With the customary focus on renewal and improvement that accompanies the start of a new year, it is prime time for looking ahead to the 27th climate conference of the parties (COP27) set to be held in Egypt. At COP26, the 1.5 degrees climate commitment was described in the Glasgow Climate Pact as having been “kept alive” but with a “weak pulse” and the COP26 president Alok Sharma said we “must continue our efforts to get finance flowing”. With COP27 less than a year away, it is worth noting the regulatory landscape to “get finance flowing” and the types of policies required to ensure progress is made ahead of COP27.
COP26 saw some noteworthy progress in the form of further climate commitments from countries and the conference ended with a call for countries to revise their pledges and come back with more ambitious emissions targets to 2030. One of the major accomplishments of COP26 was the approval of the Paris Rulebook, which sets out the approved guidelines for how the 2015 Paris Agreement (the source of the 1.5 degrees target) is to be delivered, focusing on transparency, accountability and a framework for the exchange of carbon credits.
There was also a specific focus on reducing and phasing out coal power, though this was amended to “phasing down” unabated coal power in the final text of the agreement. In November 2021, the creation of the International Sustainability Standards Board (ISSB) was hailed as progress towards establishing a global set of standards for climate change reporting. These will inform the UK’s own standards and further help to bring ESG reporting firmly into the mainstream, putting environmental reporting on a par with financial reporting requirements.
Key to the success of all the financial regulatory and corporate disclosure regimes introduced will be to ensure comparability and accuracy of information provided. It is also important to understand the flows of capital and information in the economy, which move in opposite directions – capital moves from investors down towards the environment through the financial and corporate sectors whereas information on sustainability and climate change moves up from the environment to investors through companies and financial institutions. Principles of responsible stewardship of capital are not new for asset owners and asset managers and the UK Stewardship Code has been around since 2010. However, the recent and anticipated ESG disclosure regulations will go further to embed ESG factors into specific areas such as reporting, decision making, directors’ remuneration and labelling of products.
The EU’s Sustainable Finance and Disclosure Regulation (SFDR), which was one of the first pieces of ESG legislation adopted in relation to financial institutions and funds, was not “on-shored” as part of the UK’s withdrawal from the EU but does indirectly apply to UK funds if they wish to market in the EU or market to investors based in the EU. The recent announcement that the European Commission would include nuclear power and natural gas projects, under certain circumstances, within its Green Taxonomy, risks undermining the anti-greenwashing provisions in the SFDR and has the potential to confuse investors and delay the flow of funds to sustainable projects.
Next quarter, the UK’s financial services regulator, the Financial Conduct Authority, opens a consultation on policy proposals for the Sustainability Disclosure Requirements (SDR) announced by the Chancellor in July 2021. The SDR will bring together existing sustainability disclosure requirements which will apply to companies, asset managers and even require disclosures in relation to investment products to aid consumers in their decision making. The UK government has supported the ISSB standards and intends for these standards to be adopted in the UK as part of a consistent structure for ESG reporting.
By the start of COP27 we may not see the efficacy of these regulatory developments but establishing and implementing a global standard for climate reporting to ensure accurate and easily comparable information will be a constructive step towards achieving some of the goals set by the parties. The most difficult step may be to act on the information disclosed.
