From COP21 to COP23: What are the signals that investors should be looking for from the COP in Bonn?

And so the circus returns. The climate COP in December 2015 was such a landmark, but it’s not easy to dismiss the reflex thought that these big international gatherings on the climate change negotiations (or, to give the annual meeting its proper designation, the Conference of the Parties (COP) UN Framework Convention on Climate Change (UNFCCC)) have invariably failed to deliver. But the Paris Agreement– where, crucially, every country agreed that they are obliged (though not legally bound) to make their own individual contribution towards tackling climate change – really did change the game.

Two years on from that historic meeting, delegates meet from 6 November at COP 23 in Bonn in a somewhat ambivalent mood. On the one hand, the momentum continues, driven by policy makers, investors, corporations, cities and municipalities. There is a prevailing consensus that: not only is the transition to the low-carbon economy underway; but that a combination of domestic policy measures around the world and the spiralling fall in the costs of wind and solar technologies means that this transition is accelerating.

On the other, the worst fears of 12 months ago, when COP 22 in Marrakesh was greeted by the surprise election of Donald Trump to the US Presidency, have been realized. In May, Trump announced that he will withdraw America from the Paris Agreement because “it’s a bad deal for the US”. In procedural terms this withdrawal will take four years to complete, but one of the sub-plots in Bonn will be how the US delegation behaves: passive bystander or disruptive participant?

Bonn will make no major decisions. But it still matters for investors who want to better understand the scale, pace and implications of the low-carbon transition. At the high level, the most important takeaway will be whether this international climate show stays on the road. 2018 will be a more significant year: it will be the first occasion for the parties to come together to assess their progress against the national emissions reductions goals they submitted to the Paris Agreement. So COP 23 will be about finalizing the rulebook for this 2018 stocktake (known as the “Facilitative Dialogue”), and making sure the building blocks are in place.

On the geo-politics, the investment community should be reassured that no other industrialized country is following the US through the Paris exit door. On the contrary, although there remain tensions between developed and developing countries about how ambitious their national climate polices should be, the indications are that Trump’s climate stance has if anything stiffened the resolution of the rest of the international community to stick firmly with Paris.

Critically, this includes China; and all stakeholders will want to be reassured that China’s behaviour on the international stage is in line with the stream of domestic policy announcements and measures on decarbonization to have emerged in recent months.

Signals from financial policymakers and regulators are also key for investors. COP 23 may not have much to deliver on that front – although it’s worth recalling that the Taskforce on Climate-Related Financial Disclosures (TCFD) was launched by Mark Carney and Michael Bloomberg at the Paris COP two years ago – but it will be followed hotfoot by the international climate summit that President Macron is convening in Paris in December, to mark the two-year anniversary of the Paris Agreement. The French have determined to make climate finance the focus of this summit, and they are pushing for a number of announcements. It will be interesting therefore to hear what that summit says about the TCFD, perhaps the European Commission’s High-Level Expert Group on Sustainable Finance – and on bringing the Sustainable Development Goals into investor and finance planning, where there is something of a push. The summit will also help showcase the policy framework, symbolized by the Energy Transition Law, the French are adopting on climate and transition risk disclosure.

COP 23 isn’t all about policymakers, of course. A developing theme in recent years has been how investor coalitions have used the COP to launch initiatives. We may for example hear from the PRI and UNFCCC and their work and engagement on ESG in credit ratings; from the UN, World Bank and investors on developing blended finance vehicles and tools to contribute towards the sustainable development Agenda 2030; and from the Sustainable Stock Exchanges (SSE) Initiative on their new “Guidance on Green Finance”. Green and sustainability bonds will remain high on the COP agenda; as well as the financing of sustainable infrastructure, including at cities and municipality level. Individual corporates may wish to use the meeting in Bonn to highlight the progress they are making with TCFD and SDG commitments in relation to strategy, disclosure, governance, targets and metrics.

Which is a long way of saying there’s a lot going on. Investors should stay firmly tuned over the next few weeks. See you in Bonn – or Paris.


(This article was also published in RI news on the 6th of October 2017)


How policymakers can drive the TCFD agenda, with Europe in the driving seat

As published on Responsible on the 12th of September 2017

The EU’s HLEG recommendations can dovetail with other regulatory changes to back up the climate reporting shift.

There has been extensive commentary on the work of the Taskforce on Climate-Related Financial Disclosures (TCFD), first on its formation and then on its recommendations, which were presented in final form to the G20 in Hamburg in July 2017.

In short, the TCFD is a big deal; and the reaction has served to emphasise that following the watershed Paris Climate Agreement in December 2015 change is underway in the financial community, as it is for other parts of the economy affected by the climate and energy transition. Less considered is how policymakers and regulators can help drive this key agenda relating to disclosure and climate risk.

The first point to make is that the TCFD’s genesis is policy-based. It was the G20 who first pulled the trigger in 2014 when its finance ministers met. Following their initiative, Mark Carney, as FSB Chairman, and fresh from his own high-level interventions on climate change and the “tragedy of the horizon”, approached Michael Bloomberg about establishing the Taskforce.

It has therefore come full circle for the TCFD to present their report to the G20. But there’s a problem. Although taskforce members themselves have indicated that their recommendations are aimed as much at policymakers and regulators as they are at the business and finance community, the G20 now doesn’t know exactly what to do with the report.

The G20’s July communique carried only a reference to the TCFD report, and made no attempt beyond that to take it forward, either directly or indirectly. The primary reason for this is quite simple: the depressing reality of US federal climate policy in 2017, and how that has spun on its axis since 2014 when a rather different US administration was in office.

To be clear, even if Obama (or Hillary Clinton) had been in office, there would have been limitations on the G20’s mandate to direct action on the TCFD report. But with US international climate policy under Trump playing unwilling participant or blocker, the G20’s political will in this area is fractured. Those who advocate making the taskforce recommendations bite therefore need to look elsewhere if policymakers and regulators are going to act.

The EU – or European countries – have for some time looked the most likely candidates to carry the TCFD torch. This is not only because of the leadership shown by senior figures such as Carney. The last 12 months have demonstrated that even if they were initially late to the game on the implications of climate risk for finance and investment, the European Commission now really seems to have grasped it. The catalyst was Financial Services Commissioner, Valdis Dombrovkis, the former Prime Minister of Latvia, fresh from his appointment in the summer of 2016, and his decision to add substance to the deliberations about climate finance in the Capital Markets Union (the Commission’s flagship finance initiative under President Juncker) by appointing a “High-Level Expert Group” (HLEG) on sustainable finance.

The HLEG has just published its interim report, prior to a final report that will go to the Commission at the end of 2017. The signs, in the report’s ambition and scope, are promising. The interim report carries unqualified endorsement for “clear, comprehensive and comparable” disclosure of information, and it cites the need for forward-looking analysis on how portfolios are aligned with the transition. On the latter point, proponents of a stronger disclosure regime are highly supportive of scenario analysis, where corporates (and possibly financial institutions) run publicly available assessments about how they will tackle the climate and energy transition under different policy and technology scenarios. This constituency will therefore welcome the report’s positive reference to scenario analysis (specifically giving climate-related disclosures in the energy or extractives sectors as an example).

A key point about the HLEG is that it will be reporting into a regulatory environment that offers opportunities for incorporation into existing or promised initiatives. Two such possibilities are the EU’s Prospectus Regulation and the Non-Financial Reporting Directive (NFRD), both of which deal with aspects of corporate reporting. The updated Prospectus Regulation, having entered into force very recently, has now been passed on to the relevant EU-wide body ESMA (the European Securities and Markets Authority) which will draft guidance, including possibly on what factors should be publicly disclosed as material factors in company prospectuses. The NFRD does what it says on the tin, laying down the rules on the disclosure of non-financial information by large companies. It has been criticized for its lack of specificity and that it risks placing ESG information in a silo. But it is being reviewed in 2018, and there will be pressure on the Commission to take account of HLEG proposals in the review.

That said, there will inevitably be challenges to what the HLEG recommends, and investors (corporates and financial institutions) will need to be alert to signs of push-back from opposing interests: e.g. business coalitions or national regulators who are unenthusiastic. The IHS Markit report in May which questioned the TCFD recommendations on scenario analysis – on the grounds that it could undermine efficient capital allocation – demonstrates how progress may not be straightforward.

It is also worth noting the potential for other international bodies to push forward policy and regulation on climate-related financial disclosure. IOSCO (the International Organisation of Securities Commissions) is essentially the international equivalent of ESMA and, although it may not have the regulatory mandate that ESMA has inside the EU, IOSCO wields considerable influence in setting standards for capital markets. It would therefore be surprising if this organization has not been prompted by the TCFD report to examine the climate disclosure agenda.

The other field that investors must monitor is national regulators. Again, we probably come back to Europe – and especially the French and German financial regulators (the AMF and BaFin respectively) – as those most likely to move. Still feeding off the post-Paris momentum and energized by their new President’s ambitions to do more on climate, the French have their Energy Transition Law – which inter alia strengthened carbon disclosure requirements for listed companies – to build on. The German Government would like to have done more with the TCFD report at the recent G20 summit; the question is whether they and their regulators will want to push on with the agenda once the German election is out of the way.

Franco-German interest also poses the question about how active UK policymakers and regulators will be. The UK Treasury and the Corporation of London would like the City of London to be the global green finance hub – witness the Corporation’s Green Finance Initiative. But there must be a concern that, with Brexit demanding so much time and attention, UK regulators are too preoccupied to be in the vanguard. It can’t help that the British Government is losing influence in Brussels, which is most disappointing when taking into account all that the Brits have done to drive forward the EU climate and energy agenda. Against this background in Europe, it would be no surprise to see a dynamic develop between EU-wide action and the priority accorded by the most progressive regulators. This brings us back to a core question: can government make a difference on this agenda through a pro-active approach; and do investors actually care about the policy and regulatory implications and developments?

In Conclusion

TCFD members, based on the track record of taskforces of this kind, are confident that business and finance will act on their recommendations. That seems reasonable. Peer pressure can be powerful, and a combination of action from the most forward-thinking companies and shareholder initiatives (e.g. on AGM resolutions) can help push things forward.

The HLEG’s emphasis towards a sustainable financial system through integrating ESG factors fully into financial decision making is also highly encouraging. In line with this, HLEG’s advocacy for harmonization of acceptable definitions and frameworks around ESG and sustainable finance at EU level addresses something that has plagued and hindered the scaling of the sustainable and responsible finance industry globally.

However, although there is undoubtedly rising interest in climate risk among the investor community, caution and a view that climate change is tomorrow’s problem rather than today’s (in effect, reinforcing Carney’s fears about the tragedy of the horizon) can still be strong restraining factors. Likewise, regulators can be cautious beasts. There are therefore risks that investors and regulators will hold each other back, which could undermine an orderly climate and energy transition. In short, more national regulators will probably need to stick their necks out and show some leadership; and investors – who are advised to stay fully on top of the policy agenda, above all in the EU (think for example about responding to the HLEG consultation in train) – would be advised to engage with governments: it’s always more productive to try to influence change than be a passive bystander.