Australia
1. COP26 resulted in a range of announcements and new initiatives on climate change.
The UN Climate Change Conference 2021, better known as COP26, met with mixed reactions. Headlines and activists highlighted the weaknesses of the final agreement, though it reiterated a temperature rise of 1.5°C as the global target and resolved outstanding issues pertaining to the implementation of the Paris Agreement1.
Key agreements resulting from the conference included2:
- a commitment by over 130 countries to tackle deforestation and land degradation;
- a formal pledge, led by the US and EU, to reduce methane emissions;
- a range of announcements focused on reducing the use of coal power;
- a decision by some countries to shift from financing fossil fuels to renewable alternatives; and
- a commitment by some countries to shift towards 100% zero-emissions cars and vans – though notably, this final commitment was not made by the US, Germany or China.
Key implicationsThere were points of particular interest for investors, including the announcement of the Glasgow Financial Alliance for Net Zero, marking another step forward for the financial industry in tackling climate change; the ongoing emphasis on transparency regarding carbon emissions and related metrics; and progress on a global carbon market (see news item below). Joshua Kendall, Insight’s Head of Responsible Investment Research and Stewardship, offered his views on the conference and its outcome, along with an overview of Insight’s efforts with regard to climate change. Read his opinion here. |
2. The International Financial Reporting Standards (IFRS) Foundation announced the launch of the International Sustainability Standards Board, which intends to “deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions”3.
This is the next step in an extended process undertaken by the IFRS Foundation, including a consultation conducted late last year, to which Insight responded4. Emmanuel Faber, former CEO and chairman of European food producer Danone, will lead the initiative.
The ISSB will carry out a public consultation in 2022, focused both on the first proposed standards and on which items should be on the ISSB’s initial work plan.5
Key implicationsStandards proposed by the ISSB will be highly influential. It is notable that the ISSB is developing a corporate disclosure standard on sustainability information “relevant to assessing enterprise value and making investment decisions”6 – with some commentators seeing this as a setback for advocates of an approach that goes further, perhaps in line with the EU’s drive to encourage greater investment in sustainable activities, which includes new sustainability disclosure requirements. This is related to a wider debate on the concept of ‘double materiality’: the idea that it is not only important to consider the materiality of a specified factor (such as climate change) for a company, but also the materiality of a company’s activity for that factor. Focusing only on the former is generally more accepted across global markets, while the latter is more contentious. The Global Reporting Initiative, which is either recommended or mandated by many jurisdictions for their ESG reporting7, has made double materiality a “guiding principle” in its standards8. |
3. IOSCO (the International Organization of Securities Commissions) called for oversight of ESG ratings and data providers, issuing 10 recommendations for regulators to consider when developing relevant frameworks9. The recommendations include promoting transparency regarding underlying methodologies, ensuring appropriate procedures for managing conflicts of interest, and improving communication between data providers and the entities they cover.
Key implicationsRegulatory oversight could help investors gain clarity on how various ESG ratings providers differ in their approaches – the UK government is considering whether such oversight is necessary, for example (see UK news section). However, with companies following inconsistent approaches to disclosures on ESG factors, greater standardisation among such disclosures may be necessary before ESG ratings can be meaningfully improved. Similar points were noted by the OECD in a recent paper10. Varying methodologies and gaps in data led Insight to develop its own proprietary ESG and climate risk ratings, known as Prime. Based on data from multiple inputs and adjusted using our in-house expertise, we believe they more accurately and reliably reflect the risks that companies and countries face than other alternatives. More information is available here. |
4. Progress was made at COP26 on global carbon markets. Delegates of c.200 countries reached an agreement on the three key mechanisms of Article 6 of the Paris Agreement, with decisions made on the eligibility of activities for inclusion within the global carbon market mechanism; the approval process for, and issuance of, credits; the making of corresponding adjustments to the emissions accounts of host states; and how to deal with legacy projects and credits under the Kyoto Protocol's clean development mechanism11.
Key implicationsA global carbon market has long been seen as a key mechanism through which emissions might be reduced. The latest agreement is likely to drive the further development of carbon accounting, and the future of both the ‘compliance’ (mandatory) and voluntary carbon offsets markets. It builds on work by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), an initiative by Mark Carney, UN Special Envoy for Climate Action and Finance, which earlier in the year released its proposals for new standards for trading carbon offsets12; and the Voluntary Carbon Markets Integrity Initiative (VCMI), which launched in July 2021 and specifically focuses on addressing credibility concerns “by working on a number of critical gaps in voluntary carbon market integrity”13. |
5. The International Energy Agency (IEA) stated that the current pace of the global energy transition is falling short of the 1.5°C target. In its latest annual World Energy Outlook (WEO), which is widely regarded as one of the most influential contributions to ongoing discussions around energy and climate change, the IEA said that even if all countries fulfilled their pledges, warming would be limited to 2.1°C by in 210014.
Published before COP26, the IEA said the four key priorities for action over the next decade should be to deliver a surge in clean electrification, realise the full potential of energy efficiency, prevent methane leaks from fossil fuel operations, and to boost clean energy innovation.
Key implicationsThe WEO is a highly influential publication, with its projections used widely to judge progress towards net-zero emissions targets and assess companies’ alignment with Paris Agreement targets. The WEO’s analysis highlights the challenges with achieving net-zero targets – and the difficult decisions investors may need to make if they are seeking to tackle climate change with their portfolios. |
