The Intergovernmental Panel on Climate Change has sounded its starkest warning yet about the irreversible changes being inflicted by global warming. Even at current levels, heating is causing dangerous and widespread disruption, and threatens devastation to swathes of the natural world, it says in its report ‘Climate Change 2022: Impacts, Adaptation and Vulnerability’.
Swenja Surminski, head of adaptation research at the LSE’s Grantham Institute, told Sustainable Views that regulators needed to focus more on adaptation and resilience. She said: “The report brings home that climate change is not really a future risk any more – we have to act now. Often in the financial community it is seen as a longer-term thing, where we focus on net zero now and adaptation later. But these goals and objectives are really linked. There are many decisions being taken today which put firms on a certain trajectory.“
Over to you, policy makers… Climate stress testing of banks plays an important role, can change mindsets and trigger internal climate governance processes – but at the moment no one is really reporting on adaptation action and resilience, warns Surminski. And until they are reported on, there is no real incentive to do anything about them.
…and investors. “The report shows that no region can escape the impacts of climate change – investors should assess their exposure across the whole value chain, and ask companies to invest more in ensuring the resilience of business strategies and supply chains. Investors, businesses and governments must plan collaboratively for the longer term in order to avoid breaching the limits to adaptation, where it becomes prohibitively expensive to respond,” wrote Wai-Shin Chan, head of HSBC’s climate change centre and ESG research, in a research note.
The EU Platform on Sustainable Finance published its proposal for a social taxonomy, which, as expected, contains a common structure with its environmental counterpart, simplifying earlier proposals thought to be over-complex or too costly. The new structure would consider the social value of activities rather than of companies in their entirety. This leaves some questions open regarding corporate governance and business ethics.
Impact of Russia’s invasion of Ukraine and embargoes: the Platform’s rapporteur Antje Schneeweiss told Sustainable Views that based on the current social taxonomy proposal, adherence to embargoes and company-wide ethical considerations could be addressed only though the minimum social safeguards currently present in the green taxonomy. “The social taxonomy group is presently working out some advice for the European Commission on how to apply minimum safeguards, under article 18 of the existing [green] taxonomy regulation. However, this work has not yet been finalised,” she said.
Further, Russia’s invasion of Ukraine may force a revision of views on western defence firms, which the EU has discussed labelling as socially harmful. Warburg analysts commented: “We strongly believe that the threat of discrimination against the defence sector as ESG-incompatible under the EU’s planned taxonomy for sustainable finance will no longer be on the table,” according to Dow Jones.
Meanwhile Victor van Hoorn, executive director at investor members network Eurosif, told a conference that the taxonomy is likely to help investors by providing common consensus on social objectives, as well as to help investors engage with portfolio companies on social issues. However, compared with environmental issues such as climate change, for social matters “you clearly don’t have the same hard scientific evidence to assess performance of different investments,” he said.
Activist groups have ramped up warnings that the European Commission’s initiative on due diligence to counter human rights abuses and environmental harm in supply chains has been extensively watered down. Brussels finally published its Corporate Sustainability Reporting Directive last week, prompting not-for-profit ShareAction to join the voices complaining about the array of exemptions.
A recent call by more than 100 leading companies and investors for the inclusion of all businesses, including financial actors regardless of size, fell on deaf ears. By excluding small and medium-sized enterprises, which account for around 99 per cent of all EU companies, only a tiny percentage of the EU’s economy will have to identify and manage these risks, say activists.
ShareAction says: “The new rules could have set a strong standard to lead companies in the EU on a path to climate neutrality and sustainable development. It is a real disappointment, however, that these rules only apply to large companies. Human rights and environmental risks occur in operations and value chains of companies of all sizes.”
The European Securities and Markets Authority, the EU’s securities markets regulator, has urged financial institutions to help shape its new climate-risk stress testing framework for central counterparties. Up for discussion is a new classification of climate risks and a new methodology relevant to CCPs; ESMA also wants comments on how best to calibrate this stress test and the current development of climate risk assessments by CCPs.
Although climate risks remain a relatively new concept, several central banks have conducted pioneering work in this area for several years, which led to the creation of the powerful Central Banks and Supervisors Network for Greening the Financial System.
What ESMA says: “This call for evidence focuses on climate risks rather than the broader concept of environmental risks. The NGFS highlights the need to focus in priority on climate risks, given the need for a radical shift in resource allocation and the potential impact of actions taken today over many years in the future.”
In other policy news
The Banque de France has declared that there is a “bad greenium” (green premium) attached to green bonds that would indicate a bubble. Financial stability deputy director Jean Boissinot told an Environmental Finance conference that a bad greenium is the difference in pricing between a green bond and a non-green bond from the same issuer. At present, this is fortunately much smaller than the “good greenium”, the difference in pricing between a green issuer and a non-green issuer.
The Hong Kong Financial Reporting Council has established a Sustainability and Climate Action Task Force. Its aim is to provide high level strategic recommendations to the FRC Board on global developments in financial and sustainability reporting. This will include a Climate Change Action Roadmap for the FRC aligned with Hong Kong’s Climate Action Plan 2050.