Building Investor confidence for enhancing climate finance by leveraging global and national frameworks on corporate sustainability disclosures

On 9th November 2022 | 13:30 Hrs - 14:30 Hrs EET

The United Nations annual Conference of Parties (COP27) had an objective of shifting the focus from negotiations and planning to action on ground. Finance is the cornerstone for implementing climate actions and scaling up ambition.

Discussions at the COP 27 were expected to formulate a new climate finance goal beyond the USD 100 billion from 2025: the New Collective Quantified Goal (NCQG). The goal should be extensively discussed and negotiated and should take into account not just the mitigation but also the adaptation goals of the developing countries.

It is increasingly being recognised that public funds alone will not suffice to curb the challenges of climate change. Therefore, scaling up of sustainable finance from the private sector would play an extremely significant role. Globally, corporates are coming forward to reiterate their commitments to low carbon transition strategies. The investor community and financial institutions are emphasizing and redirecting their strategies towards ESG investments while also calling the need for an enabling policy environment and disclosures that accelerate and scale up private finance flows. This will help in strengthening their own portfolios. Some of the recent initiatives of financial institutions include the announcement of Federal Reserve Board to have the nation’s largest banks - Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo to participate in a pilot climate scenario analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate-related financial risks. The Bank of England, in May 2022, published the results of its Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change for the largest UK banks and insurers.

At COP26, the International Sustainability Standards Board (ISSB) was launched to develop a comprehensive global baseline of sustainability disclosures for the capital market. The most critical aspect of the global baseline is that it allows for comparable information and helps investors to assess enterprise value.

In order for a deep dive into key pillars for enhancing climate finance and evolving discourse on frameworks, TERI along with CDP organised deliberations with Financial Institutions (FI’s), the investor and capital markets community, and the industry players on the Finance Day at COP27. The theme of the deliberation was Building investor confidence for enhancing climate finance by leveraging global and national frameworks on corporate sustainability disclosures. The increased alignment of global and national frameworks would increase climate finance and support evolving dynamics of capital markets. The investment in well-run, climate-smart businesses and low carbon technologies will flourish. This will be good news for investors, the stability of our financial system, and the habitability of our planet.

In India, the Security and Exchange Board of India (SEBI) has mandated Business Responsibility and Sustainability Reporting (BRSR) for the top 1000 listed companies based on market capitalization from the year 2023. Amongst many things, the need for an enabling policy environment as well as accelerating corporate sustainability disclosures was highlighted during the deliberations at COP27. The latter would not only improve transparency but specifically lead to ‘smart’ capitalism.

Summary of Discussions

Introductory Remarks

Delivering the keynote address, Dr Vibha Dhawan, Director General, TERI highlighted the nascent stage of ESG which corporates are still trying to unravel. “I am glad to share that Indian corporates are increasingly understanding and showing interest in the framework and in how it will be helpful to build their business. There is an interest in having an ESG academy to train people on reporting. Therefore, corporates can play an important role by disclosing and measuring how far they have achieved in the next COP summit.”

Speaking on the importance of finance in today’s world, Dipak Dasgupta, Distinguished Fellow, TERI and a former negotiator for India, added that “It is important and necessary to include corporate perspectives when disclosure standards relating to ESG reporting are being prepared”. He stated that the “corporate sector’s action on climate agenda, and their requirement for climate funds to further fulfil climate actions are not in sync.”

"The challenges faced by the corporate sector is immense, and the sector needs to be listened to more carefully."

On the issue of climate finance, he stated “Industrialized countries believe that so long as the source is from a developed country, everything counts. Which means there is no concessionality, additionality, you should only factor in finance flows of that origin and that’s enough.”

Following the opening remarks, the session moved to a panel discussion moderated by Prarthana Borah, Director CDP India. The panel discussion gauged perspectives of the global financial industry and the Indian heavy industry on how finance flows for climate action can be best leveraged.

Perspective of the Global Financial Industry:

Commenting on the alignment of disclosure frameworks, Mardi McBrien, Director of Strategic Alliances, ISSB emphasized the importance of CDP’s announcement at COP27 to incorporate ISSB climate-related disclosure standards into the framework for the 2024 cycle. “The decision will improve the consistency of climate-related information for investors and reduce the disclosure burden on entities through an alignment of requirements. This announcement sends a clear signal to the global market ahead of finance day at COP27 that CDP and ISSB are responding to market demand for effective, consistent climate disclosure.”

The most critical element of global baseline is that it intends to be compatible with jurisdiction-specific requirements as well as meet broader stakeholder information needs.

Giving an on-ground perspective, David Wong, APAC Deputy Director GFANZ drew insights on how to move forward after disclosing. “Initially we focused on disclosures but now we are looking into transition planning and attaining net zero, creating transparency, and setting GHG reduction targets.”

“In the transition planning, the role of financial institutions getting involved is much more important. We need to focus on the implementation strategy and how to engage stakeholders. We need to work on how to monitor our progress.”

No large financial institution in India, China and Indonesia has committed to net-zero by 2050 which shows that a lot more work needs to be done. Net-zero transition planning would create transparency and also help in setting up targets. There are about 70 financial institutions in Asia Pacific that are committed to net-zero targets by 2050, collectively accounting for 17 trillion dollars of assets in Asia committed to net-zero.

Alluding to the need to increase the level of finance, especially adaptation finance, Allison Hollowell, COO, International Venture Philanthropy Centre (IVPC) remarked that there is an “opportunity loss with the big businesses unable to align their corporate strategy with their CSR projects”. Creating convergence between the two will help “create a continuum of capital that can potentially unlock trillions of funds, and create a bigger pipeline of investable deals”.

And unlocking these funds is essential if countries want a ‘just’ transition in their economies, where funds and enhanced capacity building of organizations can help carve a sustainable journey.

Perspective of the Indian Heavy Industry:

Looking at the hard-to-abate sectors like steel and cement, Prabodha Acharya, Chief Sustainability Officer, JSW Group emphasized: “It’s very important to disclose the right information so that the investor has confidence; targets should be interim and practical and not selling dream targets of net zero. JSW Group raised 2 billion dollars from sustainability-linked finances. Transparency is very important in reporting which organizations should focus on gain[ing] investor confidence.”

Commenting about financial institutions and their expectations from the heavy industry, especially the cement sector, E R Raj Narayan, Business Head and Chief Manufacturing Officer, UltraTech Cement Ltd, spoke about the need for companies to create capabilities that help them deliver their climate KPIs. “Investors will want to stay invested with companies that are capable of achieving their climate targets”, citing the example of UltraTech Cement successfully raising $400 million worth of sustainability linked bonds attached with a key KPI of reducing CO2 emissions intensity.

Connecting the threads, Prarthana Borah, Director CDP India, emphasized: "Disclosure is the first step to environmental action”. “There was a 40% increase in the disclosures by corporates in the Indian context. The private sector has begun to respond, now it’s time for the FIs to think about mobilizing it. We should be working on analysing data to bring more corporates towards disclosure in driving climate action. Scope 3 emissions were 11 times higher in comparison to scope 1 and 2 for India. To meet these commitments, investors and financial institutions require environmental disclosure from the companies in their portfolios so that they can understand and manage their financed environmental impact.”

The session successfully addressed the need for mobilizing capital for dealing with climate urgency, whilst highlighting the criticality of the sustainability disclosures in raising climate finance. This will enable smart capitalism. Efforts, however, need to gather greater momentum. It is important to disclose information in a consistent manner to build investor confidence. This will ultimately help emerging economies like India make progress on pathways to align financial decisions and flows with 1.5°C scenarios. India has submitted its long-term low emission development strategy showing its commitment to decarbonisation. However, it has emphasised that timely access to finance at concessional rates and at flexible terms is critical.

Although in the past few years, an increase in awareness and policies has helped navigate the transition towards a greener tomorrow, there is no denying that Indian financial institutions need to come forward and develop a sustainable finance ecosystem. The policy framework developed in the country is of equal importance. In addition to this, a collective urge to make a sustainable change will make a real difference. Greater public awareness, information sharing, and constant research and development would help to boost the confidence of investors to be at the precipice of creating a real shift.

Key Actions and Recommendations:

• The session addressed the need for mobilising capital for dealing with climate urgency.
• During the first week of COP27, developing nations highlighted concerns over gaps in fulfilment of pledges and between needs and delivery, and a common definition of climate finance. India made an official submission to the UNFCCC detailing that climate finance should include public finance flow exclusively from developed to developing countries and come “on a grant or concessional basis.” A clear definition of climate finance was reiterated during the panel discussions.
• The panel discussion agreed on the need for an enabling policy environment and accelerating corporate sustainability disclosures. The latter would not only improve transparency but specifically lead to ‘smart’ capitalism. This would be crucial for building investor confidence and bring stakeholders together to deliver the climate agenda.
• The significance of transitional planning and monitoring progress was reiterated.

ANNEXURE-I

Details of Press Coverage:

• https://bfsi.economictimes.indiatimes.com/news/industry/need-more-clarity-on-climate-finance-definition-for-developing-nations-says-cdp-india-and-teri/95448040
• https://theprint.in/environment/why-definition-of-climate-finance-remains-a-major-bone-of-contention-at-cop27-talks/1212493/
• https://www.pv-magazine-india.com/press-releases/india-at-cop27-in-need-of-investors-confidence-to-achieve-climate-financing-goals/