- The real litmus test of the net zero proposals at COP26 will be the degree to which the public and private sectors commit to agreeing on priorities and determining how to work together.
- Confusion and fragmentation has developed over how to assess ESG policies, compare them and even what constitutes a sustainable investment in the first place.
- It is essential that the gaps in monitoring progress / benchmarking performance, increased transparency and moving from program to action are closed to maximize the potential of ESG policies.
As COP26 approaches, industry and government will seek to best prepare their proposals to deal with the climate crisis. Much will be analyzed in the coming weeks, but the real litmus test will be the degree to which the public and private sectors commit to agreeing on priorities and subsequently determining how to work together.
The world clearly wants to move towards sustainability in climate and other areas. At the same time, confusion and fragmentation has developed over how to assess environmental, social and governance (ESG) policies, compare them and even what constitutes a sustainable investment in the first place.
This topic has garnered considerable attention from investors, policymakers and society more broadly in recent months due to concerns over greenwashing and the ability to meet the ambitions of the Paris climate accords.
Beyond that, making different solutions transparent with a fair choice for consumers and investors – and avoiding misallocation of capital – would create business opportunities and competitive advantage for industries, while reducing financial sector risks.
Governments have a key role to play in standardizing the methodologies used by companies to set their goals. In collaboration with the private sector, it is essential that the following gaps are addressed to truly maximize the potential of ESG policies. Areas of interest include:
Progress monitoring, performance comparison. It would be beneficial to have a simple and easy way to track progress and compare the performance of companies, banks and all sectors of the economy, with examples such as the Sustainable Accounting Standards Board (SASB, now managed by the Value Reporting Foundation) or the EU. Sustainable taxonomy. Insufficient ESG data and the absence of common standards is a gap that hinders innovation and the scaling up of solutions.
Along with financial accounting standards, we need reliable ESG reporting standards. For their part, governments could specify common standards on how companies and banks should measure, report and set targets for their carbon emissions in line with the best practices of the Climate-Related Financial Disclosures Working Group.
Increased transparency. To ensure all the benefits that ESG policies bring to the economy, environment and society, we need greater transparency and better disclosures. Disclosure, transparency and partnership efforts would enable the financial sector to provide greater clarity to clients, shareholders, rating agencies and regulators. This would allow investors to meet their goals of securing strong returns while delivering positive ESG-related results. This would help banks design sustainable solutions that meet customer preferences and businesses would have more clarity as they transition to less carbon intensive operations.
In addition, such measures would allow investors to better quantify the risks and returns associated with sustainable development, and regulators to better assess them. Moreover, it would ensure that the financial sector is held to a clear global standard of what is expected, allowing the company to measure its progress in tackling climate change and other ESG priorities.
Governments must remain realistic and consider the availability and quality of data while working with industry and the financial sector to avoid multiple systems that can confuse implementation and use.
From agenda to action. ESG disclosure has been a priority for global regulators. The EU has been a forerunner, rolling out module by module, based on the general action plan published in 2018 with examples so far including climate benchmarks and level 1 of the Financial Disclosure Regulation sustainable (SFDR).
Other jurisdictions are following suit. The issue is receiving increased attention from US regulators, with climate policy a top priority under the Biden administration. Nonetheless, it is essential to move from program to action, for example by setting stricter emissions standards or accepting ESG approaches.
This focus is starting to lead to greater global alignment, with SASB aligning with the Global Reporting Initiative on the reporting side and emerging global standards for climate transition. There is still work to be done, and we hope that COP26 will lead to more concrete actions.
Ahead of COP26
We welcome the continued coordination and consolidation in this area, and would support the establishment of globally aligned disclosure standards. As we continue to encourage such development, we must align with emerging frameworks while playing our part to prevent further fragmentation.
Partnerships will be essential and the financial sector has a responsibility to embrace collaboration. For example, Credit Suisse is a member of the Financial Services Working Group of the Sustainable Markets Initiative, a collaboration of a dozen global banks convened by HRH the Prince of Wales to accelerate the financial sector’s transition to net zero with key areas of intervention before COP26.
In January, Credit Suisse was among more than 50 companies from all industries that pledged to provide the Stakeholder Capitalism Measures published by the International Business Council of the World Economic Forum.
We have also joined the Science Based Targets Initiative (with around 100 banks) and the Net Zero Banking Alliance, a group of around 60 banks that are working closely together in the run-up to COP26.
These two groups are working on a common set of standards on how to measure, report and set carbon reduction targets. This allows for the sharing of methodologies and will ultimately ensure that we have a common basis for comparing climate change mitigation performance between different banks and financial institutions.
Progress can sometimes seem gradual. Yet business and finance leaders must dig to chart the way forward, realizing that at this point there is no single rulebook or established roadmap to develop these standards and resolve these issues.
Switching to clean energy is key to tackling climate change, but over the past five years the energy transition has stagnated.
Energy consumption and production contributes two-thirds of global emissions, and 81% of the world’s energy system is still based on fossil fuels, the same percentage as 30 years ago. In addition, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018, energy intensity improved 1.2%, the slowest rate since 2010.
Effective policies, private sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.
Benchmarking progress is essential for a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies based on their balance between energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing the energy transition is the lack of preparedness among the world’s largest emitters, including the United States, China, India and Russia. The 10 countries with the highest preparedness scores represent only 2.6% of global annual emissions.
To sustain the global energy system, the Forum’s Shaping the Future of Energy and Materials platform works on initiatives such as system efficiency, innovation and clean energy and the Global Battery Alliance to encourage and enable investment. , innovative energy technologies and solutions.
In addition, the Mission Possible Platform (MPP) works to bring together public and private partners to continue the industry transition to put the heavy industry and mobility sectors on a net zero emission path. MPP is an initiative created by the World Economic Forum and the Commission on Energy Transitions.
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The scale of the challenge and the scale of the ambition we are striving to achieve is immense. The dangers of inaction are real: from climate change and social risks to economic fallout for lagging industries and economies.
Coupled with the timeline in which we try to make changes and the immaturity of the nascent underlying regulatory frameworks and regimes and rules, this creates fertile ground for great collaboration.
I hope that COP26 will be an important step in this critical effort.