Risk & Economy » Climate change » COP26: A consistent framework will “energise” ESG efforts as firms place high hopes on new ISSB

The 26th UN Climate Change Conference of Parties (COP26) sees business leaders placing high hopes that decisions will be made on harmonising and mandating global sustainability disclosure standards to meet investors’ information needs.

Consistent standards will “energise” companies in their efforts to reaching climate targets and act as “catalyst” to enhance their reporting framework, says Tim Wakeford, VP of financial product strategy at Workday.

“One of the reticence companies have at the moment is they don’t know exactly what they’re supposed to report on. […] I would like to see COP26 really start to drive the corporate agenda around reporting so that there is consistency to what is required,” he says.

“[A decision will allow] companies to start working towards a standard and make it easier for stakeholders to assess the performance of companies across ESG through the lens of a consistent reporting framework.”

Similarly, the decisions made at the conference will help direct investment, says George Favaloro, US head of South Pole.

The harmonisation and prioritisation initiatives that will take place at COP26 can help direct capital and set priorities, he says, as well as highlight areas corporates should either invest in due to business opportunities or divest because of the risk of stranded assets.

A report by the WWF and Metabolic found investors are at risk of losing £6.19trn due to declining ocean health and climate change.

Creating accountability

Wednesday’s announcement from the International Financial Reporting Standards (IFRS) on the go-ahead of the International Sustainability Standards Board (ISSB) is a step towards a consistent framework.

The new board, to be based in Frankfurt, will develop a comprehensive global baseline of sustainability disclosure standards that address companies’ impacts on sustainability matters relevant to assessing enterprise value and making investment decisions.

“The formation of the ISSB will bring together all these [different] frameworks and build a single set of norms globally so companies can use that in order to build their reporting on the impact of climate change and their business,” says Jill Klindt, SVP and CFO at Workiva.

“That’s very important for us because it will help us internally standardise how we would report on some of the sustainability information but as a business, will help us align the functionality that we need in order to support our customers.”

The ISSB will be a merger of the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB) –  a process expected to be completed by June 2022.

“The ISSB will allow like-for-like assessment between businesses’ true ESG credentials and progress towards them,” said Andromeda Wood, vice president of regulatory strategy, at Workiva. “This will make it possible for companies to demonstrate their support for – and their own roles in delivering against – the goals of COP26.

“Critically, it does so on a global scale, and consolidates the various reporting standards in place currently but it demands that countries fully commit to the ISSB standards; everyone must be accountable to make the ISSB the success it needs to be.”

A single set of sustainability standards will help boost accountability in the industry, adds Klindt.

Another barrier to holding companies accountable is the voluntary approach used in many climate pledges. This is something world leaders are under pressure to address.

It was revealed earlier this year that the Science Based Target Initiative (SBTi) removed 119 companies, including Honda Motor Company and National Express, from the initiative since 2015 due to failing to set climate goals set by the SBTi.

Additionally, 29 percent of the UK’s largest businesses have not yet made any commitment to reach ‘net zero’ and only 19 percent have a detailed strategy outlining how they will reach their net zero targets by 2050, according to a report by the WWF.

“It is six years since the Paris Climate Agreement set a target to keep global temperature rise to below 1.5 degrees Celsius and most of the UK’s largest businesses aren’t doing nearly enough to curb their emissions to make our planet safe for future generations,” said Tanya Steele, WWF’s CEO, in a statement. “We cannot rely on voluntary measures to tackle the greatest crisis of our time.”

Pricing carbon

Industry experts and business leaders are also paying close attention to any decisions made on Article 6 of the Paris Agreement, which seeks to set rules to strengthen carbon markets and create a global carbon offsetting mechanism.

“The Paris Agreement was very comprehensive but not very detailed in how it would actually be implemented and operationalised,” says Frederic Gagnon-Lebrun, business director at South Pole.

An agreement on the rules could encourage interest in the market for voluntary carbon offsets and boost investment and liquidity. If fact, cooperative implementation through Article 6 compatible carbon markets could generate up to $1trn per year in financial flows by 2050, according to research by the International Emissions Trading Association (IETA).

A final decision will allow market mechanisms to be operationalised and fully functional to contribute towards the objectives of the Paris Agreement, says Gagnon-Lebrun.

Similarly, Nusrate Ibrahim, head of corporate governance and internal controls at Diamond Developers says decisions must be made to drive harmonisation of existing carbon pricing instruments.

“When there is a number that is going to come into the financial statements, it will create an alertness [among businesses] because it’s going to affect my bottom line.”

Clarity around the price of carbon will help with develop carbon reduction plans in businesses’ value chains, says Favaloro.

Similarly, agreements made around Article 6 present a “huge opportunity” for companies who provide emission reduction solutions and technologies, adds Gagnon-Lebrun

A poorly designed and implemented framework could hinder the achievement of the Paris goals but a well-designed framework could further them.

An agreement on Article 6 can shift capital investment from developed to developing regions, in turn improving local sustainability results, and present incentives for further technological innovation, found the IETA’s report.

Mobilising finance

The third goal of COP26 is to mobilise finance and calls for developed countries to raise at least $100bn in climate finance per year. However, a report by the OECD found that climate finance fell short of $20bn in meeting the goal last year.

The decisions made around the third goal and the impact it has on the global economy will be interesting to see, says Wakeford.

“The concept of mobilising finance and starting to move money around the world to poorer countries has the ability to invest in sustainable practices,” he says.

“Does that talk to tax rises? Does that talk to levies on developed countries to go into individual countries, if it does what kind of taxes? Does that impact businesses as a corporation tax rises, income tax rises for employees?”

Klindt highlights how monitoring the progress of mobilising finance and investments comes back to improving the quality, quantity, and comparability of reporting – something to be set by standards.

ESG takes centre stage

COP26 was delayed due to the pandemic, however, it provided an opportunity for many organisations to get to grips with ESG.

The delay was a “blessing in disguise” as it allowed ESG activity to come alive, says Ibrahim.

“In the big picture, it hasn’t really made a big difference,” says Gagnon-Lebrun. “At the same time, doing it now has enabled governments to take into account the economic recovery packages to play in the climate policy.”

However, Wakeford says it prolonged the ability to reflect on climate progression and as such, any underlying issues have been able to grow.

“The value of these COP conferences is effectively a regular touchpoint so delaying a year, we’re finding out things that a year ago would have caused us to make decisions.”

The attention around COP26 will trickle down to organisations, with employees and investors paying close attention to how companies react to the outcomes of the event this year, says Klindt.