Companies challenged to deliver “tangible evidence”; FCA and BoE outline strategies ahead of COP26 at Green Horizon Summit.
Sustainability analysis and disclosure are considered the “absolute bedrock” and a minimum requirement for large institutional investors, according to Aviva Life CEO Angela Darlington.
In addition, investors are looking for companies that “are actively taking action” when following through on net–zero emissions pledges.
“We are increasingly looking for companies that properly understand and disclose sustainability and green issues in their business models,” she said. “We are looking for companies genuinely taking action against those disclosures. Disclosure analysis has really become the absolute baseline we look for.”
Darlington was speaking on a panel chaired by Severn Trent CEO Liv Garfield at the Green Horizon Summit, alongside London Stock Exchange Group (LSEG) CEO David Schwimmer and Barclays Bank Group CEO Jes Stanley.
She further warned that companies failing to provide “tangible evidence” of their transition to sustainability will be “left behind”.
Institutional investors are demanding increased transparency, clearer ESG integration goals and more accurate metrics to help in their assessment of company performance.
LSEG’s Schwimmer said widespread demand for sustainable investment is reflected in broader market data. “The FTSE Environmental Opportunities Index has delivered returns of 12.7% this year through October, and that compares with returns of –1.3% for global equity markets over the same period,” he said.
Constituents of the Green Economy Mark, launched by the LSE in 2019, which recognises equity issuers on the exchange with green revenues of 50% or more, “have collectively outperformed the FTSE All Share Index over the past two years by 36%,” Schwimmer added.
To accelerate the transition to a carbon-neutral economy, Darlington called on government and regulators to incentivise a positive shift in capital into green infrastructure, noting that Aviva Life had invested £3.8 billion in 2019, outstripping its goal of £2 billion by 2020.
Schwimmer also highlighted the need for more consistency in the information required of listed firms to help investors identify green investment opportunities. Earlier this year, Schwimmer and ex-Bank of England (BoE) Governor Mark Carney contacted heads of exchanges to accelerate harmonisation.
“Issuers come through stock exchanges to gain access to investors and capital. We’re working with the UN’s Sustainable Stock Exchanges Initiative to have exchanges around the world align their disclosure standards. We’re hoping to come up with model guidance early next year, ahead of COP26. Partnerships between market infrastructure, governments and NGOs can help transition private capital into more appropriate investments,” he said.
Carney’s successor, Andrew Bailey, revealed that the BoE would be running its pandemic-delayed climate risk tests in June 2021 in his address to the summit. The tests aim to accurately forecast the potential costs to UK businesses of three possible climate scenarios over a 30-year period.
The tests are designed to improve the BoE’s approach to risk management practices, based on feedback the central bank will receive from companies running the simulation.
“We’re not going to use the results to size firms’ capital buffers, but that does not mean firms should not be thinking about near-term capital requirements,” Bailey said. “Firms must assess how climate risks could impact their business and review whether additional capital needs to be held against this.”
The Governor further stated the BoE expects firms to make “reasonable judgements, rather than default to zero” in order to facilitate a collation of data that is as accurate as possible.
From January 1 2021, the Financial Conduct Authority (FCA) will introduce rules requiring premium listed UK companies to make better disclosures about how climate change affects their business, CEO Nikhil Rathi announced in a special address at the Green Horizon Summit.
The announcement aligns with prior recommendations proposed by the Taskforce on Climate-related Financial Disclosures (TCFD), with a possibility of the scope of these rules being extended according to consultations scheduled throughout the first half of 2021.
However, Chancellor of the Exchequer Rishi Sunak later announced climate disclosures by large UK companies and financial services firms will be mandatory by 2025, “going further than recommended by the TCFD – the first G20 country to do so”.
Rathi said the FCA would “strongly support” the proposed sustainability standards board put forward by the International Financial Reporting Standards (IFRS) trustees, noting the UK regulator is also “co-chairing a work stream on disclosures with other international regulators, called the Sustainable Finance Taskforce, […] to drive international progress.”
The funds space also can expect new anti-greenwashing measures to be introduced by the FCA next year, aimed at combatting misleading marketing of products.
“The FCA would like to help market participants manage the risks of moving to a low carbon economy, while also capturing opportunities to benefit consumers,” Rathi said.
