ESG Insights: Climate signals businesses cannot ignore

Discussing the driving forces behind climate momentum and clean energy transition for businesses, and the actions to take.

Financial institutions have increasingly recognised the role they have to play through transparency, reporting, and disclosure in tackling some of the world’s most pressing issues. Such responsibilities have never been more front and centre on the global stage than they are now in relation to climate change.

In late 2020, financial institutions saw the release of the Equator Principles 4 (EP 4), a framework to assess Environmental, Social and Governance (ESG) risk in projects. EP 4 recognises financial institutions must honour and further the outcomes of the 2015 Paris Agreement, as well as make efforts to improve the availability of climate-related information by adopting the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Currently 114 Equator Principles Financial Institutions (EPFIs) in 37 countries have officially adopted the EPs, and thusly TCFD, covering the majority of international project finance debt within developed and emerging markets.

Climate risks are now receiving the same attention as other material financial risks. However, the financial sector is not the only harbinger of the rising tide of climate change risk and opportunities. Governments around the world are also sending strong signals that climate must be top of policy, corporate, and even individual agendas.

Currently, the UK is ramping up its climate policy as it prepares to host COP26 in Glasgow this November. As part of its bid to lead by example, Prime Minister Boris Johnson announced a 10-point Climate Plan in November 2020, which was followed by an announcement in December that the UK’s carbon reduction target will increase from 53% to 68% by 2030. Highlights included: producing enough offshore wind to power every home (quadrupling current output), investing in hydrogen as a clean fuel source for use in industry and transport, investing in small-scale nuclear, and restoring nature. Full list available here.

The UK Government signalled to the market that the days of the internal combustion engines are numbered. Petrol and diesel car sales will be outlawed by 2030. The UK has also announced it will increase the reporting requirements for large, UK-listed companies in line with TCFD. The stricter requirements are set to come into force in 2022 and be introduced for a wider range of companies by 2025. Pension fund trustees are also aligning with TCFD and British Members of Parliament criticised the Bank of England for failing to attach any carbon reduction requirements to corporate bailout funds during the COVID-19 pandemic.

Momentum in the UK for climate action is certainly building a head of steam, as it is in other parts of the world, but nowhere is that more evident now than in the US. Newly seated President Joe Biden has committed to taking a whole-of-government approach to tackling the climate crisis and is in the process of implementing an ambitious agenda to achieve a 100% clean energy economy and reaching net-zero emissions no later than 2050. His plan includes making federal investments of $1.7 trillion over the next 10 years into clean energy infrastructure and technology, pausing and reviewing oil and gas drilling on federal land, doubling energy from offshore windfarms by 2030, moving federal government agencies from fossil fuel to clean cars, addressing racial and economic inequities exacerbated by climate change and air and water pollution, and creating millions of new jobs in the renewables energy sector.

Biden’s renewed climate commitment is not only a signal to governments around the world that the US is ‘back in business’, but also an important signal to the private sector that the era of carbon-fuelled profits may be coming to an end. And markets are reacting – only a week following Biden’s inauguration, BlackRock, the world's largest asset management firm, declared "no issue ranks higher than climate change" and warned it may withdraw investments from companies which fail to commit to net zero emissions by 2050, signalling a “tectonic shift” in the investment landscape[1]. Similarly, General Motors, America’s largest automobile manufacturer, announced a mere day later that it plans to completely phase out vehicles using internal combustion engines by 2035, going completely carbon neutral at all facilities worldwide by 2035[2].

As the policy landscape changes, other major corporations and financial institutions are likely to follow suit. Individual shareholders, customers, and clients will not be far behind in signalling for climate action through their purchasing power. It is therefore vital for businesses and organisations to understand the climate momentum and clean energy transition that is taking place globally and develop a climate action plan.

There are different ways SLR can help your business navigate through this transformative time, including:

• Advising on the latest climate and energy-related requirements to ensure compliance and best practice.
• Compliance with reporting to standards, such as EP4 and TCFD.
• Identifying material physical and transition risks, including developing measures to reduce or eliminate risks and enhance potential opportunities.
• Undertaking greenhouse gas (GHG) calculations and carbon assessments.
• Supporting organisations in their sustainability reporting efforts.

If you’d like to learn more, or to discuss a project, please get in touch.

Written by SLR’s Sam Gill (Principal Climate Change Consultant) & Aleksandra Taskovic (Senior Consultant, Social Performance & ESG Advisory)

[1] https://www.ecotextile.com/2021012727283/fashion-retail-news/blackrock-warns-ceos-on-climate-change.html

[2] https://www.nbcnews.com/business/autos/gm-go-all-electric-2035-phase-out-gas-diesel-engines-n1256055