The tone was set by Mahmoud Mohieldin, the UN Climate Change High-Level Champion for COP27, who used LinkedIn to publish his expectations: “Every company, bank, insurer and investor will have to adjust their business models, develop credible plans for the transition and implement them.” He acknowledged the growing ambition of the sector but said “unlocking systematic change will require coordinated and ambitious commitments across the financial system”, and that financial institutions “need to wake up to the investment opportunities in some emerging markets and developing economies”.
Transition plans
Transition is one of the key issues. The UK Transition Plan Taskforce published its consultation on its Disclosure Framework and accompanying Implementation Guidance. The group was set up to develop the ‘gold standard’ for private sector climate transition plans in the UK. The Glasgow Financial Alliance for Net Zero (GFANZ) also launched its report on Financial Institution Net-Zero Plans which provides guidance on how financial institutions can develop credible transition plans.
There was a ground-breaking move by the UK which announced the introduction of Climate Resilient Debt Clauses (CRDCs) by UK Export Finance into its loan agreements. This is the first time an export credit agency has offered such clauses, which will give low-income countries and small island developing states a chance to defer debt payments in the event of catastrophic climate events. A ‘model term sheet’ of CRDCs was also published on the International Capital Market Association’s website for use in private sector lending, and Multilateral Development Banks also agreed to explore the use of such clauses.
Carbon markets also received a lot of attention yesterday. Tuesday saw the launch of the Africa Carbon Markets Initiatives (ACMI), which intends to develop a roadmap to scale African voluntary carbon markets. John Kerry, the US climate envoy, announced a new global carbon trading initiative called the Energy Transition Accelerator. Its aim is to direct private funds to finance developing nations’ transition to clean energy by selling carbon credits to companies looking to achieve net zero.
However, it faced criticism as another way to simply delay the structural changes that are required to achieve net-zero and being open to risks of greenwashing. The International Organization of Securities Commissions (IOSCO) said both regulated and voluntary carbon markets had fallen short of their objectives. It made recommendations to improve transparency in the markets and also asked whether voluntary markets should also have more oversight from regulators.
Critical spotlight falls on transition plans
GFANZ was the key private sector finance initiative going out of last year’s Glasgow COP. It includes the Net-Zero Insurance Alliance (NZIA) whose members have committed to transition their underwriting portfolios to net-zero greenhouse gas emissions by 2050. For some these are ambitious targets but several major insurance groups have gone further, including Allianz and Zurich, who have set their target as 2030. GFANZ was not without its critics in the days leading up to COP27, particularly given it dropped its partnership with the UN’s Race to Zero. Focus will now be on how these targets are incorporated into credible transition plans, especially in light of the GFANZ’s guidance published yesterday and the wider UK Transition Plan Taskforce’s consultation.
Clamp down on greenwashing
As companies set their own targets to reflect these wider initiatives, and come to realise the commercial benefits of marketing their green credentials to consumers and investors, regulators have stepped up their efforts to manage climate related risks and clamp down on greenwashing. As we reported yesterday, this trend to clamp down on greenwashing is set to continue and has already been a key theme at COP27:
- In 2022 the Prudential Regulation Authority started to actively monitor firms against its supervisory expectations on climate change, and last month issued a Dear CEO letter summarising the capabilities it expects regulated firms to demonstrate.
- The Financial Conduct Authority continues to increase efforts to prevent greenwashing. In July 2021 it warned CEOs and ESG investment fund managers that financial products with ESG or financially sustainable characteristics should be accurately disclosed and marketed. We have seen the introduction of the new ESG Sourcebook into the FCA Handbook and associated rules on climate related financial disclosures, as well as updates to the Listing Rules. In July this year the FCA completed a review of disclosures by premium listed issuers, reminding firms of their expectations. In September it wrote to benchmark administrators, highlighting particular concerns with disclosures for ESG benchmarks. The FCA followed this up with a consultation on proposals for sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing. This would put the UK ahead of the European Union which is still struggling to forge a consensus on its green taxonomy that was first proposed after the Paris COP in 2015.
- The Competition and Markets Authority has launched an investigation into greenwashing by three firms in the retail and fashion industry. It has indicated that this is only the beginning, with its focus moving to other sectors in due course.
- The Advertising Standards Authority continues to deal with many advertising greenwashing complaints, stretching across a wide range of industries. Its recent decision that claims made by HSBC were unqualified and omitted important information about the bank’s investments in carbon intensive industries, and were therefore misleading, is a reminder that the financial services sector is by no means outside of the reach of the ASA.
Investors and consumers are engaged too. The trend in shareholder activism is continuing, and there are existing legal avenues that can be exploited where investments have been miss-sold or consumers misled. Interest in greenwashing claims is expected to grow, especially in light of compulsory climate related financial disclosures, which, since 6 April 2022, now apply to most of the UK economy. Liability for greenwashing is a very real and quickly evolving legal risk, especially for regulated firms. Companies need to ensure their green claims are not misleading, and seek legal advice where necessary.
