Ethical Finance Round Table Summary: Leadership is crucial in driving better economies

Leadership is crucial in driving better economies. From fighting the climate crisis, to driving inclusion across business and society, we cannot build a better world without effective leadership. The pandemic, combined with the threat of the climate crisis, has created a uniquely challenging set of circumstances for leaders across the spectrum.

In the latest Ethical Finance Round Table, taking place on 5 May 2021 and entitled ‘Leadership: Embedding Responsibility’, Michael Cole-Fontayn, Chairman at the Chartered Institute for Securities and Investment (CISI) and the Association for Financial Markets in Europe (AFME); Helen Cook, Chief HR Officer at NatWest Group; and Karina Robinson, CEO at Robinson Hambro joined moderator Graham Burnside of GEFI to discuss the role of leadership in driving social and environmental responsibility in organisations. Despite the scale of the challenge, the panel offered optimism that leadership in the finance sector is moving in the right direction.

While the current global health and economic crisis has tested the resolve of leaders throughout finance, Michael Cole-Fontayn emphasised that climate change, biodiversity loss and social inequality offer a challenge many times greater. He added that, on top of these existential pressures, managers in the finance sector are facing increasingly complex demands from clients, governments and regulators.

Helen Cook discussed NatWest Group’s journey to put their purpose at the centre of the bank’s strategy, stressing the importance of action over words. While the NatWest journey began 5 years ago, it has become the bank’s ‘North Star’ during the pandemic by providing a guiding purpose through its three core tenets: enterprise, learning and climate. One manifestation of this has been the shift towards hybrid working, likely to continue after the pandemic. Helen also remarked on the ways in which her role has changed over the years, with investors more concerned than ever about the practical steps companies are taking to look after their employees.

Karina Robinson gave an optimistic view of the future: while the finance sector is in no way perfect, there is an effective ‘carrot and stick’ across the industry, with incentives to perform well allied with much-needed effective regulation. Even prior to Covid-19, Karina argues that there was general dissatisfaction with capitalism, consistent across generations and even income levels, and only by addressing this dissatisfaction can the business sector make the case for capitalism.

The session ended with a Q&A; one particularly interesting question asked about the challenge of leading hybrid workforces, creating cohesive teams while some employees are in the office and others work remotely. Michael pointed out that those physically present tend to unconsciously exclude virtual participants, with Karina arguing for effective education to resolve this issue and Helen highlighting the role of behavioural scientists employed by NatWest Group to understand the psychology behind the challenges of a hybrid workforce. “Middle manager” might be a term with negative associations, but as Helen pointed out, it is becoming an increasingly difficult job as working patterns become more complex.


Greenwashing - what it is, and how to avoid it

What is greenwashing, and why does it happen? With Earth Day 2021 coming up, we take a look at a phenomenon which threatens the credibility of green businesses across the spectrum. For those inside the sustainable finance movement, the term is familiar. It is a common enough phenomenon that it has even made its way into the dictionary, with Cambridge Dictionary defining it as “mak[ing] people believe that your company is doing more to protect the environment than it really is”. In finance, this could mean a “green” investment fund which invests in unrepentant fossil fuel companies.

It is not hard to see how this could harm the credibility of both individual businesses and the green business movement more generally. If there are persistent gaps between how companies present themselves and their products and what they are actually doing, this will harm trust, putting customers off green products and causing genuine damage to the environment in the process. To mitigate this risk to both the environment and businesses operating in good faith, there have been numerous attempts to standardise what it means for a financial product to be considered “sustainable”, most notably the EU Sustainable Finance Taxonomy.

The rise of legal standards around sustainable finance implies three distinct types of greenwashing – scientific, legal, and perception. Legal greenwashing refers to falling short of legal standards, scientific to being assessed to fall short of some standard – for example, being consistent with limited global temperature rises to 1.5C – and perception to falling short of public expectations of what a product should mean.

This suggests that there can be both deliberate and accidental greenwashing. As more customers across the financial system demand sustainable products, the incentives to label products as green have increased, and consequently fund managers may consciously or subconsciously respond to this incentive. Fund managers might also sincerely believe in a product which turns out to fall short of legal, scientific or perception standards for what that product should be.

For example, many in the finance industry, such as Lothian Pension Fund’s David Hickey, strongly believe in the power of equity engagement on “brown” stock. The public – as shown in this video from pension campaign group Make My Money Matter – may have limited understanding of the details of how pensions operate and expect even those funds not explicitly engagement in ethically-aware investing to avoid some types of businesses.

With the complex spectrum of greenwashing in mind, it is difficult to put a number on the exact scale of the problem, in finance and beyond. As regulation around sustainable finance improves, and consumers demand more integration of ESG concerns, we will no doubt see some fall short.

How do we solve a problem like greenwashing? Sadly, it seems unlikely that the problem will just go away of its own accord. As sustainability becomes an ever more important part of economic life, greenwashing will continue to be an issue, but one that can be mitigated as regulators, consumers and the financial industry improve their understandings of sustainable finance. In future, assessing whether a financial product’s green credentials are grounded in reality will be as important as assessing whether its financial claims stand to muster.

One innovative solution, touted by Kaisie Rayner, Climate Change Lead at Royal London, at our Ethical Finance 2020 panel on greenwashing, is to flip the situation on its head. With food, Kaisie pointed out, we do not highlight the vegetable content, but rather the sugar and fat. Likewise, instead of labelling some products as “green”, perhaps we should instead be putting health warnings on those that are not.

What can we do to prevent greenwashing?

Be open, honest and transparent about financial products

Financial institutions should disclose the details of their products, and not try to optimistically claim unearned green credentials. Consumers should be able to easily find out the principles and strategies of ethical finance products.

Call out bad practices

Where greenwashing is taking place – intentionally or not – we should call it out.

Strengthen regulation and standardise terminology

Historically, the ethical finance sector has run largely on trust. Firms have been responsible for labelling products as “green”, “ethical” or “ESG”, and consumers have been responsible for assessing whether these labels match their expectations. A standardised set of terms for ethical finance should improve transparency.

Move towards “health warnings”

It should become standard practice to highlight the aspects of a financial product that consumers might not want to be associated with.


UK Pension Funds Required to Report on Climate Change Impact

UK pension funds are now required to report on their climate change impact.

  • New legislation puts obligations on UK pension trustees to evaluate and report on the risks and opportunities presented by climate change.2
  • It is likely that from October 2021 UK schemes with over £5billion in relevant assets will be required to make disclosures in line with the recommendations from the Task Force on Climate-Related Financial Disclosures (“TCFD”)3 and this requirement may be expanded to smaller schemes as early as 2024.8
  • The TCFD recommendations are designed to guide organisations in providing better information on the impact of climate change to support informed capital allocation.4
  • TCFD-aligned disclosures will be mandatory across non-financial and financial sectors of the UK economy by 2025 and in New Zealand by 2023.5, 9

The impact of climate change will be felt across all aspects of society and across jurisdictions. The process of transition to a low carbon world needs to involve both individuals and governments alike. Consumer led activism has already started in the pensions industry – our recent blog on Make My Money Matter highlighted that 52% of consumers want their pensions to be part of the solution in tackling climate change. The Pensions Schemes Act 2021 (“the Act”), which achieved Royal Assent on 11 February 2021,1 is further pushing the c.£2 trillion in assets under management of UK occupational pension schemes towards considering the impact of climate change.6 The Act has also laid the foundation for a pensions dashboard to enable individuals to view their pensions online, providing greater transparency.10 The Act also includes increased Pensions Regulator powers and associated criminal offences as well as a toughening of the funding regime for defined benefit schemes.12

The Act requires trustees to ensure there is effective governance in respect of the impact of climate change as well as evaluate and report on the risks and opportunities presented by climate change.2 Guy Opperman, Minister for Pensions, said: “This Act makes our pensions safer, better and greener, as we look to build back better from the pandemic. Its passage will reassure savers that they can, and will, have a retirement they deserve.”7

Draft regulations and statutory guidance, closed for consultation on 10 March 2021, propose that schemes with relevant assets of £5 billion or more as well as all authorised master trusts and authorised collective money purchase schemes will have to produce and publish a TCFD report from October 2021.  It is anticipated that these requirements will then be extended to schemes with relevant assets of £1 billion or more from 1 October 2022. An interim review will be carried out in 2023 to determine whether the regulations will be rolled out to smaller schemes, this may be as early as 2024.8

The draft regulations require trustees to:

  • implement climate change governance measures and produce a TCFD report containing associated disclosures; and
  • publish their TCFD report on a publicly available website, accessible free of charge.3

The TCFD was set up in 2015 to deliver a set of recommendations for voluntary company financial disclosures of climate-related risks. The intention of TCFD is to facilitate an orderly transition to a low carbon economy and ensure that climate-related financial disclosures are comparable and consistent. The TCFD recommendations provide guidance on making disclosures on the opportunities and risks presented by climate change, including physical and transition risks.4

Source: TCFD website

The TCFD recommendations are structured around four thematic areas: Governance, Strategy, Risk Management and Metrics & Targets. Each theme has a few recommended items that should be included in the disclosure. For example, the Governance disclosure includes “Describe the board’s oversight of climate-related risks and opportunities.” The TCFD recommendations are intended to be used as a tool to guide organisations on making climate related disclosures rather than an exact prescriptive blueprint.4

The use of the TCFD recommendations is more widespread than the UK pension sector. In September 2020, New Zealand was the first country to announce that the TCFD will become a mandatory framework, it is expected that c.90% of New Zealand’s assets under management will be required to report using TCFD by 2023.9 On the 9th November 2020, Rishi Sunak, the UK Government’s Finance Minister announced that climate risk reporting will become mandatory for some large companies and financial institutions in the UK by 2021 and will be mandatory across the UK economy by 2025.5  The Canadian government made TCFD reporting mandatory for recipients of covid-19 support funding.11

In the run up to COP26 in Glasgow in November, the UK is making firm commitments to force UK pension funds and other organisations to consider and disclose the risks and opportunities presented by climate change.

References

1Pension Schemes Act 2021 - Parliamentary Bills - UK Parliament

2 Pension Schemes Act 2021 (legislation.gov.uk)

3 Aligning your pension scheme with the TCFD recommendations (publishing.service.gov.uk)

4 About | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org)

5 Chancellor sets out ambition for future of UK financial services - GOV.UK (www.gov.uk)

6 Pension schemes and climate-related risks - GOV.UK (www.gov.uk)

7 Landmark moment for UK pensions as Bill receives Royal Assent - GOV.UK (www.gov.uk)

8 Taking action on climate risk: improving governance and reporting by occupational pension schemes (publishing.service.gov.uk)

9 New Zealand becomes world’s first country to introduce mandatory TCFD disclosure (responsible-investor.com)

10 Passing of the Pensions Schemes Bill: the keystone of pensions dashboards | Pensions Dashboards Programme

11 TCFD adoption continues to grow (accountingforsustainability.org)

12 The Pension Schemes Act 2021.pdf (lcp.uk.com)


The Radical Old Idea with Keith Skeoch | The ESG Enlightenment | Event Summary

Keith Skeoch spoke about the ‘ESG Enlightenment’ and the power of finance to translate ordinary people’s savings into a powerful force for good in the world.

In the latest Radical Old Idea session from the Global Ethical Finance Initiative, the former CEO of Standard Life Aberdeen and interim chair of the Financial Reporting Council sat down with Royal London Climate Change Lead Kaisie Rayner to discuss the legacy of capitalism, the challenge of the climate crisis and what we can learn from Adam Smith. Watch the session now, or read the summary below.

At the start of the session, the audience of finance sector experts were polled on their views around sustainability. Over 40% of respondents said that their organisations had only started putting sustainability into their decision making in the past 5 years, with a further 17% saying that they had yet to do so, while 75% of respondents felt that the finance sector was not on track to support the massive economic transformation needed to deliver climate action.

Capitalism has, over its 400 year history, been a success story, argued Keith. It has collectivised savings into a force far more powerful than individual savers could ever be. “There has never been a more important time to invest in your future and the economy’s future and it’s your savings that will facilitate those investments”, said Keith, adding that this was “a story you only usually hear during wartime.”

Reflecting on Boris Johnson’s recent claim that greed drove the development of the new COVID-19 vaccines, the former Standard Life Aberdeen CEO agreed that it represented a victory for capitalism, but argued that the real story was the success of regulated capitalism, not unfettered greed. By tailoring the approval process for the vaccine to the unique circumstances we find ourselves in, the state and the market worked together for the good of humanity.

This is a story, as Keith and Kaisie discussed, that would have been familiar to the intellectual father of capitalism himself, Adam Smith. While some of Smith’s modern advocates paint him as a proponent of pure, unregulated capitalism, this was far from the truth. Smith’s most well-known work is the Wealth of Nations, but he also wrote at length about ethics in his other great work, the Theory of Moral Sentiments, which provides the moral purpose to the Wealth of Nations.

The point of the metaphor of the invisible hand – which he only used once in the entire Wealth of Nations – is not that markets should never be regulated for the good of society; in fact, Smith was in favour of this. Seen in the context of the fragmented markets of his time, the metaphor was simply an argument not to restrict foreign trade.

In fact, context has often been a driver of economic theory, suggested Keith. From Keynes’s response to the Great Depression in the 1920s and 30s, to Friedman’s theories about runaway inflation in the 1970s, economics has always responded to the situation it finds itself in. Ironically, however, in the years since Smith, average long-run growth rates have remained roughly stable. More than anything else, economic theory has affected the distribution of resources in society, rather than the total size of the pie.

While theories have responded to economic stimuli, over time they become intellectual straitjackets, confining thinking to a narrow policy paradigm until an external shock forces a re-evaluation. With the instability we have seen over the past few year, Keith argued that, in fact, “time is ripe for a fundamental paradigm shift” in economics and finance. The question, he suggested was “what should be the future of the new policy paradigm”, outlining 5 key factors needed in this new paradigm:

  1. Economic models which reflect the relationship between finance and other parts of the economy
  2. A responsible and sustainable corporate sector
  3. A view of regulation as something which helps markets by aligning them to the public interest
  4. A recognition that good behaviour minimises the cost of regulation by building trust
  5. A finance sector committed to putting substance into the mantra of “build back better”

Finance has a huge opportunity to make a difference as we build back better. It is the only way we can build trust and the only way that it will be delivered is by everybody taking personal responsibility: sustainability is everybody’s business.


Scottish Government announce campaign partnership for the Path to COP26

The Scottish Government has announced it will be a campaign partner for the ‘Path to COP26’ campaign to demonstrate to the world that Scotland is playing a leading role in the shift towards more environmentally responsible and sustainable finance.

With a global footprint and Scottish roots, the Global Ethical Finance Initiative (GEFI) is leading the campaign which has united major financial services institutions representing over £2 trillion in assets to help build more resilient economies which support the transition to a greener, net-zero planet.

The finance sector needs to act together to achieve decisive action at COP26, the most important climate summit since Paris, and the campaign will deliver a series of over 30 events and projects leading up to COP26 in Glasgow in November.

This includes Ethical Finance 2021, a flagship global summit to be convened virtually from Scotland in June, with confirmed speakers including a former COP President, head of the UN Environment Programme and CEOs and financial services leaders from four continents.

Held in conjunction with the Scottish Government and the United Nations Development Programme (UNDP), the summit will explore the long-term future of ethical finance, looking at the climate finance challenge, financing the UN’s Sustainable Development Goals (SDGs) and leadership in finance for the challenges ahead.

NatWest Group is the host partner, and the global event is supported by Chartered Banker and the Chartered Institute for Securities & Investment. Confirmed speakers include Manuel Pulgar-Vidal, Climate and Energy Global Practice Leader at WWF, COP20 President and a former Peruvian environment minister, Inger Andersen, executive director of the UN Environment Programme and David Pitt-Watson who co-chaired the finance discussions at the Paris climate summit.

The announcement comes after the Scottish Government yesterday unveiled its global capital investment plan, which aims to build a pipeline of ESG-ready (environmental, social and governance) projects that deliver for people and places in Scotland.

Ivan McKee, Minister for Trade, Innovation and Public Finance, said:

“The Scottish Government is delighted to further strengthen its relationship with the Global Ethical Finance Initiative.

“By providing support for a series of events on the road to COP26 showcasing Scotland’s investment opportunities, GEFI will help signal to the world that Scotland is leading the global movement towards investment which is socially and environmentally responsible.

“Scotland is already in a strong position in attracting ethical investment and GEFI, along with Scotland's outstanding financial sector, is paving the way in this developing field of green finance.

“Our global capital investment plan reemphasises our commitment to Net Zero and a wellbeing economy, and we will continue to work with partners and investors who share our values as a nation, making Scotland the destination of choice for ESG investment.”

Omar Shaikh, co-founder of GEFI, said:

“We welcome the Scottish Government’s support for the Path to COP26 campaign. The flagship summit at the heart of this, Ethical Finance 2021, will be a crucial milestone for the finance industry ahead of COP26.

“We’ll be convening leading professionals from across finance, from banking, to asset management, to asset owners, so that we drive further action ahead of the UN summit in Glasgow in November.

“It’s time to move from talk to action.

“We have been working with Scottish Government, the UN and global financial institutions to position Scotland as a leader in ethical, sustainable finance to attract the global capital needed to support a successful and fair transition.”


PRESS RELEASE: SCOTTISH GOVERNMENT TO PARTNER ‘PATH TO COP26’ CAMPAIGN

NEWS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE

EMBARGO: IMMEDIATE

SCOTTISH GOVERNMENT TO PARTNER ‘PATH TO COP26’ CAMPAIGN.

The Scottish Government has announced it will be a campaign partner for the ‘Path to COP26’ campaign to demonstrate to the world that Scotland is playing a leading role in the shift towards more environmentally responsible and sustainable finance. Led by the Global Ethical Finance Initiative, the campaign has united major financial services institutions representing over £2trn in assets for a programme including over 30 activities ahead of COP26.

This includes Ethical Finance 2021, a flagship global summit to be convened virtually from Scotland in June, with confirmed speakers including a former COP President, head of the UN Environment Programme and CEOs and financial services leaders from four continents.

Held in conjunction with the Scottish Government and the United Nations Development Programme (UNDP), the summit will explore the long-term future of ethical finance, looking at the climate finance challenge, financing the UN’s Sustainable Development Goals (SDGs) and leadership in finance for the challenges ahead.

NatWest Group is the host partner, and the global event is supported by Chartered Banker and the Chartered Institute for Securities & Investment. Confirmed speakers include Manuel Pulgar-Vidal, Climate and Energy Global Practice Leader at WWF, COP20 President and a former Peruvian environment minister, Inger Andersen, executive director of the UN Environment Programme and David Pitt-Watson who co-chaired the finance discussions at the Paris climate summit.

The announcement comes after the Scottish Government yesterday unveiled its global capital investment plan, which aims to build a pipeline of ESG-ready (environmental, social and governance) projects that deliver for people and places in Scotland.

Ivan McKee, Minister for Trade, Innovation and Public Finance, said:

“The Scottish Government is delighted to further strengthen its relationship with the Global Ethical Finance Initiative.

“By providing support for a series of events on the road to COP26 showcasing Scotland’s investment opportunities, GEFI will help signal to the world that Scotland is leading the global movement towards investment which is socially and environmentally responsible.

“Scotland is already in a strong position in attracting ethical investment and GEFI, along with Scotland's outstanding financial sector, is paving the way in this developing field of green finance.

“Our global capital investment plan reemphasises our commitment to Net Zero and a wellbeing economy, and we will continue to work with partners and investors who share our values as a nation, making Scotland the destination of choice for ESG investment.”

Omar Shaikh, co-founder of GEFI, said:

“We welcome the Scottish Government’s support for the Path to COP26 campaign. The flagship summit at the heart of this, Ethical Finance 2021, will be a crucial milestone for the finance industry ahead of COP26.

“We’ll be convening leading professionals from across finance, from banking, to asset management, to asset owners, so that we drive further action ahead of the UN summit in Glasgow in November.

“It’s time to move from talk to action.

“We have been working with Scottish Government, the UN and global financial institutions to position Scotland as a leader in ethical, sustainable finance to attract the global capital needed to support a successful and fair transition.”

ENDS

NOTES TO EDITORS

More information on Path to COP26 is available here:   www.pathtocop26.com

Ethical Finance 2021 – ethicalfinancesummit.com #EthicalFinance2021 will be held between Tuesday 8th – Thursday 10th June 2021 and is themed “Financing a Sustainable Future: Climate and Beyond”.

The world depends on global finance making the right choices to deliver positive change and achieve the UN's Sustainable Development Goals. To deliver this change, we need to connect people and ideas, and the Ethical Finance Summit has a six-year history of driving action through frank, honest debate among a global coalition across financial services.  Previous speakers have included First Minister Nicola Sturgeon, former Prime Minister Gordon Brown, Archbishop Justin Welby, NatWest Group CEO Alison Rose and UK Committee on Climate Change Chief Executive Chris Stark. The 2020 summit attracted over 1500 delegates from 96 countries.

Register free or find out more at www.ethicalfinancesummit.com

GEFI is a non-profit based in Scotland with a global footprint. We are dedicated to enabling finance to deliver positive change and help achieve the UN's Sustainable Development Goals. Our core team has expertise in corporate finance, ethical finance, faith-based finance, sustainability, economics, banking law & governance and communications.

Find out more at   www.globalethicalfinance.org

Chartered Banker have designated Ethical Finance 2021 for continuous professional development to enhance the learning content for their 30,000 members after completion of professional qualifications. See more at:   www.charteredbanker.com


Ethical Finance Round Table | Accounting for Sustainability

At the latest Ethical Finance Round Table, we were joined by Professor Michael Mainelli, Alderman and Sheriff of the City of London, founder of think-tank Z/Yen and qualified accountant, and Jon Williams; Partner, Sustainability and Climate Change, PwC. The discussion centred around the need for companies making commitments to net zero to truly understand what this means for their business models year on year, as well as emissions trading schemes and the need to price embed the true cost of externalities within the economic system.

Key headlines

Michael Mainelli

  • Green finance was born with the creation of sulphur dioxide permit trading
  • The EU Emission Trading Scheme is often dismissed, but appropriate carbon pricing was not achieved due to governments issuing too many permits
  • Carbon pricing works. Miles driven in America dropped 4% in 2011 due to a 32% increase in oil prices, not due to an outbreak of environmental awareness
  • Policy performance bonds could be a useful tool for governments and companies to deliver on their commitments and hedge against climate and policy risk.

Jon Williams

  • Over 1,500 companies and 50 countries have made net zero commitments, but very few understand the true scale of the challenge to achieve this.
  • To meet the Paris commitment to limit global warming to 1.5C means an annual reduction in carbon of over 11% No economy in history has achieved this on a sustained level; the global reduction in 2019 was 2.4%.
  • Financial institutions are unsure of their “carbon liabilities”, and have assumed around 2/3 of the reductions they need for net zero will come from government policy outwith their control. If they are required to offset these emissions, it could cost as much a 500% of the profits from these assets.
  • if the finance sector is to support this transition, every finance professional needs to start understanding these issues and supporting their clients to deal with them.

Watch now:

Michael began by explaining that green finance as we commonly know it came into being with the trading of sulphur dioxide permits in the USA in 1992. Traders thought they might be able to bring down these emissions by around 20%, but actually managed to halve them in just 4 years, creating considerable optimism around carbon permits going into the Kyoto climate conference.

A small group in the City of London, including Professor Mainelli, then picked this up and ran a market around this in London, later developed by the EU in 2002 to become their emissions trading scheme (ETS). This is often thought of as a failure, though Prof. Mainelli argues that the carbon price it produced did fairly reflect the supply of and demand for permits, but the issue was that far too many permits were issued by governments – roughly double what was needed. While governments had committed to keeping the price above 25 euro/tn, it plummeted to pennies shortly after launch.

Top-down pressure on capital allocation is good, explained Prof. Mainelli, but plans and awareness alone are insufficient. There needs to be an internalisation of environmental factors into the billions of everyday economic decisions. Incorporating environmental factors into prices works: in 2011, Americans drove 4% fewer miles not because of “awareness” of issues, but due to a 32% increase in oil prices. In fact, China has now implemented an internal emissions market, so even communists think that carbon markets work.

In Prof. Mainelli's view, carbon pricing is achievable and effective, and if companies internalise carbon in their decisions , there will be no need for banks to decarbonise their loan books, as many are calling for, as the carbon will be internalised in traditional measures of risk and reward. Some of the voluntary schemes, however, leave something to be desired; the issuer of a 25-year carbon credit could simply burn the forest after 26 years!

One area Prof Mainelli felt had a lot of potential was that of policy performance bonds. They were proposed a number of years ago, but never truly caught on in the Anglophone finance community. They have been successful in France, with major companies including Danone and Enel issuing them. One major opportunity around them could be in governments buying bonds – if you miss your emissions target, you pay interest, but if not, you essentially get free government money. The UK government is looking to do this ahead of COP26, which would effectively allow financiers to hedge against government policy. Sadly, progress in this area has not been as fast as it needs to be; one of Prof Mainelli’s final slides was taken from 2007, and the issues remain largely the same in 2021.

Jon Williams sits on the TCFD, and explained that the endgame for TCFD is forward-looking metrics, but this requires a level of information that businesses and the finance industry just do not have right now.

He posed the question of what is meant by “net zero”? Over 1,500 companies and 50 governments have made announcements or commitments around net zero, but what do they really mean when they make these announcements? Have they got concrete plans and timetables, or are these more “aspirational” commitments? PwC’s Net Zero Economy Index 2020 shows some of the data around net zero and decarbonisation. By combining carbon data and a macroeconomic model, PwC estimate that global carbon intensity fell by 2.4% in 2019.

This is still below what is needed – the decarbonisation rate needed to limit global temperature increases to 2C would be 7.7% per year, and to limit to 1.5C would be 11.7% per year, which no economy in history has every achieved on a sustained basis. The companies that are committing to net zero need to understand that this level of decarbonisation is implied, and start to plan how they will actually achieve that. This is a huge challenge, much bigger than the one faced by COVID.

What is the role of finance? Providing the capital to help the economy transition from where it is today to where it needs to be in 10 or 20 years. Financial institutions need to move from looking merely at their own emissions, to those embedded in their loan books, or portfolios, and to do this it needs more data on emissions downstream.

Financial institutions are largely unsure what their balance sheet and loan books are actually exposed to – most companies  borrow for liquidity, not to tie themselves to financing specific projects. Many have made huge assumptions about how large residual emissions will be – in other words, how much of the emissions reductions will be achieved by government policy without any active interventions on their part. If these assumptions turn out to be inaccurate, the cost of offsetting residual emissions will vastly outweigh the profits from the assets behind them.

Jon concluded by saying that net zero is not a myth. It is a reality, but a very difficult reality. Companies need to take net zero seriously. The pathway to net zero includes climate risk and impact baselining, strategy development, organisational transformation and transparency and reporting. Ultimately, if the finance sector is to support this transition, every finance professional needs to start understanding these issues and supporting their clients to deal with them.

The Q&A at the end of the session discussed a number of issues. Michael Mainelli highlighted that the tools for carbon reduction can also be used for maintaining biodiversity, but this is much harder to measure, and that trade is a key issue – it has been a major driver of growth over the last half-century, but there may need to be adjustments for embodied emissions. Jon argued that the furore over pricing nature is often misplaced – it is not that there is a price at which you can destroy nature, but instead that there is a need to put a price on the ‘free ride’ that people get out of emissions, nature and biodiversity.


The Path To COP26 | One Year To Go Event

Speakers at the ‘One Year To Go’ event for GEFI’s Path to COP26 campaign discussed how the finance sector can practically support action on climate change ahead of the COP26 summit next year in Glasgow. The session offered perspectives from banking, asset management and COP insiders, with Gail Hurley of GEFI joined by Cambridge University Visiting Fellow David Pitt Watson, Ingrid Homes of Federated Hermes, Isabel Fernandez of ING, and discussion moderator Hamish Patrick of Shepherd + Wedderburn. Click on the links to watch videos from the event, including all the presentations, the Q&A, and individual presentations from David, Isabel and Ingrid.

Gail Hurley introduced the Path to COP26 campaign, which seeks to ensure that the finance sector plays a leading role in the most important COP since Paris. Over 40 organisations have joined the campaign, representing £2.7 trillion of assets; click here to find out how to get involved

Gail highlighted a recent UN publication, which gave a damning report on the financial sector’s efforts so far to get funding to where it is needed. It has come up short in dealing with both climate change and development in the world’s poorest countries, despite positive signs across the sector.

David Pitt-Watson, investor, Cambridge Judge Business School Visiting Fellow and former UNEP FI chair during COP21 shared his practical experience of COP, and stressed that climate matters for finance. Finance needs to move money from where it is, to where it needs to be, but at present there is not enough green finance and far too much brown finance is still taking place.

COP is important because finance cannot solve the issue of climate alone, but needs support from policymakers, and it is important that discussions for ambitious climate agreements take place before the conference itself. The finance sector will likely be looked at with some cynicism and suspicion, in part because£100 billion was promised to the developing world as part of the Copenhagen Accord agreed at COP19, but evidence of its influence is hard to find.

David stressed that there is genuine progress in the finance sector, particularly on reporting, but more needs to be done. One area he felt that we can improve at COP is stewardship. Divestment diminishes the power we hold by maintaining equity;by using the votes equity holders have to appoint Directors, we can vote for those that align their organisations with the Paris Agreement. The onus is on the finance industry to demonstrate that we are doing the right thing: delegates will not be interested in virtue signalling.

Isabel Fernandez , Member of the Management Board and Global Head of Wholesale Banking at ING spoke about how the banks sees the pandemic as a chance to ‘hit the reset button’ and on issues including biodiversity loss, climate change and inequality.

While there are many commitments out there, it is action that counts and Isabel argued that ING have taken the lead when it comes to aligning lending portfolios with Paris.  They have done this by creating an approach called Terra, which uses scenario analysis to determine the impact of different sectors on the climate. Assessing the gap between the technology required to meet the Paris Agreement targets and those used currently by clients, Terra shows how far each sector is along the path towards Paris. This allows ING to finance the technology and innovation clients need to move their business closer to achieving the goals set,steering key sectors towards a low carbon future.

The second progress report on Terra has been released, showing that across the nine sectors which are contributing the highest emissions, most are on track to align with Paris. They have found that many clients are actively looking to develop sustainably so have bought in readily to this approach and the advice which ING have given. Terra is all open source to increase its reach and open collaboration across the banking sector. Isabel explained that ING believe that it is not where clients are today, but where they are heading which is most important.

Ingrid Holmes, Director – Policy at Federated Hermes opened by sharing some of the issues that they are dealing with. For instance, what needs to be done to commit to net zero, when they should be trying to achieve that goal, and also when they should be committing to becoming a Paris aligned firm.

There are six key things Federated Hermes expect every company to be thinking about:

  • Disclose in line with the TCFD
  • Sufficient governance and capacity to move forward with climate management
  • Embrace the complexity of the issues
  • Look beyond operations and strategy into supply chains
  • Use public policy influence positively to engage with government with new market rules
  • Commitment to science-based targets, with interim targets also established

Federated Hermes feel some activities are unjustifiable, such as thermal coal, and will be withdrawing capital from them. Controversial investments, such as those burning fossil fuels but in the process of transition, will require a business case to ensure the transition comes to pass or divestment will occur.

The session closed with a Q&A moderated by Hamish Patrick of Shepherd + Wedderburn, who asked the speakers how the trends and push towards climate finance that we are seeing is helping the developing world. David answered that this is a very difficult position where, with justification, the global south is looking at the north to fix the problem they have profited from. Promises of funding have not materialised and we need to get funds flowing to global south sustainable development projects. Isabel spoke about some of the feedback she has had from the global south, that the developed world has had 50 years of pollution to get to its present state, but nonetheless she has seen their determination and enthusiasm to develop sustainably. It then becomes ING’s role to help wherever they can.

Regarding the products needed for a transition, Ingrid spoke about the desire to see more thematic products with an explicit Paris alignment to them, adding that while there are an increasing number of products out there, we need to stop greenwashing. David argued that we do not need more complex products: the finance sector’s job is to manage the money of the millions of people who have invested money, often through their pensions, and to move it to where it needs to be. We have a set of financial institutions that are ‘Institutionally fossilist’ – institutions that have grown to up to be able to finance the old economy. Now we need to get the new systems that will finance the new economy.