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Regulatory round-up

By Victor Smart and

The UN Intergovernmental Panel on Climate Change’s just-published Climate Change 2022: Mitigation of Climate Change report warns that missing the 1.5C Paris Agreement goal is now “almost inevitable” but says policymakers can bring global overheating within that limit if strong action is taken within this decade on energy sources and energy-intensive products. A few other points are worth noting.

Climate litigation. Some warn that legal action against companies is set to rise with the temperature. Louise Fournier, legal counsel for climate justice and liability at Greenpeace International, said: “In a historic first, the IPCC acknowledges the power of people going to court to assert their human rights in the face of the climate crisis. Governments, corporations and financial institutions, you’re officially on notice: align with the science and address fundamental injustices, or be forced to do so.”

Lavetanalagi Seru, regional policy coordinator at the Pacific Islands Climate Action Network, said: “The scientific evidence becomes more damning with each IPCC report, and makes it inevitable that those corporations and state sponsors that are profiting off the lives and livelihoods of our island women, youth and indigenous peoples will soon face criminal prosecution. We must bring climate change to the International Court of Justice to protect the rights of present and future generations who call this planet home.”

Nature and tech focus. Meanwhile, others are hoping for more persuasive metrics on mitigation solutions – which would also attract greater investment. Helen Crowley, partner at climate investment and advisory firm Pollination, said: “As the battle against climate change approaches a point of no return, we need solutions that deliver critical short[-term] impact and long-term mitigation strategies. Critical to this is building understanding of the role that nature-based solutions and disruptive technology can play in driving meaningful change. Alongside this, we are hopeful that the report will provide greater transparency on the economics of action in terms of the cost of implementing mitigation strategies, the benefits these can bring to local communities and the investment opportunities this creates.”

The IPCC authors also note how the cost of green technology such has solar and wind energy and lithium ion batteries has reduced by as much as 85 per cent over the last 10 years. They also say that far greater investment is needed (between an extra three to six times current levels) but that there is enough global capital and liquidity to close the gap.

Still underestimating climate risk? Shelagh Whitley, chief sustainability officer at the Principles for Responsible Investment, notes a few positive developments: availability of green technical solutions, availability of capital, and interest of investors. One worrying negative is what she believes is a great underestimation of climate-related financial risks by some in finance. She said: “Today’s IPCC’s report underlines the urgency of the climate crisis. To avoid a dangerous increase in emissions, we must cease new investments in fossil fuels and increase financial flows towards assets which facilitate the low carbon transition. Encouragingly, we know from today’s report that we have the solutions needed to halve emissions by 2030. We also know that there is sufficient global capital and liquidity to finance these solutions. Now, we must see urgent action to finance the solutions needed.” She continued: “Investors have a leading role to play in this process. The IPCC report notes that investors are raising awareness of climate change as a financial risk. However, climate-related financial risks, whether from physical climate impacts or from a disorderly transition to a low carbon economy, are still greatly underestimated by parts of the industry.”

“There is hope.” Understandably, following the report, the UN is attempting to galvanise action. In a joint statement, COP26 president Alok Sharma, COP27 president designate Sameh Shoukry and UN climate change executive secretary Patricia Espinosa wrote: “Despite the urgency of our task, there is hope. The window for action has not yet closed. The report highlights that the falling costs of renewables and green technologies present significant opportunities for progress. There is also clear evidence that – with timely and at scale cuts to emissions – countries can pursue a mitigation pathway consistent with limiting global warming as envisaged in the Paris Agreement and further reflected in the Glasgow Climate Pact, while also developing their economies through a just transition and in a sustainable way. Increasingly, transitioning to a low carbon and resilient economy is the safest and most competitive choice any country, business or investor can make.”

Last week’s release of the climate and sustainability reporting standards by the new International Sustainability Standards Board has been welcomed across the Atlantic – with some linking the ISSB work with that of US policymakers. Below are some of those comments.

Ceres, the US sustainable finance advocacy body, applauded the input from the standard setter as well as regulators, including the US Securities and Exchange Commission, which recently published mandatory disclosure proposals. Ceres president Mindy Lubber said: “It’s most impressive to see such strong alignment between the SEC’s proposed climate disclosure rule and the ISSB standard. This type of harmonisation is exactly what investors and companies have been asking for.” Both ISSB and the SEC reference the Task Force on Climate-related Financial Disclosures.

Meanwhile, in parallel with the SEC, the US Federal Deposit Insurance Corporation has launched a 60-day consultation on the introduction of climate-related risk plans for the largest financial institution, with more than $100bn in assets.

More broadly, Erik Thedéen, chair of the International Organization for Securities Commissions’ sustainable finance task force told Sustainable Views: “Iosco strongly welcomes the approach of the ISSB of focusing on the value of an enterprise to the market. This could provide a consistent and comparable global baseline of sustainability-related information that is investor-focused and material to enterprise value creation, while also providing flexibility for interoperability on jurisdictional reporting requirements with a wider materiality lens.”

As regulators such as the Bank of England ramp up climate-related stress tests, climate risks tools are improving. But there are still shortcomings in data inputs and their scope,  according to a new report by the UN Environment Programme Finance Initiative. In particular, the report highlights how weak the tools are at charting the impact of sudden tipping points in the climate that can be triggered at even modest levels of warming.

Outsized risks. The report states: “Tipping points can be physical in nature, such as melting ice sheets, or economic, such as the collapse of confidence in global credit markets in 2008. Few tools explicitly capture tipping points as they relate to physical risks, such as marine ecosystem collapses, or as they relate to transition risks, such as the collapse of coal power in OECD economies. Given that these non-linearities are where outsized climate risks may be experienced, it is imperative that tool providers consider how they can be both integrated into their models, and used to inform the outputs generated.”

The report argues that these tipping points also demand a paradigm shift for financial institutions from “risk-return management to resilience management”.

The Australian government has decided that ministers will have a veto power over certain carbon farming projects, just days after agreeing that carbon would be classed as an agricultural activity. This has brought a rebuke from the Carbon Market Institute, an Australian non-profit body.

In their words: The CMI said: “The impact of the intervention will depend on guidelines for the exercise of the agriculture minister’s veto power, and the extent to which current or future ministers might make arbitrary decisions. There is also a bittersweet irony here. We welcomed Tuesday’s Budget announcement that carbon farming would be recognised as an agricultural activity but now we have the frankly bizarre situation where an agricultural activity which is already regulated is subject to even more red tape.”

Other policy news

UN Secretary General António Guterres launched a high-level expert group aimed at improving the net zero commitments from investors, banks and other non-state actors, citing the need for greater transparency and consistency to weed out greenwashing, including any over-reliance on carbon offsets.

According to a cross-agency group including the Hong Kong Monetary Authority, Hong Kong should take the opportunity to become a gateway for international investors to access mainland China’s voluntary carbon market.

The UN-backed Principles for Responsible Investment has teamed up with the Alternative Credit Council and the Loan Syndications and Trading Association to align lenders and get private equity sponsors to support harmonised ESG data disclosure within the credit markets. The three organisations will shortly publish a sustainability template for borrowers across the private and broadly syndicated credit markets.

A service from the Financial Times