Start-ups, investors, and climate activists are keeping an eye on November. Here's Why.
On November 6th, and running for 12 days, country leaders and delegates from nearly every corner of the world will convene on Sharm El-Sheikh, Egypt, for the COP27 Climate Change Conference.
Marking three decades of study, collaboration and intergovernmental commitment, the United National Framework Convention on Climate Change (UNFCCC) conferences are seen as the pinnacle convention on climate action, the outputs of which intending to lead the world closer to the 2040 Net Zero targets and controlling global warming for the long term.
This will be welcome news to many, those hopeful for outcomes indicating marked improvement in GHG emissions. Yet others like starts-ups, investors and climate advocates watch with caution trying to digest the paradoxical reality of skyrocketing climate pledge investment (up $10 trillion in four years alone) against failed emissions targets and enforcement inertia.
Helping these factors converge could spell long-term success for all three groups.
Given the scale of representation and economic interests, it’s unsurprising that a major part of the conferences centers on negotiation - from scientific measurements and reporting standards to regulatory oversight and disclosure mandates. Why are these agreements so critical? Because the absence of cohesion and cooperation in these reporting metrics means we will continue to fail the UNFCCC climate change targets, at best.
How is progress reported?
Following the signing of the Paris Climate Treaty in 2015, and for every five years, the UNFCCC members commit to increasingly ambitious targets on the path to reducing carbon emissions. In 2020, the members provided their first long-term plans to meet the agreed targets and together committed to a new reporting framework charting their progress: the enhanced transparency framework (ETF).
Starting in 2024, under the ETF, countries agreed to report transparently on climate emissions, mitigation efforts, and ongoing commitments. Critically, the ETF also provides for international procedures for the review and oversight of the submitted reports, which could take the form of legislation at a country level – where needed.
The UNPRI (read more below) and other equally important, if not abundant, four-letter-acronymed-partners gather, analyze and publish data (voluntarily supplied) by the member nations and report this annually to the UNFCCC and a vast network of financial and government bodies.
Image source: Wikimedia creative commons license
The overall findings are made public at a country level and an association level - including to the Carbon Disclosure Project - a respected, non-profit group responsible for transparent disclosure to investors, companies, cities and regions to help them to make informed decisions and better manage their climate impact.
What does this mean for businesses?
Manufacturing, energy, agriculture, transport and many other industries are major contributors to greenhouse gases. So too, are small, family-run businesses, when taken as a collective. Truly every industry can have a sizeable carbon footprint. Taking a top down approach, it was sensible for the reporting and oversight to start with biggest emitters and prioritize from there. As such, rules for emissions and waste reporting typically started with big corporations. But given most of the rules on GHG reporting were largely voluntary, the question became how do you motivate big, powerful industries to comply – and to be transparent with their data? The answer was the banks.
With estimates that ESG assets under management will exceed $40 trillion this year, and with more than 90% of S&P500 companies publishing ESG reports (McKinsey & Co) leading with banks and investment firms pays major dividends for climate action and for investor growth. Extraordinary gains can be seen both in reliable returns for green stocks and in pressuring start-ups and businesses seeking large funding or IPO to ensure their ESG reporting is authentic and their targeted commitments are verifiable.
Why should start-ups, SMEs, and pre-IPO businesses care? Because VC and PE funding now and in the future will likely come with an ask to provide evidence of an ongoing and measurable ESG plan before they can be considered a viable candidate for investment.
Why Standardized Reporting is Key
Enter the UNPRI. Considered the gold standard for responsible financial reporting, the UNPRI both gathers and produces data on the implications of environmental, social, and governance factors on global markets and investments for its international bodies.
Core to their responsibilities is the establishment of ESG reporting principles for investors globally (VCs, Private equity, banks, insurers, and so on). The principles are now cited in numerous stock exchanges, trade instruments, company, and governmental policies. The principles include the following commitments:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
Their work (with contribution from partners) has aided the much-needed framework for standardized inter-country reporting, the insights of which contribute to the ongoing development of common legislative terms and oversight to be applied at a country level.
To track progress, each year they collate, digest and publish a myriad of investor, market and country-level ESG reports, findings and recommendations and feed this back to the UNFCCC.
Criticisms of government inaction and the need to move from “Tell Me” to “Show Me” reporting
In an effort to drive accountability for responsible reporting, and in the lead-up to COP27, the UNPRI published a report this month Trends in ESG Reporting for Investors covering 120 ESG reporting instruments across five global reporting initiatives and nine key jurisdictions (chosen for their significant economies and impact on global trade): Australia, Canada, China, the European Union, France, Hong Kong, Japan, the UK and the US.
What they found were substantial gaps in the reporting and legislative oversight country to country – making efforts to combat the climate crisis all the more harder.
Here are their key findings:
Investment-related ESG reporting is growing, but not everywhere needed
Across the sampling of 9 jurisdictions, compliance rankings became evident, with the United States and Canada trailing other developed nations:
- High-regulation jurisdiction: the EU, France*, Hong Kong and the UK
- Medium-regulation jurisdiction: Australia, China and Japan
- Low-regulation jurisdiction: Canada and the US
Key jurisdictions need to move faster to evidenced-based reporting: from “Tell me” to Show Me” reporting and to establish anti-greenwashing laws to mitigate false claims
ESG issue-specific reporting is growing (GHG reporting versus sex trafficking, for example) with new reporting bodies springing up at speed. Whilst this is seen as positive, it’s fair to say it’s a huge and evolving group of players to engage, consolidation is needed.
Global consensus on many reporting issues is a long way off
*France has additional ESG legislation over and above their EU commitments
Added to these challenges is the growing number of scientists and climate activists who are sceptical of financial markets cashing in on “green-stamped” pledge funds - further frustrated that the hard work of enforcing controls for measurable improvement across complex ESG matters is being lost by the vast (and growing) scale of the burgeoning oversight committees.
So What Can Investors and Climate Advisors Expect from COP27?
It’s been an unprecedented year concerning climate change - whether measured in drought days, pump prices, or investment dollars. COP27 will be convening after a summer of unforgiving heatwaves, record-breaking temperatures in normally moderate climates, and devastating droughts across the US (Western states), Europe (UK and numerous parts of Europe) and Asia (China).
Noteworthy topics like the below are expected to be center-stage:
Supply chain security issues following microchip shortages due to drought, grain and oil shortages brought on by war, commodity price spikes in everyday essentials following COVID.
The US’s behemoth investment of over $500 billion (collective across three new laws) to combat climate change and what they'll want in return
The IPCC reports that countries are far from reaching the targets set in the Paris Agreement and middle and high-income countries are critical to closing the gap.
Climate advisors believe this COP27 meeting may be the final opportunity for members to meet and take real action on the climate crisis or fall short again in achieving critical Net Zero targets by 2040. In preparation the UNPRI is prioritizing bold action and the need for heightened commitments across these five key themes:
Closing the commitment gap: more action, less talking
Addressing the energy "trillema": energy security, affordability and climate change must be treated together - developed nations need to step-up
Mobilizing climate financing: focusing on re-prioritizing the climate financing - whether public or private pledge funds and rewarding carbon reducing efforts
Joining the dots between climate, nature and biodiversity: focus on science and scaling nature-based solutions
Inclusion, solidarity and global partnerships: financing and material support for vulnerable communities in emerging fossil-fuel reliant economies.
It's fair to say mandatory disclosures have been slow to take seed, but with the eye-watering sums being invested in climate pledge funds, and other investments touting ESG-readiness, financial bodies have set the pace to make legally mandated disclosures a reality - and at times faster than their local government bodies. The EU is on pace to mandate legal disclosures (versus voluntary disclosures) from January 2023, Australia and parts of ASEAN are cracking it, the US SEC is still discussing it, but with pressure from the TCFD (www.FSB-TCFD.org ) which is represented by the G20, I suspect the proposed legislation will come into play soon to avoid embarrassment of being one of the largest UN members without legal reporting requirements.
Many of the other large, developed nations have some form of government reporting - but much of it remains voluntary and non-standard, country to country. Groups like the Climate Disclosure Standards Board (www.CDSB.net ) are working hard to establish common metrics and reporting to ensure countries are actually meeting their committed goals across the board (and not just for financial trades) - and equally as important that they're not lying about it to investors (greenwashing) which could later pose a major issue for stock values.
Given the slow progress in meeting their collective 2040 targets, it may prove that the financial bodies hold the power to transparent reporting and meaningful compliance enforcement. The “show me” reporting mindset is growing rapidly amongst investors and big businesses globally where the key to unlocking funding for new starts-ups and enterprises may lie in how green they truly run their businesses.
Kelli Wilks is Management Consultant at Spring CPO where she advises clients on ESG priorities, procurement transformation, negotiation strategies, and supplier performance.