At the COP26 climate change event, countries forge agreements that may help banks nudge themselves and corporate clients toward a more sustainable future
GLASGOW — Landmark agreements on deforestation and methane reduction signed at the United Nations Conference of the Parties (COP26) climate change meeting will help banks and asset managers in efforts to steer themselves to net zero. The COP26 meeting runs until November 12 in Glasgow, Scotland.
“Land use is the next frontier for getting to grips with climate change,” said Daisy Streatfield, program director at Institutional Investors Group on Climate Change (IIGCC). “We have probably not paid enough attention to non-energy emissions [to date].”
More than 100 countries including the United States, China, and the European Union signed the Glasgow Leaders Declaration on Forests and Land Use pledge, and 95 signed the Global Methane pledge. The deforestation pledge commits countries with 86% of the world’s forests to work “collectively to halt and reverse forest loss and land degradation by 2030.” While the methane pledge, which covers 50% of global methane emissions and was first suggested by the E.U. and U.S. in September, commits signatories to cut methane emissions by 30% from their 2020 levels by 2030. After carbon dioxide, methane is the biggest contributor to global warning.
It is widely hoped that these governmental agreements should make it easier for asset managers and banks to quiz corporations on their own methane reduction and land use plans.
Streatfield’s comments came during a panel discussion hosted by Swiss banking group Lombard Odier. The IIGCC produced the framework behind the Paris Aligned Investment Initiative which has 350 members, from 22 countries, with a collective €49 trillion under management.
Skeptical about implementation
Environmental groups have expressed skepticism about the likelihood of some countries fulfilling the commitments under the Glasgow leaders agreement.
Rebeca Coriat, head of stewardship at Lombard Odier Investment Managers, said satellites meant it would be possible to track if countries and corporations were sticking to their commitments on reversing deforestation. Alongside the deforestation agreement, the chief executives of 30 financial institutions, including Fidelity International, Aviva, Legal & General, Federated Hermes, Skandia, and the Church of England Pension Fund announced they would work on the elimination of agricultural commodity-driven deforestation risks in their investment and lending portfolios by 2025.
“Protecting our forests and their biodiversity is fundamental to the fight against climate change,” said Amanda Blanc, chief executive of Aviva, in statement accompanying the announcement. “Financial institutions have a pivotal role, using our influence on the companies we invest in to encourage and ensure best practices. Together, we can reduce risk to the planet and the financial markets, and capitalize on the opportunities that come from more sustainable investment.” The institutions involved in the commodity commitment have a collective $8.7 trillion in assets under management.
E3G, a climate change think tank, welcomed the Global Methane Pledge; however, Maria Pastukhova, an energy expert at E3G, said the hard work involved in creating a transparent governance and monitoring system now had to be done.
“[The pledge] is a long overdue step forward,” Pastukhova said. “[But] the real work begins now. Before COP27, the pledge must get the top three emitters — China, Russia, and India — on board, supported by transparent governance and monitoring.”
Green bubble
Such was the growth of funds flowing into environment, social, and corporate governance (ESG) funds, that in September, the Bank for International Settlements added its name to those warning about the risk of a green bubble. ESG assets rose by nearly one-third to $35 trillion, between 2016 and 2020, and now account for one-third of all assets under professional management.
Regulation has to be better aligned to push in the right direction to achieve carbon reduction, Streatfield explained. “It’s not just about ‘bright green’ but investing in the transition as well.”
Maxime Perrin, head of sustainable investment at Lombard Odier, agreed. “Investing in a decarbonized company is not the same as investing in decarbonization.”
At COP26’s recent Finance Day, the financial services industry hoped that governments would agree to key milestones in their transition to net zero. To date, the United Kingdom is the only G20 country to say it will mandate corporate reporting of climate-exposures in line with the Taskforce for Climate-related Financial Disclosures.
Rishi Sunak, the U.K.’s Chancellor of the Exchequer, announced that the country will become the world’s first net zero finance center. Transition plans for net zero will be made compulsory for all U.K. financial institutions and corporates, Sunak explained.
The plan was “a bold move”, said Ed Matthew, campaigns director at E3G. “Mandatory net zero transition plans are a key pillar in the financial architecture needed to mobilize the trillions [of dollars] required to get on track to net zero and achieve a green economic recovery.”
Financial institutions also have called for international alignment of climate reporting standards. Erik Thedéen, director general of Swedish regulator Finansinspektionen, heads up the work on a standard for the International Organization of Securities Commissions (IOSCO).
“We are close to a global standard for how firms should report their climate risks and climate work,” Thedéen said in a statement. “It will drastically increase the financial sector’s possibilities for pricing climate risks correctly, thus helping to move capital from harmful activities to those that contribute to the climate transition.”
