Climate policy developments and data disclosure frameworks
Part 1: Regulation
In 2018, the European Commission unveiled its “Action Plan for Financing Sustainable Growth”. The Action Plan is a roadmap to raise the role of finance and investment in achieving a sustainable economy.
It is based on the recommendations of the EU’s High-Level Expert Group on Sustainable Finance (HLEG), a group of 20 senior experts from civil society, the financial sector, and academia, set up in 2016. The Action Plan also incorporates the framework recommendations of the TCFD (see Data & Disclosure in Part 2).
Reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth
Manage financial risks stemming from climate change, environmental degradation and social issues
Foster transparency and long-termism in financial and economic activity
Since the announcement of the EC’s 2018 Action Plan, there have been several climate developments that are important for investors to understand. Among them are the IPCC report in 2018 and the Net Zero Alliance, and crucially the climate benchmark regulations that kicked off in 2019.
An important outcome of the European Commission’s Action Plan, and the associated work undertaken by its Technical Expert Group (TEG), was better green labelling for financial products. New regulations for climate benchmarks and ESG disclosures have particularly important implications for investors and the low-carbon transition.
At the crux of this amendment to Benchmark Regulation is the creation of new investment benchmarks designed to help investors decarbonise their portfolios, and align with a 1.5°C warming scenario. Based on the recommendations of the TEG, these indices should be constructed to match a decarbonisation trajectory consistent with the goals of the Paris Agreement.
To improve carbon disclosures and meet these regulatory requirements requires rigorous and credible underlying data.
This means standardised data sets, which can be reported in a consistent way to allow for meaningful comparisons. Carbon disclosure can be mandatory (the EU’s Non-financial Reporting Directive), or voluntary (SBTi and CDP, explained in this chapter), and can come from specialised sources such as the IEA or government data.
3https://www.cdp.net/fr/info/about-us/what-we-do
CDP is widely considered the gold standard for dependable and standardised carbon data.
It’s a UK-based non-profit founded in 2000, and runs a global carbon disclosure platform on which thousands of companies, cities and states submit their emissions and other climate-related data every year. In 2019, over 8,400 companies – accounting for more than 50% of the global market – submitted carbon disclosures to CDP. Participating companies fill in a comprehensive questionnaire covering emissions, climate change, water security and deforestation.
Over 515 investors with US$106 trillion in assets requested companies disclose through CDP on climate change, water security and forests3
Over 8,400 companies reported through CDP on climate change, water security and forests3
The TCFD or the Task Force on Climate-Related Financial Disclosures was another product of the 2015 United Nations Climate Change Conference.
Created by the G20 group of countries, formally launched by the Financial Stability Board (FSB) under Chair Mark Carney, the TCFD is headed by Michael Bloomberg, co-founder of Bloomberg LP.
The TCFD’s goal is to empower companies across industries with an effective framework for comparable climate-related disclosures and help them align with the needs of market participants and climate investors.
Targets are crucial to effectively transition to a low-carbon economy.The Science Based Targets initiative (SBTi) was established as a collaboration between the CDP, the United Nations Global Compact, World Resources Institute and the World Wide Fund for Nature, to add scientific rigour to the process of target-setting.
Using the latest climate science, the SBTi defines Science Based Targets (SBTs) to help companies set their GHG emission reduction targets to align with the goals of the Paris Agreement, those being global warming well below 2°C above pre-industrial levels with efforts to limit to 1.5°C.4
4Source: https://sciencebasedtargets.org/companies-taking-action/
How companies set Science-Based Targets
Science-based target setting is a top-down approach. Companies can choose between three different global warming scenarios:
SBTs help by allocating a ‘carbon budget’ at the company level. This carbon budget is the total amount of CO2 a company can emit before warming exceeds a specific temperature threshold, in the context of a global carbon budget for all emitters.
The Intergovernmental Panel on Climate Change estimated a remaining global carbon budget of 570 gigatonnes of CO2 to limit warming to 1.5°C with 66% probability.5 Within this global budget, individual companies must be allocated carbon budgets in order to collectively reach that goal.
5https://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf
The gold standard forcarbon emissions reporting. 8,400 companies do so.
Recommendations for environmental disclosures that combine governance, strategy, and risk management with climate targets.
Frameworks to help companies project decarbonisation trajectories and link them to temperature scenarios.
The gold standard for carbon emissions reporting. 8,400 companies do so.