The momentum in the adoption of core ESG components across industries has reached another tipping point as November’s COP26 conference in Glasgow approaches, according to a panel of senior sustainability leaders speaking at the recent Financial Times Moral Money Digital Dialogue event, “Financing the Transition to Net Zero.”
The panellists, who represented banks, asset managers and multinational corporations, expressed optimism that their industries were edging toward a consensus that places ESG considerations at the heart of organisational strategy. However, they also acknowledged the huge challenge of turning conversations into actions that drive the world toward zero net carbon emissions by 2050.
Hervé Duteil, Chief Sustainability Officer, Americas at BNP Paribas said the sheer number and size of financial institution that have committed to net zero carbon emissions by 2050 has made 2021 a pivotal moment in the journey to achieving the Paris Agreement’s target of limiting global warming to 1.5°Celsius.
The key to understanding why the world is now set on a net zero trajectory is the amazing acceleration of commitments taken by the financial sector over the past year.Hervé Duteil, Chief Sustainability Officer, BNP Paribas Americas
“The key to understanding why the world is now set on a net zero trajectory is the amazing acceleration of commitments taken by the financial sector over the past year, and that will increasingly channel capital flows towards organisations with credible transition strategies,” said Duteil.
Duteil cited the creation in April of the Glasgow Financial Alliance for Net Zero (GFANZ) – which brings together over 160 financial services firms with combined assets of about $70 trillion – as an example of how the financial industry can leverage the penetration of policies to reduce carbon emissions throughout the private sector.
The scale and ambition of private sector initiatives such as GFANZ are now also reinforced by a more internationally aligned public sector following the re-entry of the US in global climate discussions, he said.
Focusing on the top 100
Anne Simpson, Managing Investment Director for Board Governance & Sustainability at CalPERS, noted that the changes demanded by financial stakeholders will have a transformative effect on business in every sector and geography.
Simpson said her first challenge was to look across her organisation’s $450 billion investment portfolio, which spans public and private markets across an array of equity and debt holdings, to understand the risks and opportunities associated with the carbon footprint of individual assets.
We need to track emissions from cradle to grave. Divestment just shuffles ownership of those emissions.Anne Simpson, Managing Investment Director for Board Governance & Sustainability, CalPERS
“Among 10,000 public equity holdings, we found that 100 were the source of 85% of carbon emissions,” she said. The next step wasn’t to simply divest those assets, Simpson added, but to work with heavily polluting industries and companies as they transition to a less carbon-intensive future. This led to CalPERS convening and co-founding of Climate Action 100+, which is now a $54 trillion initiative driving business action at systemically important emitters.
Simpson also warned that divestment strategies can lead to companies spinning off or selling subsidiaries into the private markets – making transparency an issue. “We need to track emissions from cradle to grave. Divestment just shuffles ownership of those emissions.”
Kathleen McLaughlin, Executive Vice President and Chief Sustainability Officer at Walmart, expressed that companies can integrate climate action into their core business practices, bringing their capabilities to bear in partnership with others to help accelerate a global transformation toward net-zero.
Companies can integrate climate action into their core business practices, bringing their capabilities to bear in partnership with others to help accelerate a global transformation toward net-zero.Kathleen McLaughlin, Executive Vice President and Chief Sustainability Officer at Walmart
For example, because the majority of emissions in the retail and consumer goods sector lie in product supply chains, Walmart launched an initiative called Project Gigaton, aiming to avoid one gigaton of greenhouse gas emissions in global supply chains by 2030. McLaughlin says over 3,000 suppliers have engaged in this program to “decarbonize” supply chains through initiatives related to energy, product design, packaging, waste, agriculture and forest management. Walmart encourages suppliers to engage in target setting, measurement and disclosure through the Gigaton platform; provides support, including access to favorable financing, renewable energy PPAs, and playbooks; and facilitates sharing of best practices.
The need for mandatory ESG disclosure and standards
Despite the optimism about the increased adoption of net zero commitments, the panel agreed that huge improvements are still required to ensure this recent activity is maximised. There is a need to increase transparency and consistency in disclosure, and the panel touched on the growing interest in improving reporting frameworks and standards (for example, the work of TCFD; discussions underway at the SEC and other regulatory bodies; the International Financial Reporting Standards Foundation’s (IFRS) advocacy for harmonised standards).
Ultimately, the interconnectedness of global business and finance means that transparency will also be vital to measuring progress across all sectors. Simpson argued for mandatory and audited reporting, initially focused on a small number of common KPIs across industries to ensure integration of cross-industry strategies.
“We need to prevent competition between reporting standards so the huge acceleration in ESG-related activity does not become ‘noise’ that simply bemuses corporates instead of a ‘signal’ for improved climate-related action,” Simpson said, adding that these new rules need to be mandatory and integrated with other important work being done in the areas of natural capital and human capital accounting.
McLaughlin noted that when it comes to ESG measurement and disclosure, many companies are just beginning to adopt the kinds of standards, controls, processes and systems used for financial disclosures. It will take time and new capabilities for ESG disclosures to evolve to the same level as financial disclosures.
The best can’t become the enemy of the good enough
Duteil argued that sustainability leaders in all sectors and industries will be critical to speeding up the progress of all market participants toward the goal of net zero by 2050. He pointed to BNP Paribas’ involvement in the development of PACTA, an open-source methodology launched in 2018 to help the financial services industry measure the alignment of the forward-looking trajectory of its portfolios with the goals of the Paris agreement.
He also argued that there will be a difficult but important challenge to develop reporting frameworks and standards of a sufficient quality to allay fears of greenwashing, and that provide verifiable and transparent data to underpin the entire net zero movement.
On the other hand, he stressed the need to balance the understandable desire for high calibre rules (that require time to develop) with the urgent need to move forward.
“We shouldn’t get delayed too much in worrying that we don’t have the perfect standards – we have very few years to act,” he said. “The G20 should make key ESG metrics mandatory [reporting] for all corporates in all jurisdictions. This should be seen as an incentive for corporates to accelerate their transition, and as a way to provide transparency to investors who are increasingly keen to understand and monitor the sustainability impact of their investments.”
“The best shouldn’t be allowed to become the enemy of the good enough,” Simpson summarised.
 Paris Agreement Capital Transition Assessment