If 2020 is remembered as the year the world was shaken by the COVID-19 pandemic, 2021 could be seen as a pivotal year for another crisis – the threat of climate change. The recent publication of the United Nation’s Intergovernmental Panel on Climate Change (IPCC) gave a stark warning of the risks, and there are hopes that the UN Climate Change Conference (COP26) will lead to greater cooperation on sustainability-related issues.
“COP26 is the most important climate negotiation since the Paris Agreement in 2015. Success would mean an acceleration in global climate policies that will be more coordinated. We would have more clarity on the direction and speed of travel. Failure would mean ongoing uncertainty, disparate policies and likely much less action here in emerging markets which are the most vulnerable to climate change,” said Wai-Shin Chan, Global Head of ESG Research at HSBC, and Head of HSBC’s Climate Change Centre of Excellence.
Mr. Chan was speaking at HSBC’s Securities Services Leadership Festival, an event that explored the key trends set to transform how businesses can thrive in the future. Its session on sustainability took place in October, ahead of COP26, and tackled how financial institutions and corporates can work towards achieving net zero.
Sustainable finance and the role of disclosure
The financial industry’s responsibility in tackling climate change is to ensure that capital is allocated to sustainable projects. By some measures, it looks as if there is already strong progress in this area. At the beginning of 2020, the assets under management in sustainable investment was USD35.3 trillion in five major markets, according to the Global Sustainable Investment Alliance (GSIA) .
There is no doubt that this is an impressive number, but Mr. Chan says that although it is a good ballpark figure, it also highlights the need to dig deeper into the data. Verifying what counts as a green fund is still in its infancy, which allows greenwashing to occur – presenting a misleading impression of its sustainability commitments and credentials.
It demonstrates why developing strict and uniform standards will be essential to creating a truly sustainable financial ecosystem. Companies need to disclose uniform sustainability data to their investors, while funds need to show their customers that their investment process incorporates environmental, sustainability and governance (ESG) considerations.
Progress is being made, with policymakers across the world introducing requirements for more information to be disclosed for informed decision making. In March this year, the European Union introduced the Sustainable Finance Disclosure Regulation (SFDR). Mr. Chan said that other major markets – such as China, the UK, and the US – were also working on similar regulations.
Implementing green business plans
At the corporate level, there are encouraging signs that businesses are taking climate change seriously. An Economist Intelligence Unit survey of 500 global businesses found that 69 per cent of respondents said that they had a net-zero goal, with almost three quarters expecting to reach that target by 2025 . More efficient use of energy, better waste management and reducing dependency of fossil fuels were among the changes they were planning to make.
That said, the research also discovered that there are a range of obstacles, both internal and external to the organisation, that need to be overcome. Concerns about increased costs were the most cited internal barrier, while pandemic-induced financial constraints were the most common external issue.
Another issue is demands from investors: “You clearly need to bridge the gap between short-term reporting pressure from investors around quarterly targets and long-term planning that is needed to meet net-zero obligations,” said Charles Ross, Editor and Asia Editorial Director at the Economist Intelligence Unit.
On the flipside, the survey also found that there are long-term opportunities to going green. Top of the list was the potential to make cost savings on energy bills, with building resilience to climate risks and a moral imperative not far behind.
China – at the forefront of sustainability
We can see many of these business and finance trends in action in China. The world’s second largest economy is also the world’s largest emitter of carbon dioxide, but it is rapidly reshaping its economy to ensure sustainable long-term growth for future generations. In 2020, China made an ambitious target to achieve net zero by 2060 .
Raymond Ma, Council Member, China Alliance of Social Value Investment, shared the reasons he is optimistic about China’s sustainable future. For a start, there is a strong policy direction laid down by the government, with Mr. Ma citing the development of a centralised carbon trading platform.
Not all of the pressure in China comes from the regulators, as the general public is incorporating sustainability into their preferences – especially younger consumers who are willing to pay more for new products that align with their values.
Realising a sustainable future
The planet is at a critical point. If climate change is left unchecked, the consequences will be catastrophic. We can, however, work collectively on the solutions. If government, business and financial institutions work together, sustainable strategies will help steer the world towards net zero. In the coming years, businesses will need to understand that the benefits of going green outweigh the costs. These include cost savings on energy and resilience to climate events. With little time to spare, it is essential that we act now.