COP 27 took place at the end of 2021, bringing governments, businesses, and civil society groups together to address the global problems associated with climate change, it prompted discussion of the financial sector’s role in this.
Top of the agenda for the wealth industry, as it considers the part it could play in enabling the transition to a low carbon economy, is how to allocate resources effectively? One innovative example of how this could develop was the launch at COP 27 of the ‘Net Zero Asset Owner Alliance ’, an enlightened group of over 70 asset managers with over $11 trillion in assets which set its goal to align its investment portfolios with those of the Paris Agreement.
The implementation of the Paris Agreement was designed to combat the increase in global average temperatures with economic and social transformation. There has already been significant effort from both regulators and investors within the wealth industry to help better the financial markets and help align their goals with them of the Paris Agreement. It recognised the need for private investment to support the transition to a low-carbon economy, this was a major development for the wealth industry as investors aim to reduce portfolio emissions by a quarter in the next five years, with rolling five-year targets to follow, until net zero is achieved in 2050.
Combined with this, COP 27 offered new tools and guidelines to help financial institutions assess and disclose the climate-related risks and opportunities in their investment portfolios. The intention is to allow investors to make informed decisions about where to invest their money to facilitate greater transparency and accountability. This has become urgent as it recently became known that the top 20 defined contribution pension providers who shape the UK’s pension landscape are failing on climate change. Firstly, over £300bn of UK pensions are invested in companies at risk of driving deforestation and other negative environmental impacts, and secondly just over half of providers have not yet published new emission reduction targets. It has now become clear that UK pension schemes cannot realistically act on climate change without driving their asset manager and portfolio companies towards a net zero target. This reinforces the view that the UK pension industry is struggling to keep up with addressing the climate emergency.
My final point is about greenwashing, which is particularly important as the industry acknowledges a lack of rigour in the net-zero climate targets set by some wealth businesses. In response, the UN has recommended new targets including reducing the overall emissions within the supply chain, over the short, medium, and long term. Reiterating this, the FCA has also addressed greenwashing by proposing that the bar should be set high with robust regulatory standards. Within the FCA’s ESG Strategy & Business Plan is a commitment to protect consumers and to help avoid the erosion of trust in ESG products by proposing the introduction of the following:
- The application of sustainable investment product labels in order to give consumers the confidence to choose which product is right for them.
- Restrictions on how terms like ‘ESG,’ ‘green’ or ‘sustainable’ can be used. This will help avoid the misleading marketing of products.
- Consumer-facing disclosures to help investors understand the sustainability-related features of a certain product.
- Requirements for distributors of products to ensure that the labels and disclosures are easily accessible for consumers and investors.
The FCA is hopeful that the introduction of the above will put the UK at the forefront of sustainable investment internationally. The Competition and Markets Authority (CMAD) has also recently published guidance around sustainability goals as has the USA’s Securities and Exchange Commission (SEC). The latter has created a newly formed ESG Task Force which will focus on ESG-related misconduct (greenwashing).
COP 27 has already had an impact on the wealth industry, and it will impact further in the coming years. Importantly the potential to contribute in a sustained manner by developing greater transparency and accountability in financial decision-making, as well as initiating new ways of tackling the problems of climate change that directly intersect with financial institutions will be vital. But, in my view, the key question that needs to be asked is, has COP 27 gone far enough with its measures within the wealth industry or will financial institutions just invent more methods to greenwash products and render ‘net zero pledges’ meaningless? I would argue that the latter is more likely, and in response, a clear line as to the true meaning of ‘net zero’ needs to be drawn so that the toxic cover ups of bogus net zero pledges can be identified as the wealth industry goes forward.