Both investors and boards can benefit from increased ESG disclosures, governance summit told.
The recent round of commitments to net-zero emissions targets by large financial institutions has been denounced as “greenwashing” by an adviser to the United Nations and European Commission.
“One example of greenwashing is the Glasgow Financial Alliance for Net Zero,” said Peter Rowan, an adviser on sustainable investment and CEO of Lithium Capital NI, a firm involved in the development and management of utility-scale battery storage system assets and renewable energy projects.
“They have to be set science-based targets within 18 months, but there is no [requirement for] declaration of divestment from fossil fuels. Their verification is done internally. And how they disclose is not the same across the board,” he said. “Only the UN Principles for Responsible Banking has outside verification of emissions.”
A member of the UNECE Business Advisory Board on public-private partnerships, Rowan noted that many banks publicising their investments in sustainable projects are also among the 60 banks responsible for US$3.8 trillion of fossil fuel finance between 2016 and 2020.
“There is a juxtaposition between continuing to invest in fossil fuels and investing in environmental projects,” he said, speaking at an ESG summit held by the UK’s Chartered Governance Institute, in a panel discussion, ‘Board readiness: ESG risk, opportunities and mitigation strategy’.
Launched on Wednesday by UN Special Envoy on Climate Action and Finance Mark Carney, GFANZ is a coalition of 160 finance sector firms, responsible for US$70 trillion in assets, focused on achieving net zero emissions by 2050 at the latest. As part of the coalition, a new Net-Zero Banking Alliance was formed, with members required to set 2030 and 2050 reductions targets within 18 months of joining, with targets “reviewed to ensure consistency with the latest science”.
Panellists at yesterday’s session said traditional governance principles such as transparency and accountability were evolving to encompass a wider range of environmental and social issues. Martina Macpherson, Head of ESG Strategy, Oddo BHF Asset Management and Oddo BHF Private Equity, noted that the new era of stakeholder capitalism required board-level directors to consider the interests of customers, employees, suppliers and communities as well as investors.
“Directors need is to understand the environmental and social impact on the business strategy, and the risk profile of the companies that they actually serve,” she said.
“Corporate responses to increasing ESG risks and opportunities – along with the growing expectation from investors to better understand how ESG protects and drives value for an organisation – has resulted in a dramatic increase in disclosure, but also in the interest in these topics overall.”
Rowan said that corporate boards need to be alert to the strategic and business implications of the greater transparency on risks provided to investors by increasing levels of disclosures on carbon emissions.
“Transparency can change the whole dynamic of the board as well,” he said. “Ten years ago, coal made up 40% of UK power generation and the last coal-based plant will be closed at the end of this year. Things can change very quickly, leaving you with stranded assets.”
Referring to the commitments being made by governments at the Earth Day Summit convened this week by US President Joe Biden, Rowan said increasing levels of disclosure and transparency could be used by directors to help stay alert to the possibility of swift changes in their own sector.
“Disclosure is really important because regulation can change very quickly. Governments can change very quickly in their direction and what they’re declaring. If a board is not actually aware of what’s actually going on its his own organisation, because of lack of transparency, they are going to be affected,” he said.
Rowan has served as a Steering Committee member for the UN President of the General Assembly’s High-level Thematic Debates and is an adviser to the European Commission on Green Finance.