Capital markets must align with the Paris Agreement goals to effectively transition to a net-zero, resilient economy, in which the environmental risks to both people and planet are embedded.
In its current state, the global financial system lacks the resilience necessary to respond to the future shocks connected to climate change and environmental degradation. Climate change and environmental degradation are systemic risks which must be considered as material and must be well embedded in the financial system.
The cost of inaction in the long-term for financial actors, against taking concrete action to align with net-zero now, are exponential and incomparable. For financial institutions alone, the opportunities of financing the transition to a low carbon, deforestation free, water secure future amount to some US$2.9 trillion. Conversely, the financial impact of risks from deforestation alone is estimated to be US53.1 billion, and for water resources, water-related opportunities amount to US$711 billion, with the cost of inaction being over 5 times higher.
There have long since been calls for more comprehensive corporate reporting, which would lead to better, more standardized data for the financial sector which could be used to identify risks and opportunities, build resilience and allocate capital in line with the goals of the Paris Agreement. Significant strides have been made. The International Sustainability Standards Board (ISSB) is soon to release its standards on sustainability-related financial disclosures as a global baseline. CDP supports and has informed the development of the ISSB’s work. Consistent communication of how sustainability matters affect drivers of enterprise value can be a complementary enabler of change, since it creates a financial incentive for companies and their investors to improve performance on some sustainability matters as much and as quickly as they can.
The EU will this summer finalize the European Sustainability Reporting Standards (ESRS), with reporting against them set to begin from 2024. The EU standards are particularly robust in scope, as they will require companies to report widely on sustainability information and cover their impact on people and planet Earlier this year, the US Securities and Exchange Commission (SEC) published its proposed climate disclosure rule. The rule, largely modelled on the TCFD framework and greenhouse gas protocol, will apply require publicly listed companies to disclosure climate-related information. The ISSB standards are intended to be a baseline, that can be further built on per jurisdictional or stakeholder requirements. Most recently, the ISSB announced a jurisdictional steering group – with the SEC, EFRAG, China, UK, Japan - to find opportunities for convergence and to bring them closer together.
As the global environmental disclosure system, CDP will accelerate the implementation and rollout of both global and jurisdictional standards including those being developed by the ISSB, EFRAG in the EU, the SEC in the US, and other markets. Our disclosure system is ideally positioned to mainstream the widespread adoption and implementation of upcoming standards in a structured, comparable format, as we have done for the TCFD since 2018. We have always evolved and adapted our questionnaires in light of emerging new standards, priorities or regulations, and will continue to do so. We are already working on this process for the implementation on the proposed standards so that companies can utilize their CDP disclosure as required.
This includes sustainable finance taxonomies: tools created to drive capital allocation towards sustainable activities, reduce greenwashing and enable simpler comparison between investment opportunities. In the coming years, starting from 2023, CDP will focus on integrating best practice sustainable finance taxonomy criteria into its questionnaire and scoring, bringing them to life in the real economy. By collecting data on corporates’ use of sustainable finance taxonomies in one place, CDP will provide investors, and other stakeholders, access to information that is consistent, comprehensive, and comparable across geographies and regulatory requirements.
The financial system, including regulators, central banks and IFIs/MDBs, must address systemic risks, the need for investment in climate solutions, adaptation and resilience, through data, insights and best practice.
With increased focus on adaptation, sustainable finance can be used to bridge the gaps between mitigation, adaptation and finance. According to the IPCC, just 4-8% of climate finance has gone to adaptation efforts in recent years. Aligning finance flows with nature-related objectives, both in terms of preservation and restoration, will allow to close the existing USD 4.1 trillion financing gap by 2050.
Finally, it is critical that at COP27, developed countries keep their promises – they committed to $100billion annually for developing countries many years ago and this is still not being met. Those most vulnerable to, and least responsible for, climate change are often least able to mobilise the finance needed to adapt to its impacts.