Sustainable Finance in the aftermath of COP26

by | Jun 8, 2022

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London Climate Action Week 2022 takes place from 25th June with its aim to harness the power of London for global climate action. Reset Connect’s Pippy Stephenson highlights some of the challenges faced by the financial sector as well as why it is so important for us to work together to maximise the chances of reaching net zero.

COP26 came to Glasgow last year as we were beginning to see climate change directly affecting our lives, with a growing number of extreme weather events being experienced around the world. Partly because of this, COP26 had a greater sense of urgency. Its agenda and speakers insisted that we take action now, set focused targets and hold ourselves accountable. In the past, there has been a general acceptance of setting targets for 2050 or 2060, but we now realise that the timeframe for change needs to be dramatically brought forward if we are to stand a chance of avoiding the worst impacts of climate change.

At the COP26 conference, the finance community showed that they were determined to play a significant role in driving this necessary change. In order to reach net-zero, we must fund the much-needed climate solutions and transition to a green economy. This can only be achieved by making sure money flows to the right places.

In recent years, there has been a growing trend towards sustainable investment. Despite a misconception that sustainable investments don’t perform as well as traditional funds, when looked at long term they do not sacrifice performance. And from a risk management perspective, environmental issues have become economic issues.

What Promises Did the Finance Community Make At COP26?

450 firms who control $130 trillion of global assets, committed to limit global warming to 1.5C by investing in green tech and renewable energy while diverting funds away from fossil fuels.

Chancellor Rishi Sunak, said at the time: “Six years ago, Paris set the ambition. Today, in Glasgow, we’re providing the investment we need to deliver that ambition.” He also claimed the UK would become the world’s first net-zero finance centre. The Treasury also announced plans to make all financial institutions with shares on the London Stock Exchange publish net-zero transition plans. These will be regulated by a “gold standard” science-based system in order to ward off greenwashing, however the commitments will not be mandatory.

Engaging With the Debate

To mark 6 months on from COP26, Reset Connect hosted a webinar with representatives from SRI Services, King & Shaxson, WHEB, Tenet and M&G Investments all of which are trailblazers in the field of sustainable investments. They spoke about the importance of investing in companies that will provide the products and services needed to transition to a sustainable economy. And asked, how can we ensure the finance community keep their COP promises?

At both an overall company level and at fund level, the commitments made by asset managers should be fully intentional, with a clear plan of action. Companies shouldn’t be making promises they don’t plan on keeping, especially at this critical stage. The speakers in the webinar emphasised pushing companies to make a sustainable transition and of divesting from problematic companies. Businesses and financial institutions should be transparent about their sustainability plans and about how they plan to meet their goals.

The Role of Stewardship

Investment stewardship or active ownership can play an important role, with fund managers and intermediaries influencing companies to make positive changes. Stewardship goes further than ESG incorporation, which is a practice of ESG analysis, filtering out investments based on values and ethics as well as impact investing. In stewardship, investors exert influence on the companies they invest in, through board roles, monitoring, negotiation, research, discourse and litigation. These practises could encourage companies to switch to Parisaligned funds. A Paris-aligned benchmark is an index of companies whose practises align with the Paris Agreement to limit the global temperature increase to 1.5C.

Through investors and shareholders exerting influence over companies towards setting and achieving sustainable goals, real change could be delivered. Of course, stewardship can’t solve all the problems in the world but often the reason we can’t fix things is that we don’t have the co-operation of the people with the money and power to bring about that change. But with stewardship that’s exactly what you have and therefore the ease with which you can implement changes is much greater. It’s about incentivising the people in charge to run their companies more ethically and sustainably. However, stewardship shouldn’t act alone. It’s important that it be part of a wider process of regulation, market dynamics, political and investment pressure.

Regulatory Pressures

In order to keep track of greenwashing, the FCA has formed the Disclosures and Labels Advisory Group (DLAG) who focus on financial sustainability disclosure requirements, classification and labelling of investment products. And last year the EU Commission, launched the Sustainable Finance Disclosure Regulation (SFDR) that introduced disclosure requirements for the financial sector, that would provide a transparent, standardised method of tracking ESG performance and preventing greenwashing.

In light of these new guidelines and the general trend towards ethical and sustainable investment, lots of completely new ESG funds are being created and some traditional funds are being repurposed to become ESG funds. It’s unrealistic to imagine we can make a full transition on the basis of new funds alone.

Sustainable Investing Becomes Mainstream

Ethical investing is increasingly entering the mainstream. And despite being behind schedule, the financial sector is gradually making sustainability and the transition to a green economy a priority.

The WWF has launched the Greening Financial Regulation Initiative with which they plan to assist the financial sector to “redirect the flow of finance” by cooperating with policy makers and financial leaders to integrate environmental risks, biodiversity loss and ecosystem degradation into the financial system. According to the State of Finance for Nature, a report from the United Nations Environment Programme (UNEP), investing just 0.1% of global GDP into the environment each year would close the £2.9 trillion funding gap by 2050.

In his report ‘The Economics of Biodiversity’, Dr Partha Dasgupta, wrote, “We need a financial system that channels financial investments – public and private – towards economic activities that enhance our stock of natural assets and encourage sustainable consumption and production activities.” The flow of finance will determine how quickly we are able to reach net-zero. Ethical investment and using stewardship to encourage more sustainable business practices will drive this change. Despite all the progress and enthusiasm around transitioning to a green economy, we’re still not where we need to be. We must retain the urgency of COP26 as we go forward in our quest for appropriate action.

Join us for London Climate Action Week

As part of London Climate Action Week which takes place from 25 June to 3 July 2022, the UK’s largest sustainability ecosystem and green investment gathering, Reset Connect London happens on 28-29 June 2022. It will bring together investors, industry leaders and innovative start-ups in order to speed the transition to net-zero. For more information please visit here


About Reset Connect

Reset Connect London 2022 is the UK’s largest sustainability ecosystem and green investment gathering. We bridge the gap between sustainability change-makers, business leaders, government and funding. This disruptive new event provides present & future net-zero business solutions and the financing to implement them.

It attracts policy makers, government leaders, large corporates, technology providers, purpose-led brands and entrepreneurs to network, find sustainable, low carbon solutions and providers and explore opportunities for funding through institutional & impact investors, private equity & venture capital, and the financial adviser community.

To register for Reset Connect London click here

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