sign that organisations not yet disclosing their environmental impacts and plans risk trailing their peers and running into conflict with regulators.
While it is increasingly clear that financial institutions must urgently decarbonise their portfolios in line with the Paris Agreement, the tracking and benchmarking of underlying investments requires high-quality, consistent and comparable data.
The climate impact of financial institutions’ investment and lending is, on average, more than 700 times their direct impact, yet from our analysis only 25% report the emissions associated with their portfolio, and 49% do not analyse the impact of their holdings on the environment at all.
COP26 did not set the world on a direct path to a 1.5C resilient future, but it has kept the prospect of achieving it alive
At CDP we are deepening our engagement with capital market actors, covering more environmental issues, such as biodiversity and oceans, increasing our focus on targets, plans and performance against the science-based transition in a bid to fill the data and emissions gap and drive increased accountability and credibility.
Scoring all companies against science-based transition benchmarks reflecting historic, current and projected impacts will help provide a clear assessment of their ambition and performance against targets, enabling institutions and markets to make informed investment decisions.
COP26 did not set the world on a direct path to a 1.5C resilient future, but it has kept the prospect of achieving it alive with the requirement for all countries to present updated climate plans, with increased ambition and action by the end of 2022.
What happens in the next five years is critical and we must collectively ensure that the growing commitments to net zero are backed by action, transparency and accountability.
Failure to do so cannot be an option.
Paul Simpson is CEO of CDP and also sits on the boards of We Mean Business, the Science Based Targets initiative and the Investor Agenda.COP26 GFANZ Paris Agreement International Sustainability Standards Board net-zero economy Science Based Targets Initiative