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Net-Zero Asset Owner Alliance Statement on the draft European Sustainability Reporting Standard E1 Climate change

9 August 2022

The UN-convened Net-Zero Asset Owner Alliance, a group of 74 leading investors with $10.6 trillion in assets, supports and warmly welcomes the climate change Exposure Draft from the European Financial Reporting Advisory Group (EFRAG).

As noted in the Alliance’s statements on the US SEC and ISSB consultations, the current absence of standardised, comparable and granular climate-related disclosures from companies represents a significant barrier and cost to asset owners; limiting our ability to incorporate climate-related issues into investment decision-making and to implement effective stewardship and portfolio design strategies. The proposals for European Sustainability Reporting Standards (ESRS) by EFRAG, in tandem with those from the US SEC and ISSB, represent an opportunity to change this.

In particular, Alliance members wish to

1 Recognise the progress made in developing and publishing the high ambition and granularity of the ESRS E1 Exposure Draft.

The Alliance is notably supportive of the proposals as regards alignment with a 1.5°C pathway, mandatory scope 1, 2 and, where material, scope 3 GHG emissions reporting, as well as mandatory reporting on climate-related targets and progress achievement. These disclosures are critical for asset owners to assess and manage the risks and opportunities arising from climate change; as well as enable asset owners to increase their ability to finance clean energy solutions and drive change in the real economy. We also highly welcome the provisions on climate scenario analysis, climate-related risk management and transition planning.

2 Highlight priority aspects of sector-specific reporting.

  • Sector-specific metrics and targets. Sector targets are the most relevant means for financial institutions to evaluate and track real-world GHG emission reductions, incentivizing and providing capital support to companies which are the best carbon performers within their sectors, as well as supporting the financing of the global economy’s transition to a net-zero economy.

The Alliance, in particular, recommends the inclusion of certain highly relevant and decision-useful sector-specific metrics for the 12 most energy-intensive sectors (please refer to the annex) following an ambitious timeline, at the latest in EFRAG’s sector-specific standards for those sectors. If certain sectors are prioritised over others, we urge EFRAG to focus on these 12 sectors as soon as possible, also, but not only to cater to financial institutions’ information demands.

Companies in these sectors should be required to report scope 1, 2 and, where material[1], scope 3 GHG emissions (as required in ESRS E1); yet, in addition to historical data, the sector-specific standards for those sectors should also include sector-specific requirements on a forward-looking basis (at 5-year and 10-year intervals).

  • Require separate emissions reporting on methane. Methane is a major greenhouse gas that is significant in several key energy industries such as oil and gas, the utility sector and agriculture. The Alliance recommends that methane emissions are reported separately and not as aggregated CO2 Further, there should be a measure of methane volume disclosure per tonne and a measure of methane intensity in the oil and gas, utility and agricultural sectors.
  • Follow a targeted approach for sector-specific standards. In addition to the above, it is key that EFRAG’s approach towards sector-specific standards is driven by the ambition to close transparency gaps, not duplicate existing sector-specific reporting requirements (such as extending SFDR requirements to financial companies at the consolidated level). Otherwise, sector-specific standards will not be able to enhance the transparency and comparability of corporate climate reporting.

 3 Highlight key issues where further work and revision of the ESRS are needed. In particular:

  • The need for a phased-in approach to ensure high quality standards, while taking CSRD into account. Namely, the first set of ESRS should focus on:
    • Disclosures needed by the financial sector to comply with its specific sustainability-related disclosure requirements (e.g. SFDR/Taxonomy) and to fulfil its key role to drive sustainable finance,
    • Requirements overlapping with the ISSB standards (to ensure full interoperability and maximum alignment); and
    • Comprehensive coverage of the climate topic (such as proposed in ESRS E1).

When deciding upon prioritization, the maturity of metrics as well as the decision-usefulness for stakeholders, especially investors, should be taken into account, where information of quantitative and, thus, more comparable nature is particularly relevant.

In regards to prioritization, it is also key that at least the 12 high-impact sectors referred to above are prioritized when developing sector-specific standards (see above).

  • The focus must lie on information that is indeed material.
    • As such, the rebuttable presumption, which would require the disclosure of a list of non-material items accompanied by immateriality evidence as well as increase liability risk and implementation effort, should be removed, both to avoid mixing material and immaterial information, but also to set free valuable resources by preparers to produce high-quality, comparable and reliable information that is indeed material to the users of sustainability information.
    • Relying on materiality generally, without a rebuttable presumption, would be sufficient and aligned with financial reporting as well as the approach proposed by the ISSB.
    • For example, as regards climate, it is clear that this is a material topic across all companies, both for investors (and other stakeholders); as such, “standard” materiality assessments should be sufficient to ensure disclosure.
  • Clarify how the definition of the value chain will be applied to investors and what key disclosure will be required of asset owners; taking data availability from the financial sector perspective into account (e.g., time lags may be needed where financial companies can use prior year reported data).
  • Stress the importance of interoperability.

The Alliance recognises the efforts made to consider existing frameworks and the emerging ISSB standards. Yet, the Alliance would encourage all parties to continue the technical dialogue and make further efforts to avoid the fragmentation of climate-related and other sustainability-related reporting. In particular, EFRAG and ISSB should have a common structure and presentation of climate change, work towards resolving differences in terminology and since ESRS (incl. E1) go beyond ISSB global baseline, the goal should clearly be that complying with ESRS automatically means complying with ISSB.

This would limit the reporting burden on organisations and thereby reduce the time needed to achieve consistent, comparable and reliable climate change reporting, but also ensure that investors (and other stakeholders) receive globally comparable sustainability data.

About the UN-convened Net-Zero Asset Owner Alliance

The 74 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years, and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is supported by WWF and Global Optimism. Further information on the Alliance can be found here https://www.unepfi.org/net-zero-alliance/

[1] When considering whether to disclose Scope 3 GHG emissions, organizations should consider whether such emissions are a significant portion of their total GHG emissions. For example, see the discussion of the 40% threshold in the Science Based Targets initiative’s (SBTi’s) paper SBTi Criteria and Recommendations, Version 4.2, April 2021, Section V, p. 10.

 

Net-Zero Asset Owner Alliance Statement on the ISSB Climate Exposure Draft

28 July 2022

The UN-convened Net-Zero Asset Owner Alliance (NZAOA), a group of 74 leading institutional investors managing US$10.6 trillion in assets, supports and warmly welcomes the Exposure Draft IFRS S2 Climate-related Disclosures (Climate Exposure Draft) from the International Sustainability Standards Board (ISSB).

NZAOA members have publicly committed – at the CEO level – to decarbonising their investment portfolios in line with a 1.5°C pathway, and to achieving net zero greenhouse gas emissions by 2050 at the latest. Alliance members have, in addition, committed to setting science-based intermediate targets on a five-year cycle (in line with Article 4.9 of the Paris Agreement) and to reporting on their progress. A key aspect of this commitment is tracking emissions attributable to our portfolio holdings and supporting the reduction of carbon emissions in the real economy.

Yet at present, the absence of standardised, comparable and granular climate-related disclosure from companies imposes significant barriers and costs to asset owners. The lack of reliable data limits our ability to incorporate climate-related issues into investment decision-making, and to implement effective stewardship and portfolio design strategies. The climate exposure draft from the ISSB represent a landmark opportunity to change this.

In particular, NZAOA members wish to:

1. Recognise the progress made with the establishment of the ISSB and its climate exposure draft. The Alliance welcomes that the Climate Exposure Draft aims to act as a global baseline, building on the TCFD recommendations and SASB standards, containing guidance and disclosures rooted in well-established climate reporting concepts. We believe this will facilitate a common set of climate-related reporting requirements. However, we note that the SASB standards are broadening, and observe that there are timing issues in this broadening that need to resolve to arrive at a fit-for-purpose ISSB standard.

2. Highlight areas where the Alliance recommends that the ISSB goes further to ensure the consistency and appropriate granularity of disclosures, even for a global baseline. Notably:

  • Removing or defining the word “significant” climate-related risks and opportunities within the S2 Climate Change Exposure Draft. This term is not used in existing climate reporting frameworks and is at risk of being open to interpretation and inconsistently applied. The term is also not consistent with previous IFRS guidance; a 2018 IFRS staff memo[1], for example, recommended revising IAS 1 to refer to “materiality” instead of “significant” as this would better guide decision-making on what should be disclosed. Therefore, removing or defining the term “significance” is recommended, as it would ensure that all material climate-related information is disclosed.
  • As 90% of the world’s GDP is covered by net-zero pledges[2], the ISSB should expressly integrate this development into transition plans and target-setting in countries covered by such government pledges.
  • Transition plans. The Alliance recommends additional disclosure requirements should be incorporated into transition plans, such as agreed near-term actions to deliver on the underlying strategy, alignment of engagement activities, information on financing the transition, and details on individuals and governance structures responsible for implementation.
  • Target-setting template. To better support the comparability of a company’s target reporting, the use of a common target-setting template is recommended (see annexe 2).
  • Require the use of climate scenario analysis in company reporting. Reporting by companies on the resilience of their business strategy to climate scenarios is important to investment and voting decisions since it demonstrates that companies understand that the materiality of climate change will not be static and are paying attention to the issue. Disclosure of a climate scenario analysis is not necessarily a quantitative exercise but could be narrative-based, seeking to commence a learning process on how climate-related risks and opportunities could evolve over time. Scenario analysis should evaluate the degree of alignment of the company’s business model and investment plans with the Paris Agreement 1.5°C scenario (or an updated internationally recognised standard).
  • Industry metrics and targets. Sector targets are the most relevant means for financial institutions to evaluate and track real-world emission reductions. The targets can enable asset owners to provide capital support to companies which are the best carbon performers within their sectors and can guide asset owners in supporting the financing of the global economy’s transition to net zero. Therefore, the Alliance recommends:
    • The ISSB should require different disclosures of industry metrics for the 12 most energy-intensive sectors listed in annexe 3, based on the SASB proposals; these should be consistent and comparable to the maximum possible extent.
    • While emission reporting on scopes 1, 2 and 3 form part of the cross-industry metrics, which we highly appreciate, these are not incorporated consistently with the Appendix B Industry-Based Disclosure Requirements (some of which only require disclosure on scope 1 emissions, for example, B11 oil and gas exploration and production). These sector-specific proposals should be aligned with the cross-industry proposals and should, thus, include scope 1, 2 and, where material[3], scope 3 emissions. In addition, aside from historical data, sector-specific proposals should include requirements on a forward-looking basis (at five and ten-year intervals).
  • Revise the industry sector requirements on methane, a major greenhouse gas that is significant in a number of key energy industries, such as oil and gas and the utility sector. The Alliance recommends that methane emissions are reported separately and not as aggregated CO2e. Furthermore, there should be a disclosure of the measure of methane volume per metric ton and the measure of methane intensity in the oil and gas and utility sector (Appendix B Industry-Based Disclosure requirements).

3. Interoperability. The Alliance strongly supports the ISSB’s mission to deliver a high-quality global baseline of climate-related financial disclosures and encourages continued engagement between ISSB and national and regional regulators to ensure interoperability of sustainability-related reporting standards. This should limit the reporting burdens on organisations and lead to the alignment of key concepts, terminologies and metrics on which disclosure requirements are built.

Globally consistent, comparable, and reliable reporting is needed for a clear and accurate picture of an organisation’s progress, and for investors to incorporate this information into investment decisions.

Annexe | Footnotes

[1] IFRS staff paper: significance and materiality https://www.ifrs.org/content/dam/ifrs/meetings/2018/december/iasb/ap11a-di.pdf

[2] Climate Action Tracker https://climateactiontracker.org/publications/glasgows-2030-credibility-gap-net-zeros-lip-service-to-climate-action/

[3] When considering whether to disclose Scope 3 GHG emissions, organizations should consider whether such emissions are a significant portion of their total GHG emissions. For example, see discussion of 40% threshold in the SBTi Criteria and Recommendations, Version 4.2, April 2021, Section V, p. 10.

About the UN-convened Net-Zero Asset Owner Alliance

The 74 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years, and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is supported by WWF and Global Optimism. Further information on NZAOA can be found here https://www.unepfi.org/net-zero-alliance/

 

Investor Agenda releases new guidance for Investor Climate Action Plans 

7 July 2022

July 7, 2022 – Today, the Founding Partners of The Investor Agenda released new guidance to enable investors around the world to step up action to tackle the climate crisis and accelerate the transition to a net-zero economy. 

The latest guidance is an accompanying document to the existing Investor Climate Action Plans (ICAPs) Expectations Ladder. The ICAPs Guidance document highlights best practices for investors in developing and publishing ambitious climate action plans. It also helps investors self-assess which tier they are on along the ICAPs Expectations Ladder, understand the main actions they can take to strengthen their approach, communicate this information to colleagues, and navigate a growing number of climate-related investor initiatives and reporting expectations.  

Investors can access the updated ICAPs Guidance document on the Investor Agenda website here. 

The ICAPs Guidance includes a set of resources to inform the development of ICAPs. This is not intended to be a comprehensive list of all tools and guidance but provides an indication of the available resources.  

Some specific updates to the ICAPs Guidance document include: 

  • Tiers mobility and progress – how investors can determine which tier they are in for each of the ICAPs focus areas, as well as more comprehensive detail on how to move across tiers. 
  • Asset class – how ICAPs can be applied in several core asset classes, including fixed income, private equity and infrastructure. 
  • Tools and methodologies – how investors can use specific tools and methodologies both to get started and to rapidly accelerate action to net zero.     
  • Sector level guidance – setting out why sector engagement is critical for investors and how this engagement can lead to real economy impact. 
  • New resources – recognising and providing new resources on topics of increasing importance, such as nature & biodiversity and adaptation & resilience. 

In May 2021, the Investor Agenda released the ICAPs Expectation Ladder and Guidance – a framework to encourage investor action across four key focus areas: investment, corporate engagement, policy advocacy and investor disclosure, with governance as a cross-cutting theme across all areas. The ICAPs Expectations Ladder establishes four tiers of sequential accomplishment, from those beginning to think about climate change (Tier 4) to the investors who have made net-zero commitments and are well along the path to setting and implementing science-based targets (Tier 1).  

Together, the ICAPs Expectation Ladder and Guidance provide investors with clear steps they can take to support the global goal of achieving a net-zero emissions economy by 2050 or sooner.   

“We released the ICAPs Guidance document to help raise investor climate ambition,” said Kirsten Spalding, Senior Program Director, Investor Network at Ceres, and ICAPs Working Group Chair at the Investor Agenda. “It is a great resource for investors just starting their journey to help them develop and publish ICAPs, while those that have already begun their journey can use the guidance to accelerate their own climate actions to bring transition to a net zero economy closer.” 

For further media inquiries please contact: news@theinvestoragenda.org  

About The Investor Agenda 

The Investor Agenda is a common leadership agenda on the climate crisis that is unifying, comprehensive, and focused on accelerating investor action for a net-zero emissions economy. The founding partners of The Investor Agenda are seven major groups working with investors: Asia Investor Group on Climate Change, CDP, Ceres, Investor Group on Climate Change, Institutional Investors Group on Climate Change, Principles for Responsible Investment and UNEP Finance Initiative. 

UNEP FI launches third version of Portfolio Impact Analysis Tool for Banks with updated resources

5 July 2022

UNEP FI is pleased to launch Version 3 of the Portfolio Impact Analysis Tool for Banks along with an updated Impact Radar, building on over three years of experimentation and usage by a growing community of practice.

The new Portfolio Impact Analysis Tool for Banks is still in keeping with UNEP FI’s unique Holistic Impact Methodology, and supports banks in the implementation of their impact analysis requirements under the Principles for Responsible Banking.

As of 2022, UNEP FI’s Impact Analysis Tools are gradually transitioning to a ‘modular’ format, where the main components of impact analysis are contained within distinct modules. The new modular format allows more flexibility to accommodate for a variety of types of user banks.

The Tool is an iterative input-output workflow based on UNEP FI’s unique Holistic Impact Methodology. It requires users to input data to describe their portfolio and to reflect their current impact performance. The Tool uses the input data in combination with a set of in-built impact mappings to produce a number of outputs, in particular a set of impact profiles by business line, and to guide the user in identifying the bank’s most significant impact areas and determining priorities, thus setting the basis for strategy development and target-setting.

It is designed to enable banks to comply with the requirements under Principle 2 on Impact Analysis and Target-setting of the Principles for Responsible Banking.

Find out more about the Tool here

UNEP FI Impact Radar

Building on over three years of experimentation and usage by a growing community of practice both within and beyond UNEP FI’s membership the Impact Radar has been revised for even better impact analysis and management.

The Impact Radar offers a holistic set of impact areas and topics across the three pillars of sustainable development (economic, environmental and social), which can be used by private finance and business to understand and manage positive and negative impacts across the three pillars. The impact areas and topics are defined based on internationally recognized standards and definitions, including the SDGs.

New features of the revised Radar include a streamlined set of impact areas, introduction of impact topics within the impact areas for enhanced granularity and explicit reference to human rights issues such as modern slavery and child labour.

The Radar is the basis of various mappings and as such has also become the cornerstone of UNEP FI’s Holistic Impact Tools and related guidance surrounding impact management.

Find out more about the updated Impact Radar here.

UN responds to the ISSB consultation on new standards with joint statement

29 June 2022

The standards being developed by the ISSB provide a unique opportunity. They can support global convergence of sustainability-related disclosure, create a common reporting baseline, and help mainstream sustainability-related issues into regular business strategy and management.

Despite this opportunity, there is a risk that these key benefits will not be delivered. In particular: (i) a narrow interpretation of enterprise value (and the factors that affect it) would mean that ISSB standards could leave out important sustainability risks and opportunities; and (ii) the ISSB standards could result in selective disclosure by reporting companies. To address this risk, solutions lie in a holistic approach that complement a list of core globally harmonized indicators, along with additional steps to strengthen the impact of the standards, as laid out below.

1. The need for a holistic and forward-looking approach to assessing enterprise value

A holistic and forward-looking approach to sustainability management and disclosure would enable a company and its investors to account for uncertainty linked to sustainability risks and opportunities. Such an approach is conducive to better capturing enterprise value on two accounts:

  1. Risk management: to enable companies and their investors to protect themselves from sudden shifts in sustainability-related issues and ensure that companies maintain their financial viability and license to operate.
  2. Business development: to enable companies to identify a wide palette of opportunities.

The IFRS’s current ‘building blocks’ approach suggests that sustainability issues can be neatly dissociated from each other, so that what is material and immaterial to investors can be easily identified. However, in reality, sustainability issues are deeply interlinked and need to be considered holistically.

While the financial materiality of some sustainability issues might not be immediately visible, multiple recent events have shown how quickly and unpredictably things can shift and how interlinked our societies and economies are (e.g., covid-19, ‘me too’ movement, war in Ukraine, climate-related disasters). As risks materialize, governments may respond with regulatory measures, further affecting enterprise value. To assess the value of an enterprise today, it is therefore critical to consider its ability to react to shifting realities and mega-trends underway, i.e., manage sustainability issues that could become financially material in the future. A clear and consistent approach to identify sustainability-related risks and opportunities is needed to ensure that the information provided is fit for purpose.[1]

2. The need to avoid selective disclosure by reporting companies

The current ISSB draft standard put the onus for deciding what to disclose on the reporting entity, based on what it considers material to its enterprise value. This could lead to selective disclosure, including two companies operating in the same industry reporting on different sustainability topics if their materiality assessment differs. As a result, investors may not have access to all the information they need to make their own decisions on what they consider material for investment decisions.

To create a global baseline, the ISSB standards should require as a minimum that all companies report on a globally harmonized set of core sector-agnostic indicators, which should be complemented by industry-specific indicators. A core list of sector-agnostic indicators will preclude that companies make selective disclosure, intentionally or not, and leave out from disclosure issues that could be important for investors. The set of core sector-agnostic indicators should be based on global agreements, such as the Sustainable Development Goals (SDGs) and the goals of the Paris Agreement, as the latter provide the basis to understand where governments are focusing policy attention and what could become sustainability risks and opportunities for enterprise value in the future. In addition, industry-specific indicators are necessary to complement industry-agnostic disclosures and ensure the use of meaningful sustainability indicators and metrics for entities operating in different industries.[2]

3. Additional elements to consider for improving the standards

As a corollary of enabling a broad understanding of enterprise value and creating a global baseline, it is important that the standards:

  • Include clear guidance on what constitutes appropriate sustainability analysis and management. This includes but is not limited to the process for entities to identify positive and negative impacts associated with their business activities, prioritize sustainability-related issues and assess sustainability performance.[3]
  • Encourage entities to set sustainability targets. Targets are key to assess whether entities plan to improve their sustainability performance over time and at what pace. They need to include baselines and desired thresholds to assess their level of ambition. Setting science-based targets wherever applicable, such as the ones on emissions reduction, is particularly important to drive sustainable development.[4] Similarly, SDG-aligned target setting is already widely supported by the private sector.[5] ISSB standards should aim to capture this type of target.
  • Require geographically contextualized disclosures. The geographic scope of the sustainability-related disclosures is rightly set to mirror those of financial disclosures, to bear in mind operations and supply chains across multiple countries. This has profound implications for sustainability management and disclosures – not least of which given the relative difference of the importance of sustainability issues in different contexts – which require clarification and specification in the standard.[6]
  • Adopt an explicit long-term time horizon. The ISSB standards should request entities to adopt a sufficiently long-term horizon (20+ years) when identifying sustainability-related risks and opportunities as some may become financially material over time, for instance through on-going regulatory changes and from the accumulation of risks that eventually create significant crises. Even though some sustainability topics may not affect the current costs and revenues of an entity, the likelihood they will in the future makes those topics important to disclose for calculating today’s enterprise value. The likelihood of a sustainability topics being financially material may be negligible when considering a five-year time horizon, but could increase significantly for a ten-year horizon. Failing to adopt a long enough time horizon would thus make ISSB standards unable to capture important sustainability risks and opportunities (e.g., tail risks).

Finally, sustainability management and reporting remain complex. Countries are not equally prepared – some may need support to adopt emerging standards. Against this backdrop, we invite the IFRS Foundation to present its vision on: (i) how it plans to support capacity needs in developing countries; and (ii) protect them from negative spillovers (e.g., allowing developing countries time to meet ISSB standards, considering transition pathways from a development perspective, avoiding risks that ISSB standards exclude developing country firms from access to capital markets, or make the price to access capital markets more expensive due to reporting burden).

Read full statement here.

Who we are:

UN institutions, agencies, and associated organization who are supporting countries and the private sector to deliver on global goals and agreements, in particular the 2030 Agenda for Sustainable Development, the Paris Agreement, and the Addis Ababa Action Agenda.

This joint statement puts forward our vision to create a sustainability reporting framework, which is fit-for-purpose and supportive of globally agreed ambitions and goals. We are guided by the April 2022 agreement among Heads of State and Government, Ministers and high-level representatives on the need to: (i) make private business more accountable for its impact on sustainable development; and (ii) encourage progress towards globally consistent and comparable international standards for sustainability-related disclosure, by leveraging existing principles, frameworks and guidance.[7]

In addition, specific suggestions for the ISSB’s exposure drafts are/ will be available in the consultation responses provided directly by the different UN agencies.

[1] For identification procedures, see the UNEP FI Holistic Impact methodology.
[2] For establishing the set of core industry-agnostic metrics, the ISSB standards could build on existing initiatives pursuing this goal, such as the UNCTAD ISAR intergovernmental working group of experts. For sector-specific indicators see the GISD report on Sector-Specific SDG-related Metrics for Corporate Reporting. Please also see GISD Recommendations on SDG-related disclosures for more information.
[3] See the Impact Management Platform (IMP)’s Actions and Landscape of Impact Management for a consensus-driven overview of the practice of impact management.
[4] See the Science-based Target Initiative (SBTi).
[5] Two examples include the Global Investors for Sustainable Development (GISD) Alliance and the UN Principles for Responsible Banking.
[6] See UNEP FI Holistic Impact methodology and Principles for Responsible Banking for an explanation of the role of context and how this can be embedded in impact analysis and management.
[7] See Outcome Document of the 2022 ECOSOC Forum on Financing for Development

 

New Principles for Responsible Banking Academy to mainstream sustainability training

UNEP FI, the Chartered Banker Institute, and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH are today announcing the establishment of the Principles for Responsible Banking Academy (PRB Academy). This unique global academy will support the implementation of the UN Principles for Responsible Banking (PRB) and provide mainstream training on responsible banking to the entire sector. It brings together the world’s most established professional banking institute, the world’s foremost sustainable banking framework and one of the largest organizations for international development cooperation worldwide.

Banks have a unique and critical role to play in pivoting the global economic system, using their lending and financing decisions and client relationships to redirect capital for the transition and accelerate the pace and scale of positive change across entire economies. The PRB and the PRB Academy provide an avenue for them to do this by enabling bank employees to align their professional practice, and the strategies and operations of their organisations with the objectives of the UN Sustainable Development Goals and the Paris Agreement.

As well as building the capacity and capability of the 290 plus PRB signatory banks, which collectively represent around 45% of global banking assets, all banks, regardless of size, will be able to employ the training to build their capacity and capabilities, and address skills gaps and enhance expertise.

“The PRB Academy is a strong enabler of the UN Principles for Responsible Banking, providing a professional learning pathway for banks to rapidly upskill their employees on the critical environmental and social issues impacting their lines of business and client engagement. It is a pleasure to partner with the Chartered Banker Institute and GIZ on this path-breaking global resource.” – Eric Usher, Head of UNEP FI

The Academy will become available in October 2022 and over the next 5 years aims to train hundreds of thousands of bankers worldwide with practical approaches to address the triple planetary crisis of climate change, nature loss, pollution and related social issues, and embedding these within the practice and profession of banking. Building the capacity and capabilities of banks and bankers in this way supports the alignment of banks’ strategies and operations with international sustainability frameworks.

The PRB Academy will be launched as a global online platform to reach as wide an audience as possible. It will make accredited professional training for banks on sustainability issues and the Principles for Responsible Banking widely accessible, including knowledge on implementing net zero Paris-aligned targets.

The curriculum has been created in consultation with banks and courses are exciting and interactive, designed to build from a basic understanding to application and rapidly upskill large numbers of employees. It will also provide learners with a practical understanding of how to apply responsible banking principles and practice in their roles.

“We are delighted to launch the PRB Academy with UNEP FI and GIZ. Together, we recognise that climate change and other sustainability challenges are global issues requiring innovative, collective and collaborative solutions. We will lead the way in ensuring socially purposeful, ethically professional, responsible banking becomes the standard.” – Simon Thompson, Chief Executive of the Chartered Banker Institute

The development of the curriculum and rollout of the program in three pilot countries – Egypt, India, and Mexico – is  supported by GIZ, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). Whilst the Academy itself is global in scope, the pilots and an online resource library to support in-country training bring a particular focus to developing and emerging economies.

On climate change, as Mark Carney, UN Special Envoy on Climate Action and Finance has stated, “every professional financial decision needs to take account of climate change.” The Academy enables every finance professional to have a basic knowledge and understanding of climate change and broader sustainability factors.

In order to see meaningful changes at the heart of organisations, every single bank employee needs to consider responsible and sustainable practices in their day-to-day decision-making. The PRB Academy is a game-changer in creating a global community of responsible bankers.

“The PRB Academy is a truly unique learning offer that will accelerate the transformation of the financial sector towards more sustainable business practices. It provides financial institutions with a consistent framework grounded in international standards while reflecting national context, which is as important to G20 countries as it is to our partners in the developing world. It is a great product of our strong partnership with the Chartered Banker Institute and UNEP FI.” – Axel Klaphake, Director Economic and Social Development, Digitalisation at GIZ

For more information about the PRB Academy and how individuals and organisations can register their interest ahead of the go-live in October 2022, please visit https://www.charteredbanker.com/prbacademy.html

Register your Interest

UNEP FI joins international coalition to develop guidance on blue bonds

28 June 2022

Five top international organisations jointly launch global guidance for bonds to finance the sustainable blue economy—a commitment to provide the global market with consistency and transparency.

On the sidelines of the UN Ocean Conference in Lisbon, UNEP FI, together with four of the top international organizations today announced their commitment to develop guidelines that would provide the global market consistency and transparency in financing the blue economy.

UNEP FI, the International Capital Markets Association (ICMA), the International Finance Corporation (IFC), the Asian Development Bank (ADB) and United Nations Global Compact are partnering to develop a global practitioner’s guide for bonds to finance the sustainable blue economy. It will aim to provide market participants with clear criteria, practices, and examples for blue bond lending and issuances. The five organizations are currently seeking further input from the financial markets, ocean industry and global institutions with the goal of producing the final edition in Autumn 2022.

Prior to the COVID-19 pandemic, the ocean (‘blue’) economy was expected to double from 2010 to 2030 to reach $3 trillion and employ 40 million people. Despite this size current investment falls far below what is needed to transition this to a sustainable blue economy. Blue finance has strong potential to close the financing gap and support a thriving sustainable blue economy, specifically, blue bonds are emerging as an innovative instrument with increased interest from investors, financial institutions, and issuers globally. However, the lack of universal frameworks as well as a robust pipeline of bankable investments are two barriers to achieving a sustainable blue economy (ocean panel, 2020).

ICMA provides the standards underpinning the global sustainable bond market with the Green and Social Bond Principles, the Sustainability Bond Guidelines, and the Sustainability-linked Bond Principles.  In 2021 98% of all sustainable bonds issued globally, were aligned to these principles. ICMA principles enable the issuance of blue-labeled bonds, but until now, blue issuers have not had access to global guidance for how to apply the ICMA principles for blue bonds. This has resulted in market fragmentation, investor hesitation, and slow growth of blue finance.

Bonds to Finance the Sustainable Blue Economy: a Practitioner’s Guide sees 5 organisations working together to provide the market with a cohesive guidance on blue project eligibility criteria, blue bond issuances, and blue lending. Support from the financial and private sector can drive a healthy, sustainable, and growing blue economy and this internationally recognized guidance will help build investor confidence and catalyze investments.

The Practitioners Guide on Blue Bonds:

  • Recognizes the critical need for increased financing to achieve Sustainable Development Goal 14 – to conserve and sustainably use the oceans, seas and marine resources for sustainable development – which encompasses a diverse range of sectors and project types.
  • Synthesizes ICMA principles, UNEP FI’s Sustainable Blue Economy Finance Principles and associated Blue Finance Guidance, the UN Global Compact’s Practical Guidance to Issue a Blue Bond and Sustainable Ocean Principles, the Asian Development Bank’s Ocean Finance Framework and Green and Blue Bond Framework, alongside the IFC’s Guidelines for Blue Finance.  Building on this foundation, the collaboration has further refined the blue economy typology and eligibility criteria, key performance indicators, and provided the latest case studies in the field.
  • Provides practical guidance for Corporate, Sovereign and Multilateral issuers to develop Blue Bonds. It provides eligibility criteria, step-by-step processes, and case studies for applying ICMA Principles to blue issuances.
  • Is now seeking further input from the financial markets, ocean industry and global institutions with the goal of producing the final edition in Autumn 2022.

Click here to discover UNEP FI’s financial community focused on the Sustainable Blue Economy, including leading guidance and principles for financial institutions.

Net-Zero Asset Owner Alliance welcomes Sovereign Wealth Fund of Gabon (FGIS)– the first African SWF

27 June 2022

27 June 2022, Geneva – In a momentous step in the alignment of country financial flows with the Paris Agreement, the UN-convened Net-zero Asset Owner Alliance welcomes the Sovereign Wealth Fund of Gabon (FGIS). With nearly USD2 billion assets under management, FGIS has committed to: reach net-zero greenhouse gas emissions in its portfolio by 2050, set intermediate targets every five years, and report on progress annually.

The FGIS is the exclusive manager of the Sovereign Wealth Fund of the Gabonese Republic. As a financial operator, the Fund is heavily involved in the implementation of leading projects key to economic diversification. The Fund and its portfolio companies are active in the areas of energy infrastructure, the promotion of Gabonese SMEs, urban development, eco-tourism and social sectors, particularly health.

Under the Paris Agreement, signatories have set Nationally Determined Contributions (NDCs) and have pledged to submit a new (more ambitious) round of NDCs every five years. In joining the Alliance, the FGIS will benefit from the Alliance’s guidance and tools on setting and meeting targets aligned with the 1.5C scenarios, as such it will be able to support the implementation of the Gabonese NDC.

By synchronising the timeline of its SWF’s decarbonisation to the elevation of ambition in its NDC, Gabon has made a credible commitment to decarbonise on all levels of the economy.

Akim Mohamed Daouda, CEO of FGIS, said: “As a country that has 88% of its territory covered with forests and is a net absorber of CO2 Gabon is a carbon sink. Our membership of the Net-Zero Asset Owner Alliance is in line with our commitment to remaining a carbon sink, as well as our desire to further promote green investment in Gabon to accelerate our development.”

Günther Thallinger, Board Member, Allianz SE and Chair, UN-convened Net-Zero Asset Owner Alliance, said: “The membership of the Gabonese Sovereign Wealth Fund (SWF) in the Net-Zero Asset Owner will undoubtedly support the country’s transition to meet the obligations of the Paris Agreement. The Alliance is especially excited to welcome an African SWF and looks forward to collaborating on scaling blended finance for climate solutions. We invite other SWFs to make the same step.”

About the UN-convened Net-Zero Asset Owner Alliance

The 73 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years; and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is part of the Race to Zero and supported by WWF and Global Optimism, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).

About FGIS

The Gabonese Strategic Investment Fund is the exclusive manager of the Sovereign Wealth Fund of the Gabonese Republic and of the non-allocated holdings of the Gabonese State portfolio. The Fund invests in the realization of shared prosperity for the benefit of the Gabonese population and future generations. As a partner of the government’s action, defined in the 2021-2023 Transformation Acceleration Plan, the Fund intervenes in three strategic sectors: infrastructure financing, support for SMEs and support for the social sectors. Its approach is guided by three fundamental principles: sustainability of impact, innovation and risk mitigation for its stakeholders.
Investing for a shared prosperity in Gabon.

Carbon pricing policy instruments need a radical redesign and competent implementation

22 June 2022

22 June 2022, Geneva: Ahead of the G7 Leaders’ Summit in Berlin (26-28 June), a new position paper by the UN-convened Net-Zero Asset Owner Alliance argues that carbon pricing must be supported by a mix of policy instruments including international coalitions to provide predictable price signals to businesses and ensure a just and equitable transition for consumers.

Carbon pricing has the potential to accelerate the low-carbon transition across a wide range of sectors, markets and businesses. But blunt, poorly designed instruments can have regressive impacts, such as carbon leakage across borders and a disproportionately negative impact on lower income earners when revenues are poorly distributed,  the Alliance warns.

The five guiding principles offered by the paper [see Notes to Editors] call for enabling conditions to build momentum for effective carbon pricing, ratcheting up the share of global GHG emissions that are covered by pricing mechanisms. Best practice in carbon pricing design includes international cooperation in the form of ‘climate clubs’, effective CBAMs (Carbon Border Adjustment Mechanisms) to limit freeriding, pricing systems that have appropriate coverage and ambition, and complementary policies such as higher investment in abatement R&D and the removal of fossil fuel subsidies that counteract carbon prices. .

Predictable price signals create stable and reliable incentives for investors, companies and consumers to adopt or develop low-emission technologies and practices. Meanwhile, market stability measures, such as the binding price corridor proposed by the Alliance last year, minimise price volatility.

Günther Thallinger, Board Member, Allianz SE and Chair, UN-convened Net-Zero Asset Owner Alliance, said:

“The sharp rise in energy prices is putting enormous stress on households and the business sector. Continued government support and relief is needed to bridge these difficult times. Yet, in addition to better managing the near term, we also need to better position ourselves to avoid this happening again in the future.

Accelerating the shift to net zero is essential in this regard. Structural change will need policy incentive, such as carbon pricing. These take time to implement and should not be delayed. This report sets out five design principles for the challenging times that we live in.”

If designed well, carbon pricing policy can not only drive decarbonisation in the real economy, but also minimise the negative distributional impacts on communities and households, thereby enabling a more just and equitable transition. Revenue recycling, for example, can be used to subsidise energy bills or help reskill workers in emission-intensive sectors.

Governments should also promote international cooperation on carbon pricing in several ways, including through the mechanisms outlined under Article 6 of the Paris Agreement, ETS linking and climate clubs. Positive incentives may include knowledge and technology sharing, financing and trade gains, while penalties could include CBAMs.

About the UN-convened Net-Zero Asset Owner Alliance

The 73 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years; and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is part of the Race to Zero and supported by WWF and Global Optimism, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).

Dates for the UNEP FI Global Roundtable 2022 announced

5 May 2022

UNEP FI’s 17th Global Roundtable (GRT), a major global agenda-setting event on sustainable finance, will take place virtually on 10-14 October 2022. Held under the theme of “Transforming Finance, Accelerating Change”, this online event will bring together decision-makers, experts and thought leaders on a virtual event platform to help shape approaches to integrating sustainability across the banking, insurance and investment industries.

UNEP FI’s Global Roundtable consistently serves as a pivotal event in finance industry action, providing attendees an opportunity to collaborate with peers and learn from global financial leaders; 2020 keynote speakers included Christine Lagarde, Amina Mohammed, Inger Andersen, Kristalina Georgieva, Mark Carney and Christiana Figueres to an audience of over 4000 finance professionals. Read event highlights from 2020 here.

This years Global Roundtable, held in partnership with Climate Action, will provide a platform for systemic impact and address critical emerging topics, including portfolio alignment, adaptation, impact management and connectivity between the finance sector and the real economy.

Find out more and register here.

How keen and ready is business for nature-related financial disclosure?

26 April 2022

The financial community is getting to grips with its pivotal and expanding role as a key driver of our sustainable future. Realities – such as half of global gross domestic product being dependant on nature and therefore vulnerable to spiralling nature loss – are sinking in and awareness of and action on nature-related financial risks have been growing.

Meanwhile, obligation is also being baked into multilateral agreements. Discussions are ongoing, but draft text of the UN’s new global nature goals – the post-2020 biodiversity framework – now includes clear wording on raising finance for nature, phasing out harmful investment and aligning financial flows towards a make-or-break, nature-positive future for the planet.

With access to a growing nature-focussed toolkit – including resources such as the Integrated Biodiversity Assessment Tool (IBAT), the Exploring Natural Capital Opportunities, Risks and Exposure online platform and the newly released Land Use Finance Impact Hub – investors are repositioning themselves to act for nature, but how well-primed are the businesses that they fuel?

A new report, released today from an expert team from the UN Environment Programme World Conservation Monitoring Centre (UNEP-WCMC), the UN Environment Programme Finance Initiative (UNEP FI) and the United Nations Development Programme, sets out to provide answers. It investigates how far businesses are interested in and ready for nature-related financial disclosures, and gathers insights from company leaders to help guide and refine the development of disclosure frameworks, including the Taskforce on Nature-related Financial Disclosures (TNFD).

Launched in 2021, the TNFD follows in the footsteps of the Task Force on Climate-Related Financial Disclosures (TCFD) in developing a disclosure framework that enables organisations to report and act on evolving nature-related risks.

By fostering knowledge sharing and collaboration on nature-related risks and opportunities, the TNFD plans to guide financial institutions and companies in putting considerations and positive action for nature at the heart of their risk and asset management and long-term planning.

Testing market mood: are corporates ready for disclosure?

In the Autumn of 2021, the UNEP-WCMC, UNEP FI and UNDP team conducted detailed interviews with the directors and business development and sustainability leads of 19, mostly global, corporates – spanning broad sectors including energy, mining, fashion and cosmetics and food and retail.

The interviewees represented front-runner companies, most of which are involved in initiatives such as the Science Based Targets Network, the World Business Council for Sustainable Development and the TNFD, and were approached because of their ability to give informed feedback around the benefits and challenges of embarking on nature-related business analysis and disclosure.

Today’s report, Are you reading for nature-related disclosure?, reveals that while large corporates are clearly beginning to trial nature-related assessment and monitoring methods, and starting to engage with the nature conservation sector, they are struggling due to knowledge gaps.

The companies interviewed acknowledged that nature-related dependencies made up the bulk of their financial risk, however, dependencies still remain poorly addressed in practice and in corporate reporting, and actions focus primarily on mitigating impacts.

The report found that companies in high-impact sectors – such as energy, mining and infrastructure – are actively finding ways to avoid, minimise, restore and offset impacts throughout their project implementation. Meanwhile, retailers and manufacturers are prioritising engagement with their supply chains to further their impact risk management. However, risk management processes are disparate, and companies are keen for new tools, datasets and guidance.

Charting the path for global disclosure of nature-related risk

Based on the expectations and insights from companies interviewed, the report makes various recommendations to the TNFD to guide its successful ongoing development, including:

  • TNFD taking the lead in progressing consistency across nature-related disclosure initiatives, and fostering a culture of collaboration and iterative improvement across finance and business communities
  • Strengthening the business case for addressing nature-related risks and opportunities
  • Triggering cross-sectoral engagement with supply chain agents to systematically improve transparency
  • Making use of ongoing business-focussed research from initiatives such as SBTN, to decide on appropriate indicators for nature-related disclosure.

Last month, the TNFD launched its first “beta” disclosure recommendations. These will now be consulted on, piloted and refined by a broad swathe of finance, business and other interested global stakeholders, with the final version of the inaugural framework due for release in autumn 2023.

UNEP-WCMC Deputy Director Corli Pretorius said: “Today’s report into market readiness highlights the efforts and ambition of companies to manage nature-related risks. These efforts will be crucial to create resilient landscapes and the long-term sustainability of operations, and are anticipating the implementation of the post-2020 global biodiversity framework.

“Early action must be encouraged, supporting more companies to understand and assess their nature-related risks, and to deploy nature positive strategies to seize business opportunities and reverse biodiversity loss.”

What’s next for businesses, financiers and nature-related disclosure?

Today’s report shows that while corporate understanding and activity on nature-related risks, opportunities and disclosure is still at an early stage, businesses are engaged and keen to progress.

As the TNFD works towards the next iterations of its beta disclosure recommendations, enabling stakeholders – including UNEP-WCMC, UNEP-FI and UNDP – will continue to provide businesses and financial institutions with best-available insights and guidance.

Following on from the assessment of corporate readiness on disclosure, sister reports for the benefit of businesses and financial institutions have also been issued: one on the availability and suitability of public nature-related data, and another on sector-specific considerations to help prioritise nature-related disclosure efforts.


Eric Usher, Head of UNEP FI said: “Financial institutions need clear information and market transparency to be able to assess risks and allocate capital at scale towards nature-positive solutions. This report shows the urgency of action still required for corporate disclosure, with the material risk of nature loss continuing to impact balance sheets, despite many companies not yet fully prepared for disclosure.

“UNEP FI looks forward to supporting its membership, bridging the knowledge gap, preparing the financial community for the upcoming global biodiversity framework, and running pilot projects to test and strengthen the TNFD.”

Escalating energy security crisis underscores imperative for accelerated net-zero transition

8 April 2022

A statement from the UN-convened Net-Zero Asset Owner Alliance:

As countries face critical choices in their energy strategies, amid heightened geopolitical tension and a rapidly warming climate, governments must ensure that energy security policies are compatible with net-zero scenarios mapped out by the International Energy Agency (IEA) or the Intergovernmental Panel on Climate Change (IPCC).

As confirmed by the latest IPCC Working Group III report on climate solutions, the world is still heading for an excess of fossil fuel-based energy use that will vastly exceed the carbon budget needed to meet the 1.5C Paris Agreement goal. This trend must be halted.

Choices made by policymakers now must not delay the longer-term adjustments that are needed for energy markets and infrastructure to align with the Paris Agreement and reach net-zero emissions, by 2050 at the latest.

Specifically, the development of new fossil fuel reserves will create lock-ins and stranded assets at an enormous opportunity cost. Among other things, governments must now rule out locking in long-term fossil fuel subsidies, which run contrary to net-zero policies and exacerbate market distortions.

In the short term, using all available energy resources – including the immediate scaling of energy efficiency – to diversify the energy supply must be a top priority for many countries, especially in Europe. In the medium to longer-term, the national security argument for accelerating the net-zero transition has strengthened considerably.

The only approach that can and will lead to long-term energy security is a massive scaling of low- and zero-carbon technologies – including new, breakthrough technologies – and infrastructure.

With the IPCC noting “sustained decreases” over the last decade in the unit costs of solar energy (85%), wind energy (55%), and lithium-ion batteries (85%), these are viable steps towards energy system resilience, a greener economy, the provision of green jobs, and the protection of businesses and consumers against future price spikes in oil and gas.

We echo the call by the UN Secretary General António Guterres to ramp up finance to help countries adapt to rising temperatures. Here, the Net-Zero Asset Owner Alliance’s work on combining and scaling public-private finance and its call to action for asset managers to collaborate on catalysing appropriate blended financial vehicles is supportive of the transition to a fairer net-zero world.

We will continue to engage with society to invest in climate change mitigation, adaptation, and clean technologies to ensure a just transition at an unprecedented scale.

This year, the Alliance is will be publishing a position paper to consider the implications of energy insecurity and net-zero emissions for the oil and gas sectors, following up on the publication of a position on thermal coal in 2020.

The Net-Zero Asset Owner Alliance Steering Group members are as follows: Günther Thallinger (Chair), Board Member at Allianz SE; Stephan van Vliet, CIO of Prudential; Lesley Ndlovu, CEO of African Risk Capacity; Charles Émond, CEO of CDPQ; Torben Möger Petersen, CEO of PensionDanmark;  Eric Usher, Head of UNEP FI; and David Atkin, CEO of PRI.

The Strategic Advisors include: Christiana Figueres, Global Optimism and Margaret Kuhlow, WWF.

About the UN-convened Net-Zero Asset Owner Alliance

The 71 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years; and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is supported by WWF and Global Optimism, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).

“Change rules of the game,” asks $10.4trn Net-Zero Asset Owner Alliance in new paper on investor action

7 April 2022

The UN-Convened Net-Zero Asset Owner Alliance releases a high-level paper outlining a forward-looking, systematic stewardship approach for investors that seeks to mitigate the existential risk of climate change. This stewardship approach focuses on how investors can leverage multiple tools of engagement to support changes to economic realities that align with a transition to a 1.5C future.

The discussion paper, The Future of Investor Engagement, draws attention to key engagement approaches which, when deployed in complement with corporate engagement, can catalyse systemic decarbonisation of the real economy. The Net-Zero Asset Owner Alliance, which holds more than $10.4 trillion combined capital and whose 71 members span five continents, proposes three key areas where climate-ambitious investors must expand and increase their stewardship and engagement efforts:

  • Sector/value chain engagement, whereby investors can leverage insights from corporate engagement to support solutions across industries and sectors, and identify systemic or regulatory hurdles obstructing decarbonisation, particularly in hard-to-abate sectors;
  • Policy engagement directly follows, where investors lend their voice, alongside other stakeholders, in calling on policymakers to address the economic, technological, and regulatory hurdles preventing decarbonisation at sufficient speed;
  • Asset manager engagement complements all other engagement streams, ensuring that asset managers’ activities in stewardship align with asset owners’ long-term interest in a transition to net-zero;

Günther Thallinger, Allianz SE Board Member and UN-convened Net-Zero Asset Owner Alliance Chair: “It’s high time to change the rules of the game. As asset owners, we need to look towards ways we can undertake impactful engagement to directly influence asset managers, stakeholders across entire sectors, and policymakers. Regardless of how ambitious investor commitments are, companies still operate within policy and economic frameworks. Systemic change to these frameworks is needed urgently to align with a 1.5C future, and this new paper presents the case for re-writing the rules of the game to do so.”

Sector and value chain engagement

Asset owners can play a unique role as conveners of sectoral and value-chain dialogues. The paper pushes for further development of engagement streams that bring together multiple stakeholders, including peer companies, suppliers, NGOs, regulators, and customers. Wide stakeholder dialogues help identify both collaborative opportunities to reduce emissions across value chains and regulatory and policy hurdles to achieving net-zero alignment. This type of engagement drives a level of accountability that is not always possible when engaging a single company, and it also addresses the scalability issues of corporate engagement by facilitating collaborative outreach and action from investors.

Policy engagement

Asset owners can use their direct and indirect influence to call on policymakers, including civil society experts and stakeholders, to develop and implement 1.5C aligned climate policy. This can be achieved by pushing for regulation that requires company disclosure of material climate information, incorporating climate lobbying expectations into existing engagement dialogues with companies, and supporting industrial policy that effectively addresses climate change generally.

Through these engagements, institutional investors’ long-term systemic interest in the health of the global economy can help counterbalance the sometimes-narrower interests of individual companies or trade associations.

Asset manager engagement

The paper’s final focus is on elevating asset owner’s engagement of asset managers. Asset managers work on behalf of their asset owner clients to choose portfolio companies, conduct corporate engagements, and cast votes through their stewardship programs. Additionally, they are important influencers of the business community through their own policy engagement and public discourse. The paper urges asset managers to re-examine their fiduciary duties and increase the ambition of their stewardship activities to reflect the existential risk of climate change to asset owners’ fundamental businesses.

In addition, the paper calls on asset owners to integrate the evaluation of asset managers’ systematic stewardship efforts related to climate into their ongoing selection, appointment, and monitoring (SAM) processes. Ultimately, asset owners should seek to increase asset manager ambition and accountability, pushing for stewardship activities that complement the direct and idiosyncratic lever of corporate engagement.

Systematic stewardship by investors is part of a series of critical steps being taken by the Net-Zero Asset Owner Alliance, reflecting its commitment to supporting a transition to a 1.5C future. All actions taken must drive towards a financial system that is resilient to systemic risk, while also better serving the collective interest of asset owners, the business community, and humanity in general.

 

About the UN-convened Net-Zero Asset Owner Alliance

The 71 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years; and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is supported by WWF and Global Optimism, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).

Hear from lead authors of the IPCC report on climate change mitigation

6 April 2022

At the launch of the latest IPCC report, UN Secretary General António Guterres warned that a 3.2C rise in global temperatures would see our planet hit by “unprecedented heatwaves, terrifying storms, and widespread water shortages.”

The Intergovernmental Panel on Climate Change’s (IPCC) Working Group III Contribution to the IPCC Sixth Assessment Report emphasises that while we have the technology and global capital to tackle the deepening climate crisis, we are running out of time.

Published on Monday, the report says greenhouse gas emissions must be reduced immediately to limit the world’s temperature rise to 1.5 degrees Celsius. Even if all the policies to cut carbon that governments had put in place by the end of 2020 were fully implemented, the world will still warm by 3.2C this century.

The world is heading for an excess of fossil fuel-powered energy generation that will exceed the carbon budgets needed to meet the 1.5C Paris Agreement goal. While the IPCC recognises the role of carbon dioxide removal (CDR) technologies and carbon capture and storage (CCS) to neutralise emissions from new power plants, it says the only realistic scenario to keep the planet below the 1.5C involves swiftly phasing out coal use. Furthermore, projected cumulative future CO2 emissions over the lifetime of existing and currently planned fossil fuel infrastructure without additional abatement exceed the total cumulative net CO2 emissions in pathways that limit warming to 1.5°C with no or limited overshoot.

The report backs a massive scaling of renewable energy technologies and infrastructure, improvements in energy efficiency, and reductions in energy consumption, with the IPCC noting “sustained decreases” in the unit costs of solar energy (85%), wind energy (55%), and lithium-ion batteries (85%) over the past decade.

On 12 April 2022, lead authors presented the report’s main takeaways and climate scenario findings in a UNEP FI/Principles for Responsible Investment convened webinar. Speakers also suggested concrete actions to move the needle towards 1.5C, and discussed mitigation pathways compatible with the objectives of the Paris Agreement. Watch the replay here.

UNEP FI and Finance for Biodiversity Foundation begin collaboration on biodiversity portfolio targets

Following deliberations on finance and biodiversity at the recent global biodiversity conference in Geneva, two major organizations strengthen their cooperation to accelerate positive action for nature from the world’s private financial sector.

UNEP FI and the Finance for Biodiversity Foundation today announce their intention to build synergies, to support banks and other private financial institutions in setting robust, science-based targets. Banks are already committed to set and disclose targets under the UN Principles for Responsible Banking, and so are financial institutions under the Finance for Biodiversity Pledge. This collaboration will drive convergence across the industry between approaches to setting targets for nature.

More than half the world’s GDP, 44 trillion USD of economic value generation, is moderately or highly dependent on nature – which is increasingly under threat. For 3 years running, the loss of biodiversity has been identified by the World Economic Forum’s Global Risk Report as among the top 5 risks by impact to the global economy. The loss of biodiversity could have significant economic and financial implications, heavily impacting the supply chains and raw materials that underpin companies.

The financial sector has a critical role to play in ensuring the stability of the economy by taking biodiversity into account in financing, underwriting and investment decisions. This new collaboration will focus on building capacity among financial players and provide industry-wide guidance for biodiversity metrics and measurement in finance.

Together, UNEP FI and the Finance for Biodiversity Foundation will:

  • Collaborate on biodiversity targets & metrics for financial institutions at the secretariat level and where relevant via our respective working groups.
  • Develop guidance on how to apply robust metrics and measurement techniques that underpin science-based targets on biodiversity, building from UNEP FI’s existing guidance materials on target setting, Finance for Biodiversity Foundation’s guidance on measurement approaches and input from signatories.
  • Facilitate exchange between banks, insurers and investor communities.
  • Support the work of the UN Convention on Biological Diversity and its parties to craft and implement a strong Global Biodiversity Framework that meets the ambitious policy goals of governments and increases the resources available for nature by supporting the alignment of private finance flows.

Jenn-Hui Tan, Global Head of Stewardship and Sustainable Investing, Fidelity International said, “Setting biodiversity targets allows stakeholders to hold banks accountable to being responsible stewards of capital. We welcome this guidance, which provides clarity on how different types of financial institutions can implement meaningful targets, and ultimately helps contribute to real world positive impacts on biodiversity.”

Dimitrios Dimopoulos, Head of ESG at Piraeus Financial Holdings said, “As both a founding bank of the UN Principles for Responsible Banking and a signatory of the Finance for Biodiversity Pledge, we welcome this collaboration which will further drive alignment across the banking sector on effective global approaches to measuring impact and setting biodiversity targets.”

Get involved

Interested parties can look to the ongoing webinar series held jointly with partner institutions:

  • Jan 6 | New green shoots: the latest innovations in nature finance | Watch the replay
  • Jan 11 | Getting started in nature, biodiversity and finance | Watch the replay
  • April 12 | We need to talk about biodiversity – how to engage with corporates? | Register now
  • April 26 | We need to talk about biodiversity – are corporates ready? | Register now

Quotes

Eric Usher, Head of the United Nations Environment Programme Finance Initiative said, “This collaboration is set to further consolidate industry-wide convergence on biodiversity targets, metrics and measurements. Our complementary expertise will bring further clarity for financial institutions on how to measure the impact of their portfolios on biodiversity, establish a baseline, and set effective, science-based targets. For the banking sector, foundations have already been laid through the UN Principles for Responsible Banking and this collaboration will serve to strengthen the approach in this complex area.

Anita de Horde, Coordinator of the Finance for Biodiversity Foundation said, “Financial institutions have a crucial role to play in preventing further biodiversity loss and conserving and restoring nature through their activities. Setting targets on nature will help in a long-term vision and short-term motivation to start acting, next to the measurement and disclosure of impact and dependencies on nature. That is why setting targets is part of the Finance for Biodiversity Pledge. We are looking forward to collaborate with UNEP FI to align on nature targets that are based on the best available scientific knowledge.”

About the UN Environment Programme Finance Initiative

The UN Environment Programme Finance Initiative (UNEP FI) is a global partnership bringing together the United Nations with more than 450 banks, insurers and institutional investors to develop the sustainable finance agenda. UNEP FI has established some of the most important sustainability oriented frameworks within the finance industry, including the Principles for Responsible Banking, the Principles for Sustainable Insurance, and the Principles for Responsible Investment.

About the Finance for Biodiversity Foundation

The Finance for Biodiversity Foundation was set up in March 2021. The aim is to support a call to action and collaboration between financial institutions in several working groups on reversing nature loss this decade. Prior to the establishment of the foundation, the Finance for Biodiversity Pledge was launched, a commitment of 84 financial institutions to call on global leaders and to protect and restore biodiversity through their finance activities and investments.

The Global Biodiversity Framework: why aligning financial flows is key

1 April 2022

2022 will be a crucial year for the world to come together to tackle biodiversity loss. After two years of unfortunate delays due to the Covid-19 pandemic, COP15 is expected to conclude in China in the second half of the year. This session aims to seek agreement worldwide to accelerate action needed to safeguard nature by defining the Post-2020 Global Biodiversity Framework, or ‘GBF’, for the decade ahead – a stepping stone towards the 2050 vision of “living in harmony with nature”. The groundwork for this visionary framework continued to be laid with last month’s negotiations in Geneva set to continue in Nairobi in June.

The success of the GBF hinges on the alignment of financial flows with nature-positive outcomes. For this reason, UNEP FI and other partners have been working to help ensure that the critical role of private finance is reflected in the Framework. The current financing gap of around US$4.1 trillion poses a huge challenge to the implementation of the Global Biodiversity Framework. It reveals weaknesses in the global economy, as acknowledged by the latest publication of the Network for Greening the Financial System (NGFS), which shows that nature-related risks could have significant macroeconomic and financial implications. As a result, there have been calls for the financial sector to stop conducting business as usual.

In mid-March, UNEP FI worked with the Finance for Biodiversity Foundation, the Agence Française de Développement (AFD) and the Swiss government to bring financial institutions together with negotiators for a productive exchange. The session examined the wording which could yield the largest amount of funding for nature and deliver the best value-add outcomes for nature from the financial sector. Following an engaging discussion, many stakeholders were pleased to see this critical topic being reflected in the latest draft of the framework (Goal D): “public and private financial flows are aligned with [the 2050 Vision and the goals and targets of this framework][biodiversity objectives]”[1]. This updated wording on alignment of financial flows reflects the approach of the Paris Climate Agreement (Article 2.1c) which calls for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” We are encouraged to see this language, and hope it is ratified later in the year by the global community.

Indeed, financial institutions can play a critical role in the global transition, and many have taken steps to do so through signing the Finance for Biodiversity Pledge, recognising the risks of ‘business as usual, and exploring the opportunities that a nature-positive economy presents. The financial sector, which is learning fast from climate and applying these learnings to biodiversity, can send encouraging signals to governments to evolve approaches, build economic incentives and accelerate the nature-positive agenda.

Following the session in Geneva, UNEP FI has compiled three key takeaways below:

  1. Addressing the loss of biodiversity is imperative to all stakeholders – policy makers and financial institutions alike. As all companies impact and are dependent on nature, biodiversity loss and the degradation of nature are creating significant risks for businesses and negative implications for long-term asset values. Therefore, all sectors of the economy, from farmers and manufacturers to banks and insurers have a mutual interest to ensure that appropriate language is embedded in the Global Biodiversity Framework. Panelists agreed that all parties should act on halting and reversing biodiversity in order to mitigate risks and ensure the global economy continues to have access to a broad and diverse array of natural resources, for the benefit of people and the planet.
  2. Alignment of financial flows to nature does not compete with resource mobilisation, but rather complements them. It means managing risks, impacts and dependencies, thereby making the whole economy stronger, in the interest of biodiversity and finance. It also means bringing more finance for nature through incentives such as acceleration funds and blended finance facilities, as well as official development assistance (ODA), to close the funding gap. Innovative financing mechanisms can also be part of the picture, such as a proposed levy on products derived from digital sequencing information based on genetic resources. Panelists voiced that the public and private sector should both endeavour to bridge the financing gap by re-directing financial flows to simultaneously eliminate negative subsidies, reduce harmful impacts on biodiversity and increase resources for positive solutions that help restore nature, such as upgrading tax systems to align with biodiversity goals. Encouraging financial flows to nature should also be a prioritised policy objective for governments and financial market actors.
  3. The Global Biodiversity Framework to be adopted later this year should maintain mention of private finance. Inclusion of private finance in the framework not only sends a strong signal to financial institutions to recognize the significance of the topic and start taking action, but it also helps them build the case for participating in the biodiversity conversation, increasing financial flows towards the protection of nature and biodiversity.  As the negotiation of the Global Biodiversity Framework continues, we hope to see more active involvement from financial institutions to gain a deeper understanding on the intersection between finance and biodiversity, and to re-direct financial flows to nature alongside policy makers.  

UNEP FI, as a long-standing partnership between the UN and the global financial sector, will continue to create opportunities for cross-sector partners to meet and work together on nature topics, as well as help the financial sector prepare for the framework and build capacity across their organisations. UNEP FI continues to create training, guidance and tools for financial institutions, including the Principles for Responsible Banking’s Guidance on Biodiversity Target-setting and the PRB Biodiversity Community, rapidly taking banks from theory to practice as well as innovative online tools to assess risks and exposure to biodiversity loss.  

[1] (bracketed text signifying where elements are still under negotiation) 

Investor Climate Action Plans & net zero targets: Opportunities for progress in 2022

30 March 2022

By Hamish Stewart, Senior Associate, Climate Change, PRI & Rahnuma Chowdhury, Investor Climate Action Lead, UNEP FI

This blog highlights the need for high-level climate pledges to be accompanied by net-zero targets and detailed climate action plans and suggests ways for investors to turn bold pledges into action in 2022.

This year holds great potential for increased ambition of global capital markets to align with the climate change goals of the Paris Agreement. In particular, investors, banks and insurers are now working to align with the IPCC 1.5C scenarios, and the IEA’s Net-Zero 2050 scenario for the global energy system. In the lead up to COP26, more than 450 institutions responsible for over $130 trillion of capital committed to transition the global economy to net zero. These net-zero pledges were issued via a number of sub-sector net-zero investor alliances. PRI and UNEP FI convene a number these alliances including the Net-Zero Asset Owner Alliance (NZAOA), Net-Zero Asset Managers Initiative (NZAM), Net-Zero Insurance Alliance (NZIA), Net-Zero Banking Alliance (NZBA), and the Net-Zero Investment Consultants (NZICI).

Investors are now seeking to add credibility to their net-zero pledges. This will require portfolio-level targets and climate action plans via robust frameworks such as the NZAOA Target Setting Protocol, the Science-Based Targets Initiative Framework, and others. For investors, the climate action plans tool will be an important reference point. The Investor Climate Action Plans (ICAPs) framework provides a simple planning tool to get started with this process for both investors who have already set net-zero pledges and for those who seek to identify ways to operationalise them. It is also useful for investors who still need to create a more systematic approach to climate action before they are ready to set a net-zero target.

Turning 2050 targets into near-term investment and capital allocation plans

While implementation is not without hurdles, some members of the net-zero alliances are now making their climate pledges real with interim targets and structured climate action plans. A number of institutional investors and banks have committed to bring forward decarbonisation targets to 2030, with the NZAOA setting highly ambitious targets for as early as 2025. Over 100 of the world’s largest asset managers and asset owners have already set and publicly disclosed decarbonisation targets for 2025 or 2030.

Many financial institutions (FIs) are introducing operational changes at their own firms that are required to translate long-term emissions reductions targets into a real economy transition away from fossil fuel-based energy and towards sustainable energy sources. Investors who are leading on net zero are increasingly setting out technical and operational climate action in detailed plans.

Regulators turn up the pressure on net-zero targets and climate action plans

More of the global regulatory community is turning its attention to how FIs intend to take action on the voluntary pledges made at COP26. The UK Competition and Markets Authority Green Claims Code and the Financial Conduct Authority (FCA)’s evolving expectations on transition plans for financial institutions indicate that investors need to set targets and publish climate action plans to implement net-zero goals. This process will include more near-term targets and the integration of carbon pricing and other climate metrics into existing corporate financial reporting.

While some governments are still catching up with increased investor ambition, ratcheted up NDCs are expected in time for COP27. This should encourage all members of the net-zero alliances to turn their bold public pledges into concrete actions. In order to move the global economy towards net zero, investors need to set detailed quantitative, ambitious near-term targets, and publish plans to operationalise these targets.

Steps to operationalise climate pledges

Once targets are set, investors will need to develop implementation plans that involve board-level and executive management strategic planning. Backward-looking analysis will not be adequate to achieve progress on net-zero targets. The need for more action-orientated forward-planning will challenge incumbent CFOs, CIOs and executive management teams. Once targets are set, investors will need to develop plans to implement corporate action and asset allocation decisions.

ICAPs Expectations Ladder and business transition planning for net zero

The ICAPs Expectations Ladder and accompanying Guidance document provides investors with clear expectations for issuing and implementing comprehensive climate action plans and quantitative targets across the following key areas: investments, corporate engagement, policy advocacy, investor disclosure and governance.

Climbing the ladder

The ICAPs Expectations Ladder outlines a process for setting and implementing high-ambition, robust net-zero actions for investors wherever they are at on their climate journey. It does so by setting out clear expectations for investors across a “ladder” of four tiers denoting increasing levels of ambition with Tier 4 for those just starting to take action on climate to Tier 1, which is for the net-zero leaders. The tiering system is perhaps most valuable as a pathway for investors who are not yet committed to net zero to systematically progress towards increasing ambition until they reach Tier 1 and are able to join the sub-sector alliances. The Expectations Ladder helps investors meet and implement the Race to Zero criteria.

ICAPs is linked to a range of resources produced by the investor net-zero alliances. As a result, ICAPs is aligned to and, indeed, complementary to initiatives such as NZAOA and NZAM. For example, while target setting frameworks such as the NZAOA Protocol and SBTi’s forthcoming approach give guidance on ‘targets’, Investor Agenda ICAPs are the place to find the appropriate guidance on robust and detailed ‘plans’ to implement these. Investors may use ICAPs to:

  • Develop a standalone climate action plan and/or net-zero transition plan to operationalise climate pledges, and targets
  • Assess their current approach to managing climate change risk and opportunity to benchmark areas where they have made progress on climate and areas for further improvement
  • Communicate their current activities and future plans to stakeholders
  • Understand what elements of the ICAPs to embed into their existing climate change strategies and disclosures, including TCFD disclosures, board compensation packages, target setting strategies in sustainability reports

As indicated by the final point above, ICAPs Expectations Ladder are not intended to be an additional reporting requirement for investors. Instead, they are predominantly intended to help investors identify clear actions they can take to start or rapidly accelerate their journeys to net zero.

In order to help investors get on and then climb the ICAPs Expectations Ladder towards net zero, PRI and UNEP FI will be running a series of ICAPs masterclasses in April, June, and September. The workshops will focus on targeted areas of climate action such as stewardship action on sector pathways and policy engagement and advocacy. COP26 proved that the financial sector is ready to commit to net zero. As the world prepares for COP27, now is the time to turn those commitments into action.

Key terms

  • A net-zero pledge/commitment – a pledge is a statement by the head of the organisation to reach net zero by 2050 or sooner.
  • A net-zero target – a target is a short-term (2025, 2030, and so on) quantitative goal which in our view should align with decarbonisation requirements by IPCC to be credible.
  • A climate action plan – a plan is a detailed, comprehensive, and transparent narrative and set of actions which will enable the financial institution to meet its target. All credible plans must be centred on concrete targets.

If you would like to learn more about Investor Climate Action Plans, including the Investor Agenda ICAPs Masterclass workshop series, please get in touch here.

Legal Framework for Impact: The rationale for investing for sustainability impact

29 March 2022

Investors have both a profound responsibility and a huge stake in the maintenance of a sound financial system. That stability relies upon the health of our environmental and social systems – which are currently under threat. International frameworks like the Sustainable Development Goals and the Paris Agreement set out the plan to preserve and enhance those systems but the global investment sector is currently not holding up its end of the deal. We explain how our joint project is clarifying the legal responsibilities of investors to consider the sustainability impact of their decision-making and provide examples from jurisdictions around the world. We also explain how we are targeting policymakers to deliver legal frameworks that can support sustainable economies that are fit for purpose.

The IPCC unequivocally attributes climate change to human influence. Economic activity, and the financial decisions that underpin it, are one of the primary drivers of that influence. The financial sector has to manage risks linked to climate change, biodiversity loss, social and economic inequalities and human rights – but that alone is not enough.

To address these issues, investors need to increase positive (and decrease negative) outcomes arising from their actions. Investment practice is evolving to this end and policymakers and regulators need to ensure that legal frameworks evolve too – to ensure that investors’ duties and discretions facilitate investing for sustainability impact.

Investors’ duties are moving from a consideration of ESG risk to an obligation to consider sustainability impact

Beneficiaries are increasingly demanding that their investments are managed sustainably, and investors are enhancing their efforts to deliver solutions. However, despite significant industry advances in recent years, investment activity continues to generate negative impacts on a scale that our planet and society cannot sustain. It is also not yet sufficiently funding activities that can deliver on global goals, including those set out in international treaties like the Paris Agreement. The issue however is not a shortage of capital but rather the inadequate deployment of capital. Whilst common practices in sustainable investing address some of society’s most pressing challenges such as climate change, we need to place stronger emphasis on the core issue which is to fundamentally change the behaviour of investee enterprises towards a more sustainable mode of operating.

Until now sustainability factors have been taken into account by investors predominantly from a risk and return perspective. The 2005 Freshfields Report and a subsequent project, Fiduciary Duty in the 21st Century, moved the dial in this respect and argued that ‘investors that fail to incorporate environmental, social and governance (ESG) issues are failing their fiduciary duties’. But if the financial system is to play its part in achieving major societal goals, mainstream investors need to consider the impact from all their activities and legal frameworks, and financial systems need to adapt to facilitate this.

The joint project ‘A Legal Framework for Impact’ led by PRI, the Generation Foundation and UNEP FI explores how the global investment sector could strengthen its response to ESG issues by pursuing positive sustainability impact in the real economy. It looks at sustainability factors not merely from a risk-return perspective but rather emphasizes the need to utilize capital allocation, stewardship and policy engagement to steer investee enterprises towards increasing positive sustainability outcomes and decreasing activities that have a negative impact on our environment and society. For investors this means a shift in their thinking in favour of impact, and it requires goal setting, taking action accordingly and measuring that impact on a regular basis.

The report ‘A Legal Framework for Impact’, written by the law firm Freshfields Bruckhaus Deringer, was published in July 2021 and provides an in-depth analysis of laws governing the investment sector with regards to investing for sustainability impact, covering 11 jurisdictions. With the publication of the report, the project team, PRI, UNEP FI and the Generation Foundation, entered Phase II which concentrates on the implementation of policy reform options outlined in the report with a predominant focus on five key jurisdictions including Australia, Canada, the EU, Japan and the UK, as well as supporting investors to carry out their existing impact duties.

What is ‘Investing for Sustainability Impact’?

A Legal Framework for Impact sets out what is meant by ‘investing for sustainability impact’ (IFSI), a conceptual net that captures any approach whereby an investor intentionally seeks to pursue assessable positive sustainability outcomes (including the reduction of negative sustainability outcomes).

IFSI differs from ESG-integration: where the latter focuses purely on management of risk, the former is about actively pursuing an impact goal. These impact objectives might be targeted as a means to meet financial objectives, or in some cases, as an end in themselves alongside financial returns.

Such forms of stewardship and collective action are already visible and include examples such as the UN-convened Net-Zero Asset Owner Alliance, which has committed to transition investment portfolios to net-zero greenhouse gas emissions by 2050.

What does the law say?

In most jurisdictions, the primary goal of investors is generating a financial return for beneficiaries. But this is far from the end of the story. There are obligations and opportunities for investors to seek improved sustainability impacts, and a process to assess the possible materiality of those is required in all jurisdictions. Accordingly, where sustainability impacts pose a material risk or opportunity, investors will likely be required to take account of those sustainability impacts and in most contexts, there will be at least some sustainability impact they would be obliged to take action on. The report also sheds light on cases where investors could pursue sustainability goals in their own right, in parallel to financial return goals, acknowledging that these cases are more limited.

For example, the guidelines for Japan’s largest asset owner the Government Pension Investment Fund (GPIF) provide scope for investing for sustainability impact if GPIF reasonably believes it will improve investment returns in the long term.

In Canada, financial regulators allow mutual funds to be set up for sustainability impact objectives, and likewise the EU and UK regimes allow this for the establishment of Undertakings for Collective Investment in Transferable Securities (UCITS). Canadian legislation explicitly allows for pension funds to incorporate non-financial criteria ‘to formulate an investment policy or to make an investment decision’ according to the Trustee Act and a similar provision is provided in the Pension Benefits Act (Manitoba).

Such powers are not limited to pension funds and mutual funds. In the Netherlands and the UK, for example, life insurers may create products with an objective to invest for sustainability impact.

Why we need policy reform and what options are available

Despite the significant requirements and opportunities for investors to address real-world impacts, impediments to investing for sustainability impact remain. These challenges are multi-layered and, in some cases, interdependent, covering areas of regulation, policy and market practice. The Legal Framework for Impact report therefore considers a range of policy reform options to expedite the process to a more sustainable and inclusive investment sector which accounts for outcomes and meets 21st century needs. These policy options broadly envisage a) adjustments to investors’ core legal duties and discretions and the way these are understood and b) changing the circumstances in which these are applied to create an enabling environment and adjust underlying market features so that investors can recognize and discharge their existing legal duties.

Phase II of the Legal Framework for Impact project focuses on developing ideas and options for reform into policy proposals specific for the jurisdictions selected for further work. This will entail engagement with the investment community, legal professionals, policymakers and regulators. Especially in light of the ongoing COVID-19 pandemic, building back better needs to be sustainable and inclusive with concrete and coordinated policy reform options.

‘The Sustainable Development Goals and the Paris Climate Agreement are our best chance for not only a livable but also a brighter future. Reaching these goals requires an updated financial system that is fit for purpose – one in which assessing and accounting for the sustainability impact of investment decision-making is a core part of investment activity.’ Inger Andersen, Executive Director, United Nations Environment Programme

Learn more and visit: www.unepfi.org/legal-framework-for-impact/

The Net-Zero Asset Owner Alliance renews its call to asset managers for climate-focused blended finance vehicles

22 March 2022

Having received a positive response to its initial Call to Action to Asset Managers – released in February 2021 – the Net-Zero Asset Owner Alliance launched the Renewed Call to Action to Asset Managers for Climate-focused Blended Finance Vehicles.

The purpose for this renewal is to organise another set of presentations of blended finance product offerings and give visibility to the latest innovative vehicles. Thus far, the Alliance has received 20 submissions, five of which were shortlisted and presented to the Alliance members in September 2021.

The Call to Action has been developed in the context of the persistent need for capacity-building and knowledge-sharing in this field, which was raised in the Scaling Blended Finance Discussion paper (published in November 2021). The Call also comes out in the context of the German presidency of the G7, which put investments in sustainable infrastructure at the forefront of its policy agenda.

The relevant criteria and the process of selection are outlined in the Call. Please note that the selection for presentation should not be interpreted as an endorsement by the Alliance nor as a commitment to contribution by any Alliance member.

This Call to Action is ongoing until further notice; therefore, we encourage asset managers to keep submitting their blended finance vehicles.

 About the UN-convened Net-Zero Asset Owner Alliance

The 71 members of the UN-convened Net-Zero Asset Owner Alliance have committed i) to transitioning their investment portfolios to net-zero GHG emissions by 2050 consistent with a maximum temperature rise of 1.5°C above pre-industrial levels; ii) to establishing intermediate targets every five years; and iii) to regularly reporting on progress. The Alliance is convened by UNEP’s Finance Initiative and the Principles for Responsible Investment (PRI). The Alliance is supported by WWF and Global Optimism, an initiative led by Christiana Figueres, former Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC).

What conclusions should financial institutions take from the latest IPCC report?

3 March 2022

This week the Intergovernmental Panel on Climate Change (IPCC) launched the second part of its 6th Assessment Report, drawing on seven years of research from peer-reviewed scientists. The report provides an alarming summary of the increasingly devastating impacts of climate change on societies and economies, their vulnerabilities and how we may adapt to inevitable climate change. UNEP FI’s Paul Smith provides a summary of the key implications for financial institutions. 

Last August, the first part of the IPCC’s report on the physical science basis of climate change provided unequivocal evidence that human influence was responsible for global warming. The report also gathered further evidence of the direct impacts of climate change on the world’s natural cycles, underlining the impacts on natural systems including more extreme and frequent droughts, extreme weather, heatwaves, wildfires, landslide, to name but a few. This first report also outlined a set of “shared socio-economic pathways” (SSPs), which aim to estimate potential climate impacts according to different climate, social and economic scenarios.

This second report outlines how far climate change has affected societies and ecosystems, with future impacts expected to be more devastating and pervasive than reported in the IPCC’s 5th Assessment Report, published in 2014. Ecosystem impacts, in particular, are far greater than previously reported, with many ongoing irreversible changes, such as species’ extinction, habitat loss, changes to hydrological regimes and impacts on coastal, mountain and polar ecosystems. The United Nations’ Secretary General, Antonio Guterres, has described this report as ‘an Atlas of human suffering and a damning indictment of failed climate leadership’. We pick out some of the key messages from this week’s report for the global finance sector:

1. Climate change will affect all regions, with impacts more far-reaching than previously thought. Some of these impacts have already reached the limits of adaptation and will be irreversible, which underlines the importance of acting now.  For financial institutions, no one sector will be unaffected by climate change: there are no ‘safe havens’ from climate change.

2. Risk underpins the report’s framework for understanding the increasingly severe, interconnected and irreversible impacts of climate change. Understanding future climate impacts in the future requires modelling which is itself based on parameters and assumptions. Risk depends not only on modelling of climate hazards, but also exposure and vulnerability to these hazards – variables which can be controlled by adaptation measures. As discussed later, finance sector responses to climate impacts depend on assessments of these forward-looking climate risks and preferably disclosure of these risks to enable investors, governments, and society to better understand the potential impacts of climate change on businesses. Risk should also inform adaptation solutions: risk mitigation and risk sharing are at the heart of the report’s framing of adaptation and resilience, creating a collaborative framework for institutions from the public and private sectors, together with civil society.

3. Climate change is creating complex, compound and cascading risks that are far more difficult to assess and manage than individual physical climate risks. Multiple risks can interact and amplify risks from individual climate risks, e.g. rising sea levels with increasingly frequent and more powerful storms (Zscheischler, J. Westra, S., van den Hurk, B.J.J.M. et al., 2018), or the interaction of climate risks with other risks such as pandemics (Ranger N, Mahul O, Monasterolo I. 2021).  Such complex risk mechanisms can increase the complexity of modelling and assessment and are rarely integrated into climate risk assessments, potentially underestimating the potential financial impacts of medium- to-long-term climate change.  Furthermore, adaptation solutions that address single risk factors and locations in isolation often lead to maladaptation, which is difficult and expensive to unwind.

4. The mid- to long-term impacts of climate change may be multiple times higher than currently observed, with the economic costs of climate change rising exponentially with temperature rise. Reducing emissions should therefore remain the top priority with a focus on action by 2030 in line with low-overshoot pathways. High overshoot will lead to increased climate risks for vulnerable regions and societies as well as irreversible impacts in vulnerable ecosystems, such as polar, coastal and mountain regions.  This means implementing and delivering ambitious 2030 greenhouse gas emissions targets.

5. Vulnerability to climate impacts is also widespread and disproportionately affects already poor and marginalised communities and regions. The report estimates that 3.3 to 3.6 billion people live in contexts that are highly vulnerable to climate change, with over 1 billion at increased risk from coastal impacts alone.  Billions more will also be exposed to climate-sensitive transmissible diseases, with dengue fever highlighted as a particular risk due to longer seasons and wider geographic distribution.  Vulnerability is exacerbated by marginalisation, poor governance, poverty and unsustainable resource use.

6. Transformational adaptation is necessary to deliver successful climate resilient development. Just as economics need to transform over the next decade in order to deliver the emissions reductions necessary to limit global temperature rise to +1.5°C by 2100, a more integrated and holistic approach is required to meet adaptation needs.  Current approaches are often piecemeal, localised and incremental, designed only to respond to short-term risks or current impacts.

7. Climate-resilient development is proposed as an approach to achieve development goals while integrating adaptation solutions and reducing greenhouse gas emissions. This approach has multiple pathways and emphasises flexibility to adjust to changing circumstances.  Climate resilient development also emphasises recognition of the role of ecosystem services and the importance of inclusion across all sections of society.  However, the window of opportunity for climate resilient development narrows with every 0.1°C rise in temperature: +1.5°C constitutes a ‘critical level’ above which development pathways are increasingly constrained.

8. The role of government is critical. The impacts of climate change cut across sectors and geographies, requiring a strong coordinating role for government. Public institutions can also create the enabling environment for adaptation action through “institutional frameworks, policies and instruments that set clear adaptation goals”. The report underlines the key role for instruments, including budgetary allocations, statutory planning, monitoring and evaluation frameworks.  Perhaps most importantly for the finance sector, the report highlights economic instruments intended to address market failures, such as climate risk disclosure.

9. Climate change adaptation cannot be delivered without consideration of biodiversity and ecosystems. Climate change has already caused substantial damage to ecosystems, with losses irreversible in many cases. Pollution, unsustainable land-use and overconsumption are exacerbating these pressures. Temperature rise will increase the rate of extinction – for example, the report estimates that very high extinction risk in biodiversity hotspots will increase tenfold as temperatures rise from +1.5°C to +3°C. Given their multiple roles in adaptation and mitigation, ecosystems are crucial to climate resilient development, as well as providing important services for water, food, bioenergy and public health.  Effective Ecosystem-based Adaptation (EbA) can reduce climate change risks to people, biodiversity and ecosystem services, with multiple co-benefits including carbon sequestration.

10. Financing adaptation is a huge challenge and will require cross-government support with the development of new business cases for drawing in private sector flows. As UNEP’s Adaptation Gap Report 2021 highlighted, the annual costs of adaptation in developing countries alone will be $140-300bn by 2030 ($155-330bn in 2020 prices). These are relatively dated figures given that they were originally estimated for UNEP’s 2016 Adaptation Gap report, and no comprehensive calculations have been made since then, but it could be expected that those estimates have increased given that climate hazards are becoming more frequent and more extreme than previously thought – as highlighted in the IPCC’s Working Group 1 report last year. Meanwhile, COP26 last year highlighted the failure to deliver $100bn climate finance for both mitigation and adaptation by 2020, as promised in the 2009 Copenhagen Accord. Clearly the gap is significant, widening with every passing year, and governments are unable to meet this gap or even the more modest targets agreed over a decade ago. Meanwhile losses from climate-related impacts continue to mount – 2021 losses were estimated by Munich Re to be the second highest in history – and these financial impacts are a clear risk to societies, businesses and the economy.

Private finance therefore must play a role and despite the challenges of financing adaptation, there are green shoots, some of which are highlighted in the extended report (IPCC 2022). Estimating risks from physical climate impacts is an important starting point and a handful of open data providers are pulling together the forward-looking information necessary to estimate risks, such as OS-Climate, ESG Books, while certain central banks are supporting scenario analysis and climate stress testing to better estimate financial risks from climate impacts. Going one step further, financial institutions need better methodologies to integrate these risks into asset valuations. Green, sustainable and resilience bonds are vehicles whose proceeds can be used to finance activities with positive climate adaptation goals, based on qualitative guidelines such as the Climate Bond Initiative’s Climate Resilience Principles, which forms the basis for the European Bank for Reconstruction and Development’s 2019 Climate Resilience Bond. A qualitative methodology has been developed by the Coalition for Climate Resilient Investment (CCRI) to price future physical climate risks into major investments – initially focusing on large-scale infrastructure. Where this approach goes further is in estimating the costs of adapting those projects, including consideration of nature-based adaptation solutions, and effectively building a business case for investing in adaptation.  Insurers are also a fundamental part of the puzzle, with parametric risk insurance products such as the African Risk Capacity and Caribbean Catastrophe Risk Insurance Facility, enabling post-disaster responses.  Combined with public and private sector investment, insurance can even be a driver of climate resilient development, such as the V20 Sustainable Insurance Facility.

With the announcement of the Glasgow-Sharm El Sheikh work programme to define a Global Goal on Adaptation at COP26, and Egypt hosting COP27 this November, international climate dialogue will increasingly focus on climate-vulnerable countries. Consequently, UNEP FI’s members have also underlined the need for greater action on adaptation. The Principles for Responsible Banking (PRB) will this year be developing a set of recommendations for integrating climate adaptation as an impact area for the PRB, while our TCFD programme will scale up its work on physical climate risk assessment.