COP26 Focus on Finance

Day 4 of COP26 was focused on the role of finance in the transition.  We saw some expected announcements, more detail on existing plans and a few new developments:

_{International Sustainability Standards Board (ISSB) established}

The long-trailed ISSB was announced today. The International Financial Reporting Standards (IFRS) Foundation will oversee the new board, which will sit alongside the International Accounting Standards Board (IASB). As we mentioned yesterday, the G20 have explicitly supported this new initiative, as has the International Organization of Securities Commissions (IOSCO).

The ISSB will develop a new global baseline of sustainability disclosure standards which will be usable on a stand-alone basis or form the basis of regional regulatory requirements. These will draw on the technical standards and frameworks of the Climate Disclosure Standards Board (CDSB), the Value Reporting Foundation (VRF) which includes the Integrated Reporting Framework and the SASB standards, the Taskforce on Climate-related Financial Disclosures (TCFD) and the Forum Stakeholder Capitalism Metrics.

The working group which undertook the preparatory work for the new board also published prototype climate-related disclosures and general sustainability disclosure requirements.

The IFRS Foundation also announced a commitment to consolidate the VRF and CDSB within its framework.

_{FCA “Strategy for positive change: our ESG priorities” – disclosure, remuneration and anti-competency greenwashing}

The FCA published a new ESG Strategy today, timed to coincide with COP26 Finance Day. The Strategy builds on the commitments in the most recent FCA Business Plan and comes after the recent publication of the FCA and PRA Climate Adaptation reports.

Key actions include:

• Enhancing climate-related financial disclosures.
• Enhancing transparency on diversity and inclusion (D&I).
• Developing a policy approach on competency greenwashing, and enhancing governance and alignment of incentives – including remuneration – in regulated firms.
• Promoting global consistency and comparability in corporate reporting both through international and domestic channels, including the new TNFD framework.
• Ensuring that consumer facing communications under the SDRs are accessible and decision-useful.
• Embedding the guiding principles for authorised fund managers set out in the Dear Chair letter earlier this year in supervisory engagement.
• Contributing to work on improving the ESG ratings market.
• Considering its role in relation to securities lending and derivatives with respect to ESG, and to voluntary carbon markets.
• Collaboration with the Competition and Markets Authority on the tension between the need for cooperation and competition rules.

_{Taskforce on UK mandatory transition plans}

As we discussed in our earlier post, the UK Greening Finance Roadmap foreshadowed the introduction of mandatory net zero transition plan disclosure as part of the new SDR regime. The UK Chancellor Rishi Sunak today announced the establishment of an independent taskforce to define what should be included in the disclosure. 

The new taskforce will coordinate with international initiatives, including TCFD, and is expected to report back by the end of next year. The UK Centre for Greening Finance and Investment (CGFI) which was established earlier this year and E3G, a European thinktank, will act as the secretariat, with the FCA playing a role and having regard to the final output. It will aim to develop a gold standard for transition plans and metrics.

_{UK transition pathway for the UK financial sector} 

The Chancellor announced the publication of a transition pathway for financial services. This will build on the Greening Finance Roadmap and set out new policies and milestones for the sector leading up to 2050. The policy is expected to be published in 2022.

_{SDR and investment labels – FCA Discussion Paper (DP)}

There was more action furthering the UK Greening Finance Strategy, with the FCA publishing its DP on the new Sustainability Disclosure Requirements and related investment label. 

A cross-government and cross-regulator working group, including the FCA, will develop the policy and legislation for the new SDR regime, which builds on the TCFD framework announced last year. As we discussed in a previous post, the SDR will incorporate the new ISSB standards, which the FCA has been engaged with as co-chair of the IOSCO sustainability disclosure workstream.

The sustainable investment label will be designed to complement both entity and product-level SDR requirements. The labels are intended to assist both consumers and institutional investors and will look beyond climate to other sustainability factors, and may include both transitioning and goal-aligned labels. 

The DP also calls for views on the roles of benchmarks and indices, derivatives, securities lending and short selling.

_{Network for Greening the Financial System NGFS Glasgow Declaration}

The NGFS, a network of 100 central banks and prudential supervisors across the globe, reiterated its commitment to the Paris objectives, building on its 2019 Call to Action which promoted the climate financial risk approach pioneered by the Bank of England. 

The Declaration committed the NGFS to:

• deepening its existing workstreams on climate scenarios, integration of climate financial risk into macroeconomic policy, bridging data gaps and facilitating improved supervisory capacity. 
• continuing its work on the financial stability implications of biodiversity loss, as well as risks associated with climate-related litigation.
• working with policymakers and stakeholders on best practice on climate and environmental risks.
  
  

_{Glasgow Finance Alliance for Net Zero (GFANZ) update}

GFANZ, a global coalition of financial institutions with science-based commitments to net zero, was launched in April 2021 in partnership with the UNFCC Climate Action Champions, Race to Zero and the COP26 Presidency. It focuses on accelerating real economy transition plans, driving convergence in financial institution transition best practice and mobilising private capital towards net zero. It is chaired by Mark Carney, who will now be joined by Michael Bloomberg.

GFANZ announced today that it had committed USD130 trillion of private capital to net zero. Mark Carney also announced the publication of a new plan on how to scale private capital flows for the transition, including the development of country platforms to connect with private capital, scaling blended finance through multilateral development banks and developing robust and credible global carbon markets.

We will discuss these announcements in more detail in our Reflections on COP series. Tomorrow, is Energy Day. Will it match up to the calls for action in the IEA World Energy Outlook?

Author: Kelly Sporn