Commentary

ICYMI, This is no Time to Hit the Brakes

Events this week underlined calls for acceleration by GFANZ Co-chair Carney.

On Wednesday, Mark Carney made the case for a faster transition to renewable energy in the face of inflationary and geopolitical headwinds, calling for “a sustainable revolution on the scale of the Industrial revolution and at the pace of the digital transformation”.

Drawing on history, the UN Special Envoy on Climate Action and Finance said a financial revolution had been needed to support the industrial one, as fractional reserve banking and the gold standard helped to drive cross-border flows of goods and capital by providing increased maturity transformation and financial leverage. “To finance the sustainable revolution, we need to bring a faster net zero transition and reduced carbon leverage to the heart of our system,” he observed.

Whilst highlighting the role in the next economic transformation of the Glasgow Financial Alliance for Net Zero, which he co-chairs, Carney admitted nothing short of a new Bretton Woods would suffice, echoing US Treasury Secretary Janet Yellen. “Until that happens, given the urgency, we need to maximise the impact of the outmoded system we have today.”

Carney noted the innovation shown in the climate disclosure proposals of the US Securities and Exchange Commission, which require firms to disclose any internal carbon prices, targets and transition plans. But Carney’s mixed assessment of the state of progress reflects the reality that we’re still in the foothills; progress is too slow to be called a revolution.

This truth was reflected across the week’s news cycle, confirming the need for further action on climate-related disclosures. A FTSE Russell paper highlighted a material disclosure gap “with considerable variation” in reporting levels according to company size, region and sector, while the Science Based Targets initiative called for urgent action and announced new metrics, despite reporting a doubling in the number of firms committing to science-based emissions reduction strategies.

The stop-start nature of regulatory action was also much in evidence. The UK’s new Transition Plan Taskforce hit the ground running with a call for evidence to inform its mandate to draft guidelines for transition disclosures. But such alacrity was at odds with the omission of sustainability disclosure requirements from the Financial Services Bill outlined in the Queen’s Speech.

With workers’ rights and audit reforms also struggling for space, the UK government’s upcoming agenda could be seen as a missed opportunity across E, S and G, and a blow particularly to those hoping for UK disclosure requirements to reflect biodiversity risks and impacts.

But are investors making the most effective use of the information at their disposal? Anyone hoping for a repeat of the reverses suffered by big oil in the 2021 AGM season, inspired by the increasingly robust expectations issued by large money managers, have so far been disappointed.

BP’s climate strategy was passed yesterday by 88% of shareholders, despite concerns from campaigners that it does not put the firm on a 1.5C pathway. Does this mean polluters’ net zero plans are now on the right track? Overall, fossil fuel firms’ strategies are still too reliant on asset divestment and unproven technologies, according to a new Carbon Tracker report.

Engagement is a nuanced activity and it may be that investors are giving the benefit of the doubt over the pace of transition at firms facing greater uncertainty even than in recent turbulent decades. But evolving concepts of fiduciary duty are likely to lead them to side with those making the boldest moves on renewables.

As Carney noted, “there is no energy security without sustainability”.

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