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5 ways financial markets can start to make actual climate progress

There have been positive regulatory moves, but real hurdles remain. As we look to COP28, 3 climate experts share what to watch for.

5 ways financial markets can start to make actual climate progress
[Source photo: Joseph Eid/AFP/Getty Images]

This year’s conference of the parties, the U.N.’s climate change summit, was dubbed the “implementation” COP, and the world was watching the climate clock as negotiations were underway. At the international level, negotiators struck a deal on climate loss and damage financing but fell short in two major areas: strengthening emissions commitments in line with the Paris Agreement’s target of limiting annual global temperature rise to 1.5 degrees Celsius above preindustrial levels, and funding emerging nations’ transition away from fossil fuels.

To truly accelerate finance to support the climate transition, the gears of the financial system must operate in sync. On the ground in Sharm El Sheikh, Egypt, behind the scenes and in high-level negotiations, these wheels were moving. Here is what we saw and what we will be watching on the path to COP28.

REPORTING STANDARDS

The financial system runs on information, and comparable reporting standards are needed to drive better and more consistent information. At the moment, greenhouse gas reporting around the globe is riddled with gaps. At COP26, the big news was the establishment of the International Sustainability Standards Board (ISSB).

The ISSB’s primary objective is to establish a set of sustainability reporting standards that can be used around the globe. In just one year, the ISSB is well on the way to delivering on its commitment and is expected to finalize two sets of standards for reporting (one for general sustainability and one for climate) in 2023. Welcomed by the G20, the standards are designed to support regulation and drive global comparability.

The next challenge will be implementation. At COP27, the ISSB launched a global effort to support companies and users in implementing the forthcoming standards. Partners in this effort will include U.N. organizations, the Big 4 accounting firms, and corporate governance, accounting, and business associations.

Also at COP27, nonprofit disclosure platform CDP announced that it will integrate the ISSB climate disclosure standard into its reporting system, currently used by more than 18,700 companies around the world. This partnership paves the way for these companies to start voluntarily using the ISSB standard as soon as they’re final. At COP27, the International Organization of Securities Commissions reiterated its commitment to working with the ISSB, and Nigeria announced that it will adopt the ISSB standards as the basis for its sustainability reporting requirements, signaling the beginning of a burgeoning global movement.

Jumping from Sharm El-Sheikh to Strasbourg, France, Europe also kept the regulatory gears moving. The European Parliament adopted the Corporate Sustainability Reporting Directive, which will introduce new sustainability reporting requirements that will change the landscape for corporates not only in Europe but also for many large multinationals that have significant operations or raise capital in Europe.

Simultaneously, EFRAG, Europe’s disclosure standard setter, delivered revised draft sustainability standards to the European Commission. The market has been concerned that these two standards wouldn’t work well together, but the revised drafts reflect progress toward alignment, and leaders from both groups say they will continue working together toward better “interoperability.” For companies, better alignment will drive more efficient and effective reporting, and for investors, it will drive more comparable—and therefore more useful—information.

Meanwhile in Washington, D.C., the Biden administration proposed requiring federal suppliers to report on their climate-related risks, including their greenhouse gas emissions, through the CDP platform. This move foreshadows further movement toward global comparability as the CDP announced at COP27 that it will incorporate the ISSB climate standard into its platform.

Our takeaway: Climate-related reporting requirements are coming. While specific requirements will inevitably differ, companies, investors, and other stakeholders can only benefit from regulators working from the same playbook.

SCOPE 3 EMISSIONS

Currently, only 25% of public and private sector organizations measure “Scope 3” emissions (indirect emissions that occur in a company’s supply chain), despite the fact that they’re often the largest source of an organization’s overall footprint and include everything from purchased goods and services and business travel to sold products and investments. Investors have been clear that complete and comparable greenhouse gas emissions disclosures—including Scope 3 emissions—are material to their investment decisions, which makes it vital to figure out a way to track and measure them. At COP27, we heard many companies, and the financial institutions that support them, tell the world that Scope 3 is key to their business strategies too.

Scope 3 reporting may be challenging because of current data limitations, but it is crucial. The Biden proposal would require the largest federal suppliers to report their Scope 3 emissions; the ISSB has unanimously voted to make Scope 3 disclosure a requirement of its standard; and the draft European climate change standard includes mandatory Scope 3 disclosure.

At COP27, all eyes were on how the use of technology can solve the Scope 3 challenge by harnessing the data necessary to get a handle on supply chain emissions. In the COP27 Innovation Zone, there were many discussions on how technology solutions can help bridge the data gaps.

Our takeaway: Companies need to understand the complete picture of their emissions in order to manage their risk. Even companies that aren’t required to disclose their Scope 3 data should still understand it. As more companies track, share, and report emissions data under comparable standards, all companies will have better data to more effectively and efficiently manage their own footprints.

ACTIONABLE PLANS

At COP27, governments and expert groups were focused on bolstering credible net-zero targets and providing companies guidance on creating transition plans. The U.N.’s High-Level Expert Group focusing on net-zero emissions issued 10 recommendations for organizations to consider as they set and make progress toward their targets. These recommendations are intended to be a how-to guide so companies can make sure they’re setting achievable goals and have some measure of accountability.

Ideally, this will make it more difficult for companies to claim to be net zero while continuing to build or invest in new fossil fuel supply or lobby to undermine government climate policies.

At COP26, the U.K. made a splash when it announced that it would be the world’s first net-zero-aligned financial center, and that the publication of transition plans would be mandatory for listed companies. One year later, the U.K.’s Transition Plan Taskforce announced draft recommendations for a Transition Plan Disclosure Framework.

While less splashy, it’s equally important to guide companies as they prepare for the transition and share their strategies and action plans with investors. Developing the plan itself will also help companies to develop the short-, medium-, and long-term actions they can take to meet their decarbonization goals.

Our takeaway: Companies that set net-zero targets need to have credible commitments and plans to meet them. All companies, whether they have set a target or not, need to plan for the transition to a lower-carbon economy. These new recommendations can help with both.

HIGH-QUALITY CARBON MARKETS

Carbon credits can be controversial, but they are another crucial gear in the financial system that can help drive capital to climate solutions. New voluntary carbon markets are being launched around the world. At COP27, one big headline was U.S. climate envoy John Kerry’s announcement of plans for a new voluntary carbon trading market scheme to help developing countries transition away from fossil fuels.

The initiative proposes that American companies could offset their emissions by purchasing carbon credits from developing countries that remain reliant on fossil fuels. The revenue gained from the credits would support these countries’ transition toward renewables. Companies including Microsoft and PepsiCo were involved in the plans, and Chile and Nigeria expressed “early interest” in taking part.

Skeptics have pointed out that Kerry’s plan will be credible only if carefully built alongside strong safeguards to ensure the use of high-quality credits, but beyond fossil fuel companies being banned from the market, safeguards have yet to be announced. While the Kerry scheme was the big news, COP27 host country Egypt launched the first voluntary carbon market in Africa.

To keep the gears of the carbon markets properly engaged, the markets must operate fairly and efficiently. Disclosure around the use and credibility of carbon credits will also be crucial. At COP27, IOSCO launched a public consultation on recommendations for carbon markets, leveraging its expertise to provide recommendations to stakeholders and signaling that international regulators are focused on fostering “strong and well-functioning carbon markets.”

Our Takeaway: Carbon credits must be transparent, credible, and priced appropriately. Voluntary developments are leading the way in this space, but regulators are watching. Companies need to watch this space as they incorporate credits into their strategies.

INNOVATIVE FINANCING

Much of the focus at COP27 was on direct financial commitments from governments (or how they aren’t enough), but it also showcased innovations in climate finance. Innovative public-private, multinational financial partnerships, like the Just Energy Transition Partnership announced by the White House, can accelerate financing for reducing emissions, supporting impacted communities, and driving change.

Many promising, innovative climate solutions were also on display in Sharm El Sheikh. These ranged from technology solutions to enable transparency and accuracy in emissions reporting to real-world innovations like youth-led off-grid solar power projects in Africa, sustainable fertilizer, and innovative agricultural practices to feed the world sustainably. Real-world innovation will ultimately be the catalyst of the change we need to meet the climate clock.

Our takeaway: To drive the real economic changes the world needs, the financial system must continue the progress that we saw behind the scenes at COP27. And companies need to prepare for the changes ahead.

ABOUT THE AUTHOR

Kristina Wyatt is deputy general counsel and SVP of global regulatory climate disclosure at Persefoni. Previously, she was with the Securities and Exchange Commission. Emily Pierce is associate general counsel and VP of global regulatory climate disclosure at Persefoni. Previously, she also was with the SEC. Anissa Vasquez is manager of global ESG policy at Persefoni. Previously, she was with the global law firm Latham & Watkins. More

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