Carney Issues Challenge to Investors on Climate Alignment

Industry discussion is needed on portfolio metrics ahead of COP26, argues ex-BoE governor.

Institutional investors must improve climate-related disclosure to end-investors while also demanding more information from investee companies to support net-zero emissions targets, said Mark Carney, the UK Prime Minister’s Finance Advisor for the COP26 climate summit, speaking at today’s Green Horizon Summit.

Carney, the former governor of the Bank of England and a United Nations Special Envoy for Climate, was unveiling a private finance strategy document, titled ‘Building a Private Finance System for Net Zero – Priorities for Private Finance for COP26’, which outlines actions needed to establish a framework for climate-related decision-making by financial institutions and large corporates.

The document focuses on four core areas for finance sector action to support the greenhouse gas emissions reduction goals of the 2015 Paris Climate Agreement, specifically comprehensive climate-related reporting requirements, transformation of climate risk management, returns opportunities for investors, and the development of new markets to better mobilise private capital, particularly toward emerging and developing economies.

Noting the positive impact of institutional investors on the business strategies and disclosure practices of companies with high emissions levels, Carney called for increased climate-related disclosures to end-investors.

“Investors won’t just judge companies’ transition plans; they too should be judged. Investors should disclose how closely their portfolios are aligned to the transition to net zero. Some of the world’s largest and most influential asset owners are already doing that,” he said, citing the recent commitment by UN-backed Net Zero Asset Owners Alliance, with combined assets of US$5 trillion, to reduce their collective carbon footprint by 29% by 2025.

“A metrics-based approach will become increasingly common,” added Carney. “One of the challenges, by Glasgow, is for investors to agree how best to demonstrate how their clients’ investments are aligned with climate targets. A measure of portfolio alignment needs to be forward looking, anchored in real world targets, and dynamic. These criteria will ensure investors are engaging with companies that are seeking to decarbonise.”

A guide to the possible options, titled ‘Measuring Portfolio Alignment’ has been released by the COP26 Private Finance Hub’s Portfolio Alignment Team, led by David Blood, senior partner of Generation Investment. The report assesses the merits of a range of metrics, including percentage of net zero-aligned assets in a portfolio, transition progress against scientifically determined transition pathways, and calculation of a portfolio degree warming metric.

“Over the next 12 months on the road to Glasgow, the industry should use David’s report as a basis for discussion and consensus on the most useful measurement,” said Carney.

The former governor also encouraged asset owners to continue to increase their expectations of investee companies’ plans for transitioning to carbon-neutral business plans. Efforts by investor groups such as Climate Action 100+, which recently called on large emitters to publish their strategies for achieving net-zero emissions by 2050, are helping to establish best practice among large firms, said Carney.

It is becoming common, he said, for firms to develop plans based on reporting of scope 3 emissions, balancing emissions with offsets, governing management of climate risk at board level and linking executive compensation to achievement. “It may also be desirable for investors to have a say on transition, via an annual automatic advisory vote on transition plans, just as they have a say on pay. This would establish a critical link between responsibility, accountability and sustainability,” he said.

Noting growing adoption by companies and regulators of the recommendations of the Task Force for Climate-Related Disclosures (TCFD), Carney said the disclosure of climate-related risks by companies should be enforced by policy to ensure the availability of comprehensive and comparable data to investors.

“We’re calling on governments, by Glasgow, to use the TCFD as the starting point for any mandatory disclosure regime and to publish pathways to show authorities in their respective jurisdictions will be responsible for implementing climate-related reporting rules, and to work with international standards setters, particularly the IFRS Foundation,” he said, urging finance sector organisations to participate in the foundation’s current consultation on the development of sustainability standards.

Carney said the resolve of the finance sector to tackle climate change had “redoubled” in response to the pandemic, insisting that considerable progress had been made and momentum was still growing. “Covid-19 has exposed the problems with undervaluing resilience, ignoring systemic risk, and not investing upfront. So it is with climate change, a crisis that involves the entire world and from which no one will be able to self-isolate,” he said. “Society is placing a greater value on resilience and sustainability.”

The Green Horizon Summit is a virtual conference held in the week COP26 was initially scheduled prior to the pandemic. Organised by the City of London Corporation, the Green Finance Institute and the World Economic Forum, the event’s agenda is focused on the actions required by public and private institutions ahead of the COP26, now rescheduled to take place in Glasgow next November, to support meaningful progress toward the goals agreed under the Paris Climate Agreement of 2015.

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