19 October 2020
There are numerous developments boosting sustainable finance, says Martina Cheung
2020 has presented unimaginable challenges in both our professional and personal lives. It has become abundantly clear at this point in time that the work underway across the private sector, academic and government institutions is going to lay the critical foundation in society for decades to come.
Many assumed the pandemic would slow the focus on ESG, and particularly climate, by years; however, we are actually seeing an acceleration of the sustainability agenda.
Couple that with the fact we are on the edge of the largest generational transfer of wealth in history to millennials, who place strong value on the purpose, impact and sustainability of a company. Businesses and governments are seeing these developments and seeking ways to act on it.
Last month, I had the opportunity to participate in conversations through the World Economic Forum, Climate Week NYC and various other events. These forums surfaced significant developments that advanced the conversation on climate and underpinned the market enthusiasm for sustainability.
During this time, many groups, including the Business Round Table, doubled down on their agenda to mitigate climate change. My biggest takeaway was a reaffirmation that to solve the world's biggest challenges, such as climate change, the business community will have to play a critical role.
I would like to share some key takeaways that I believe will the lay the foundation for a more sustainable future.
Government alignment on emissions targets
The EU has made it a priority, post-pandemic, to build back through a "green recovery."
Most recently, the EU proposal of developing a unified EU Taxonomy will define which economic activities are sustainable.
The main objective of the action plan is to finance the transition to a low-carbon, resilient and resource-efficient economy. Trucost recently launched its EU Taxonomy Revenue Share dataset, which helps investors to align their portfolios with the EU Taxonomy for Sustainable Activities.
A Trucost analysis using this data found that investors can potentially align their portfolios with the EU Taxonomy with no sacrifice to financial returns and could potentially discover alpha by targeting companies with the greenest revenues (as classified by the EU Taxonomy).
The Commodity Futures Trading Commission (CFTC) climate risk subcommittee released a report providing recommendations to US financial regulators on measuring and addressing climate risks. I had the honour of sitting on this committee alongside representatives from all sectors of the financial markets, Non-Government Organizations (NGOs) and academic institutions.
A key finding noted that climate change poses a major risk to the stability of the US financial system and its ability to sustain the American economy. The report listed several recommendations for how regulators can address climate risks including disclosures, stress tests and carbon pricing.
Investors, banks, insurers, companies and regulators will need to have access to a new set of tools to enable them to embed climate analytics in their core decision making. The private sector, and companies like S&P Global, will continue working with policy makers to create standards and benchmarks across ESG.
"An S&P Global Trucost analysis ... found that investors can potentially align their portfolios with the EU Taxonomy with no sacrifice to financial returns and could potentially discover alpha by targeting companies with the greenest revenues"
Perhaps the biggest needle-mover in the plethora of recent climate announcements came from China, which declared that it would halt its rise in carbon emissions before 2030 and become carbon-neutral by 2060.
This announcement was welcomed by global leaders as China represents nearly 30% of global carbon dioxide emissions. Estimates suggest that this commitment could reduce the expected rise in global temperatures by 11%.
Comparing China's 2030 targets, EU emissions peaked in 1990 and have since fallen by 21%, with an aim to reduce them by 45% by 2030. This means the EU will effectively have halved its emissions over four decades – an incredible feat that that could involve huge transformation in China, should it follow a similar approach to energy transition.
S&P Global Platts analysts say that for China to reach net zero, "an unprecedented shift in the energy mix would need to take place", as fossil fuels currently account for 85% of its energy consumption. This is 10% higher than the EU but the same as the US, and to reach net zero China will need to lower this share to 25%.
The alignment of China's emissions targets with the EU's approach would be a huge step toward a more sustainable global economy.
We are beginning to see global governments take an active role in building a more sustainable future with alignment across the EU and China, while the US is gaining momentum through policy recommendations.
We have a long journey ahead but global alignment on emissions coupled with public- and private-sector collaborations are promising.
Significant commitments across the board
Some 452 cities, 22 regions, 1,101 businesses, 45 of the biggest investors and 549 universities have made net-zero commitments throughout the world, according to the UN Climate Change Race to Zero campaign.
Their significance could prove to be monumental as these entities collectively cover more than half of global GDP and nearly a quarter of global carbon emissions.
Walmart recently announced a plan to reduce its scope 1 and scope 2 emissions by 18% by 2025. Some of the world's largest banks have also recently made noteworthy announcements. Morgan Stanley announced a commitment to reach net-zero financed emissions by 2050. JP Morgan announced its plans to align its portfolios with the Paris Agreement on climate change and work toward global net zero emissions by 2050. HSBC committed to align its portfolio of financed emissions to achieve net zero by 2050, in addition to becoming net zero in its operations and supply chain by 2030.
The scale and scope of these announcements is a critical step to a more sustainable future as investors and companies are increasingly considering the effects of global climate change, and the risks it poses to companies' future growth.
According to Trucost, almost 60% of companies in the S&P 500 (market capitalisation of $18 trillion) and more than 40% of companies in the S&P Global 1200 (market capitalisation of $27.3 trillion) hold assets at high risk of physical climate change impact. (The greatest drivers of physical risk being wildfires, water stress, heatwaves and hurricanes or typhoons linked to increasing global average temperatures.)
The commitments by businesses and investors to transition to a low- or zero-carbon economy will be an important factor in mitigating the worst effects of climate change – not just for the environment, but for the long-term success of their businesses.
While the net-zero commitments are critical, we are also seeing trends in impact investing. Trucost conducted a positive impact analysis by assessing the alignment of 3,500 company business models with the United Nations Sustainable Development Goals (SDGs), representing 85% of global market capitalisation.
It found that while 65% of companies have business models that support the SDGs broadly, several SDGs garnered only 0-1% of support, including SDG 4: Quality Education, SDG 12: Responsible Consumption and Production, SDG 14: Life Below Water, and SDG 15: Life On Land.
When we think about standards and reporting, policies supporting positive impact are key for attaining not just a sustainable future, but a prosperous one for all stakeholders.
Common standards and framework
One of the most encouraging recent signs has been the increased attention on harmonising reporting standards.
Beyond businesses, we saw countries adopt the Task Force on Climate-related Financial Disclosures (TCFD) as a framework for climate reporting. New Zealand recently became the first country to make TCFD reporting mandatory, requiring financial institutions with more than US$900 million in assets to disclose their climate risks. Canada also made TCFD disclosure a requirement for businesses receiving its COVID-19 bailout funding – particularly pertinent to the many oil and gas companies in the country.
Some of the leading ESG reporting organisations have committed to collaborating on guidance for sustainability standards. The Carbon Disclosure Project, the Climate Disclosure Standard Board, the Global Reporting Initiative, the International Integrated Reporting Council and the Sustainability Accounting Board announced their commitment to developing a shared capital market standard. This will include coordination with key accounting bodies to develop methodologies and standards for integration of climate and ESG risks/opportunities into corporate disclosures.
Add to this one of the announcements that came from the International Business Council in a joint venture with the big four accounting firms, who unveiled an initiative on a standardised reporting framework that links back to TCFD and the SDGs.
Companies like S&P Global have an integral role to play in the journey to standardised ESG reporting, both as a data provider and a provider of S&P Global ESG scores. Our scores cover over 7,000 companies and we have mapped the underlying data to metrics recommended by the International Business Council initiative, the EU Taxonomy and other frameworks.
These times are not business as usual; it is a time of great stress and uncertainty. It is also a time where we have an opportunity to build a more durable economy driven by sustainable investments and responsible business decisions. This is no longer a "nice-to-have." This is table stakes.
Martina Cheung is President of S&P Global Market Intelligence