ESG advocates urge policy to catch up to science, investors as UN climate talks approach

Biden among world leaders scheduled to gather in Glasgow, Scotland, for summit beginning Oct. 31

Artists paint a mural last week near the Scottish Event Campus in Glasgow, where the COP26 United Nations climate summit will take place starting on Oct. 31.  (Jeff J. Mitchell/Getty Images)
Artists paint a mural last week near the Scottish Event Campus in Glasgow, where the COP26 United Nations climate summit will take place starting on Oct. 31. (Jeff J. Mitchell/Getty Images)
Posted October 21, 2021 at 6:30am

Advocates of environmental, social and governance-oriented investing are stepping up pressure on global leaders to pursue policies such as carbon pricing, emission curbs and better disclosure on risk at a United Nations climate summit that starts later this month.

Governments are behind the private sector in responding to climate change. Providing regulatory certainty would not only help them catch up but would also help bring more investors into sustainable finance, the advocates said ahead of the 26th U.N. Climate Change Conference of the Parties, or COP26.

The climate summit will kick off on Oct. 31 in Glasgow, Scotland, where President Joe Biden and other global policymakers are expected to announce climate commitments that build on the Paris Agreement in 2015.

“One of the enlightened moments in COP26 should be and will be when the investor sector steps up and says, ‘We believe that climate change presents an extraordinary number of risks and an extraordinary number of opportunities that we would like to be addressing, and regulatory certainty is what we seek,’” said Paula DiPerna, special adviser to CDP, a nonprofit that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.

“There is momentum demonstrated by the investor sector that has only been growing, and that should be an indicator of the degree to which the people who know about money recognize that climate change is a challenge and also an important driver of economic growth as well,” she said.

Investments and financial transactions to facilitate efforts to address climate change have picked up in the past decade, thanks to investor and shareholder pressure on companies to tackle ESG issues. More than $17 trillion of the $51.4 trillion invested in the U.S. in 2019 used sustainable strategies, according to US SIF: The Forum for Sustainable and Responsible Investment.

Investors need guidelines to allocate money properly and speed the global economy’s transition to net-zero, DiPerna said in an interview. Science, policy and capital have to work together like a tricycle: If they are all not in sync, it will be difficult to move forward.

“Right now, it is climate science that is ahead,” she said. “The investors are catching up to climate science, and the concern about COP26 is that the science is too far out ahead for either policy or capital to catch up. My hope for COP26 is that all sectors will recognize that climate science has sped up and that all efforts need to be sped up as well.”

CDP is one of the organizations that coordinated a joint letter on COP26 demands signed by 587 investors representing more than $46 trillion in assets, including Allianz Global Investors, BNP Paribas Asset Management and UBS Asset Management.

'Ambition gap'

In the letter, investors called on Biden and other world leaders to commit to more policy mechanisms on climate mitigation. 

“[O]ur ability to properly allocate the trillions of dollars needed to support the net-zero transition is limited by the ambition gap between current government commitments and the emission reductions needed to limit global average temperature rise to 1.5-degrees Celsius,” they said in the letter. 

“In addition … we need access to adequate information on how these companies are assessing and managing the risks and opportunities presented by climate change,” they continued. “Government policy has a critical role to play in increasing our access to and affirmative disclosure of such information.”

Two big recommendations are for more stringent climate targets for 2030 and a price on carbon, which DiPerna said “remains one of the most important tools to shift capital into a net-zero load.”

The investors in the letter said strong policies that fully implement the provisions of the Paris Agreement would create significant investment opportunities in clean technologies, green infrastructure and other assets and help scale up private capital toward climate mitigation.

“In turn, investors can use capital allocation and stewardship to support sustainable activities that generate jobs and economic growth, transition away from carbon-intensive activities and increase resilience,” the investors concluded. “We encourage governments to engage closely with investors to make sure these opportunities are fully realized.”

Investors and other stakeholders are also calling on countries to create uniform standards for climate risk reporting, and more corporations are voluntarily disclosing their material exposure to climate change. 

The Task Force on Climate-Related Financial Disclosures, established by the Financial Stability Board, reported last week that more than half of the 1,650 companies across 69 countries it reviewed disclosed their climate-related risks and opportunities. The organization found that climate reporting requirements from several jurisdictions as well as support from investors, international standard setters and regulators all played a role in the increase in climate-related disclosures. 

Information, please

Anne Simpson, managing investment director of the California Public Employees' Retirement System, or CalPERS, said climate risk reporting is “an essential issue to investors” and such standardization needs to happen in order to build off of the Paris Agreement.

Markets cannot be fully optimized if they are ill-informed, she said during a Washington Post Live event last week. The data required to make sound decisions is still not in “a standardized, consistent, verified format,” hindering ESG-conscious investment, Simpson said.

“Think about it: You go shopping to buy a can of beans, you expect to be able to see what's in the tin. That's the purpose of the label,” she said. "When we're buying investments, we simply don't have that kind of information that's going to help us understand risks that's ahead of us." Global standards of climate risk reporting are needed "so the financial markets can play their part, and also so regulators can do what they need to do,” she added.

While climate-centered investments have expanded without much government intervention, there is only so much growth left without policy, according to Mindy Lubber, president of Ceres, a nonprofit that works with capital market investors and companies on sustainability issues.

“Ambitious climate policies are critical market signals for investors around the world,” Lubber said in a statement. “With the right policy signals for robust economic transition pathways, investors will make large and necessary investments now. Our government leaders must do better to put the right policy settings in place. Those that do will benefit the most.”