COP26 prioritizes climate change funding, disclosure standardization

 

Key considerations for your organization

 

The 26th United Nations Conference of Parties (COP) Climate Change Conference (COP26) concluded on Nov. 13, 2021, in Glasgow, Scotland. At the end of the conference, over 200 countries signed onto an agreement to amplify the growing and urgent global focus on mitigating the impacts of climate change. The agreement is focused on motivating nations to reaffirm the 2015 Paris Agreement (COP21) — creating a faster roadmap to limit global warming to 1.5°C above pre-industrial levels by reducing emissions 50% by 2030 and achieving global net-zero by 2050; pledging to speed up the end of fossil fuel subsidies and to “phase down” coal-fired power generation; and affirming a pledge from developed nations to provide $500 billion in financing for adaptation to developing countries.

 

 

 

2 new important trends emerge at COP26

 

During the proceedings in Glasgow, two significant trends emerged that set it apart from previous COP agreements:

  1. Availability of financing to invest in the technology needed by countries, companies and other entities to reach their greenhouse gas (GHG) reduction targets and commitments
  2. Increased focus on consistent and comparable sustainability reporting through the consolidation and standardization of reporting frameworks


Both trends will have significant implications for the middle market as those companies work to achieve the aspirational goals outlined at COP26.

As the dust settles, it will become paramount for companies to understand how these two new trends impact their organizations.

 

 

 

Funding focus on coalitions and alliances through public-private partnerships

 

Achieving the radical overhaul of the global economy required to achieve GHG reduction targets — mitigating the worst effects of climate change — will require vast investment from governments as well as private and not-for-profit actors. Prior to COP26, many “early adopter” market leaders had started to mobilize significant financial resources to address climate change. Large investment companies such as BlackRock and Vanguard publicized revisions to their investment stewardship guidelines — anchoring future strategies for capital allocations to entities taking meaningful actions to address climate change as part of fully integrated environmental, social and governance (ESG) approaches. COP26 built on this momentum, seeing numerous public, private and nonprofit entities create alliances and coalitions raising capital and enhancing collaboration to address the climate crisis. Significant announcements made in or around COP26 include:

  • Glasgow Financial Alliance for Net Zero (GFANZ)
    With over 450 firms across 45 countries, GFANZ aims to “bring together the financial sector to accelerate the transition to a net-zero economy.” It was announced at COP26 that, through GFANZ, over $130 trillion of private capital (70% of total investments) is committed to transforming the economy for net zero. To support capital deployment, the global financial system, through GFANZ, submitted 24 major initiatives for COP26, focused on delivering tools and markets needed for the financial system to support the transformation of the economy. (Note: Grant Thornton International is a signatory of GFANZ.)
  • Global Energy Alliance for People and Planet (GEAPP)
    Launched at COP26, GEAPP (an alliance among the IKEA Foundation; Rockefeller Foundation; Bezos Earth Fund; and investment partners World Bank Group, IDB, European Investment Bank, Asian Development Bank, CDC Group and U.S. International Development Finance Corporation) seeks to accelerate investment in green energy transitions and renewable power solutions in developing and emerging economies worldwide. Over the next decade, the alliance aims to unlock $100 billion in public and private capital to support these initiatives.
  • First Movers Coalition
    Also launched at COP26, First Movers Coalition (a partnership between the U.S. Department of State’s U.S. Special Presidential Envoy for Climate and the Office of Global Partnerships, and the World Economic Forum, in collaboration with the U.S. Departments of Commerce and Energy) is a new platform for companies to harness their purchasing power and supply chains to create early markets for innovative clean energy technologies that are key for tacking the climate crisis. The World Economic Forum estimates that “roughly 50% of the technologies we need for net-zero emissions by 2050 are still under development, in the prototype or demonstration phases, and not yet available on the market.” This partnership will be an important step in helping to bring these pivotal innovations to commercial scale.


Understanding the rapidly changing market will be key to charting a successful, risk-aware path forward.

 

 

The financial commitments made in line with COP26 should provide access to capital for middle-market companies — particularly those without the financial resources of major institutions — to develop and deploy GHG emissions reduction plans that achieve the goals of COP26.

As these alliances continue to mature, there will be increasing pressure to join them and make strategic and investment decisions in line with their goals. Further, organizations will have to demonstrate that the funding is being used for its stated purpose and that they are meeting climate-related expectations. Many companies already feel this pressure as stakeholder groups such as investors, customers and suppliers (many of which are signatories to these alliances) increasingly favor products and services that have low GHG emissions, and employees seek to work for entities that are good corporate citizens with a strategic vision that includes reducing their climate impact. This pressure will significantly increase as a result of COP26.

 

 

 

Increased focus on consistent and comparable sustainability reporting through consolidation of standards and frameworks

 

A second transformational trend at COP26 was the consolidation of ESG reporting and disclosure standards and frameworks. Over the years, largely due to a lack of regulatory requirements around climate change measurement and management, many not-for-profits and other entities worked to provide guidance to companies and organizations trying to account for and manage their GHG emissions, as well as other ESG issues. This resulted in a proliferation of voluntary disclosure standards and frameworks, and an accompanying lack of comparable data. This lack of comparability has also reduced overall effectiveness of managing GHG emissions footprints. As an illustration, a recent study identified a 5.5 billion-ton CO2 equivalent (roughly the size of annual emissions in the United States) shortfall between emissions reported by the world’s nations and the emissions calculated using independent models. See the Washington Post’s “The giant accounting problem that could hamper the world’s push to cut emissions.”

The primary focus of COP26 was to create a faster roadmap to achieve net-zero GHG emissions. This will no doubt lead to increased scrutiny of plans and actions, especially by stakeholders such as investors that include ESG information in their evaluation criteria. These entities will demand insightful and actionable information that allows them to evaluate and compare reported GHG emissions and ensure organizations are accountable to stated GHG management goals and targets. It will be incumbent on companies to provide information to all relevant stakeholders — be it to a requesting government, investor, customer or supplier — in a manner consistent with existing and evolving reporting standards so that the company can be properly evaluated and compared to other institutions.

To support consistent and comparable reporting, during COP26 the International Financial Reporting Standards (IFRS) Foundation Trustee Chair announced formation of a new standard-setting board — the International Sustainability Standards Board (ISSB) — to help companies develop consistent and comparable reporting and disclosure requirements for climate-related and other environmental, social and governance matters. By June 2022 the ISSB will consolidate the Climate Disclosure Standards Board (CDSB, an initiative of CDP) and the Value Reporting Foundation (VRF), which houses the Integrated Reporting Framework (IRF) and Sustainability Accounting Standards Board (SASB). One of the intentions of the ISSB is to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet GHG reporting needs. In addition, prototype climate and general disclosure requirements were published by the Trustee’s Technical Readiness Working Group.

These developments will likely solidify the IFRS Foundation as a leading promulgator of financially relevant sustainability reporting and disclosure standards, as well as reduce the possibility of divergence between U.S. and global reporting. While the current chairman of the SEC has indicated the SEC may establish its own disclosure standards in areas such as climate, the SEC has also demonstrated a willingness to coordinate with global regulators and standard setters.

All companies will need to be prepared to report climate and other ESG information in line with these new standards to ensure stakeholder compliance and reporting standardization and comparability.

 

 

 

Key considerations moving forward

 

The commitments made during COP26 will have significant implications for all industries and sectors across the U.S. economy. The opportunity for increased access to funding, paired with enhanced reporting standards, will require companies to understand how these changes will impact their operations, as well as how they can enable quick, effective responses to the challenges posed by climate change.

Below are key considerations for your organization to remain well-positioned to weather the coming transition to a net-zero economy and ensure you meet stakeholder needs and expectations coming out of COP26:

  1. Collaborate with key business partners and stakeholders to understand their climate commitments and how, as part of their value chain, those commitments could impact your organization.
  2. Engage with current and prospective investors to understand how climate change may factor into your current and future cost of capital.
  3. Develop or refine climate action plans to actively monitor and manage your organization’s current GHG footprint, reduction targets and pathways to achieve those targets.
  4. Establish or refine reporting processes and internal controls to ensure consistent and comparable sustainability reporting.
  5. Connect with financial advisors to explore opportunities to access funding to effectively and efficiently achieve climate action plans.
  6. Communicate with business partners and constituents to proactively share your climate commitments and progress toward those commitments.


As commitments turn to action, Grant Thornton will continue to monitor the implications of COP26 and broader ESG market shifts. We will provide insight on the effects specific activities and commitments have in this rapidly evolving market.

 

 

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