David Harris
- Governments have an important part to play by standardising carbon emissions disclosures
- Transition plans allow organisations to detail their paths to net zero
- COP28 offers an opportunity for governments to take further action on disclosures and transition plans
The transition to a green economy is underway, re-shaping whole industries across the economy such as energy generation, lighting and electric vehicles. Just looking at clean energy; according to the International Energy Agency in 2023 there will be $1.7tn investments globally versus only $1tn into traditional energy. There’s a major industrial shift taking place and with it a reallocation of capital that brings opportunities and risks.
That’s having a profound effect on the financial sector. For instance, the recent annual FTSE Russell survey of asset owners, with over 300 responding globally, now shows that 80% have either implemented sustainability into their investments or are considering doing so.[1]
Despite this progress, annual emissions are climbing year-on-year, with the exception of 2020 due to Covid, with 2023 being likely to set the new record for the highest level of emissions. According to the UN, to achieve the ambitions of the Paris agreement there needs to be a fall in global emissions by 45% by the end of this decade.
The financial sector needs decision useful data to inform how they integrate climate into investment and finance decisions. Indeed, the speakers at LSEG’s COP28 Sustainable Growth Webinar held on 8 November 2023 expressed hope that governments will use the COP28 climate conference in the UAE as an opportunity for not only raising ambition and action across national transition plans but also to commit to mandatory climate reporting.
Standardisation of companies’ carbon disclosures would be a huge step forward. Collecting this data remains very challenging given the variety of standards used by companies and the different places they report, such as annual or sustainability reports. What’s more, 42% of the companies in the FTSE All World Index, roughly approximating the largest 4000 listed companies globally, still do not disclose Scope 1 and 2 emissions.
LSEG as a global provider of data and analytics has over 600 analysts involved in the collection of sustainability data. This large number is mostly due to the complexity in identifying, collecting and processing this information as companies report data in diverse locations, often following different standards. This inconsistency leads to data gaps and inaccuracies, requiring estimations and leading to divergent data sources. Addressing this data challenge is crucial to ensuring transparency and reliability in sustainable finance.
Governments and regulators worldwide should establish the same rigour for climate and sustainability reporting as for financial reporting. In light of this, LSEG is calling for governments to implement the International Financial Reporting Standards Foundation’s ISSB standards for sustainability reporting by 2025.[2]
A range of data challenges
During the webinar we discussed that reliable sustainability data plays a critical role in allowing investors to assess sustainability risks, opportunities and impacts. This enables investors to make decisions to allocate capital and to support the transition to a net-zero economy.
While emphasising the progress being made in terms of companies’ commitments to net-zero emissions, Tamsin Ballard, Chief Initiatives Officer at PRI (Principles for Responsible Investment) emphasised the current lack of data verification, insufficient transparency regarding emission reduction targets and varying data quality among companies.
Why might data quality vary? “One reason is lack of capacity,” she explained. “This is in particular the case for small-and-medium-sized enterprises and emerging market companies, which tend to be less advanced in sustainability reporting. So, capacity building is needed, particularly for advanced capabilities like scenario analysis and scope 3 emissions.
“Larger companies face a very different set of challenges, having to report against various different sustainability standards, regulations, investor requests. This is costly.”
She reiterated the call for government action, highlighting that COP28 represents an opportunity and stressing the importance of governments introducing regulations and taking a “whole of government approach”.
Transition plans take shape
Turning to transition plans, Patrick Arber, Head of International Government Engagement at Aviva, praised the UK government’s establishment of the Transition Plan Taskforce (TPT), announced during 2021’s Glasgow COP26 climate conference, which aims to provide a framework for companies to create transition plans. The TPT recently released its final sector-neutral Disclosure Framework.
Mr Arber stressed that the various frameworks, including the International Sustainability Standards Board’s (ISSB), the Glasgow Financial Alliance for Net Zero (GFANZ) transition plan framework, and the TPT, complement each other. “It seems a complex landscape, but we have been careful to make sure that each element docks into the other. ISSB has space within it for firms to create transitions plans but does not yet have a great deal of guidance about how they should. GFANZ has created that guidance at a global level and the UK regulatory architecture has taken that and applied it in a UK context.”
Asked what he would like from COP28, he called for national transition plans. “How is a country planning to meet its commitments? We’re not seeing that rigour and consistency in any country yet. So, this concept of planning the transition at every level is one that we’ll be promoting at COP.”
All three speakers emphasised the role of government in ensuring the continuing progress of the green transition. COP28 offers an opportunity for action.
[1] Asset owners commit to maturing sustainable investment strategies. FTSE Russell. 2023.
[2] Mind the gaps: Clarifying corporate carbon. FTSE Russell, May 2022.
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