Trends & Insights

New developments towards a sustainable, standardised financial system

New climate standards, frameworks, and guidelines emerged at COP27. We've rounded out the top ones that finance professionals should know about.

COP27 was bittersweet.

The good news: Developing countries scored a victory with the announcement of the loss and damage fund. Through this fund, rich nations—which are largely responsible for climate change—can compensate poorer nations, who are least responsible yet suffer the most from the impact.

The bad news: Hoped-for commitments around ending greenwashing and increasing restrictions on carbon markets were not announced—even though experts agree that the target to keep global warming under 1.5C is out of reach.

The notable news: Although the final COP27 agreement was described as “disappointing”, “inadequate”, “lacking in ambition”, and a “missed opportunity to act on climate change”, there were a number of noteworthy announcements that started important conversations for finance professionals.

New standards and frameworks

One of the things businesses struggle with most is deciding which reporting framework to use when measuring their progress towards sustainability goals.

That’s because there are numerous codes and guidelines on ESG reporting available but no universally accepted standards just yet. This makes it a challenge to know which reporting framework is right for your business.

Well, now we can add two more to that list:

The Transition Plan Disclosure Framework

Many companies have said they want to become net-zero, but early plans to reach these goals have been of varying quality and often don’t give enough information about what is being done in the short term.

This makes it hard to judge the credibility of individual plans or compare approaches to net-zero transition planning across multiple entities, says the UK’s Transition Plan Taskforce (TPT).

The TPT wants businesses and financial firms to come up with high-quality plans that show how they will reach their goals through short-term actions and greater accountability.

To help businesses with their planning, the TPT launched the Transition Plan Disclosure Framework, a set of national regulations that it hopes will be the “gold standard” global template for companies transitioning to net-zero carbon emissions.

The document includes guidance on the following:

  • What a good transition plan should cover
  • Three guiding principles: Ambition, Action, and Accountability
  • A strategic and rounded approach to transition planning
  • Disclosing a transition plan
  • The TPT Disclosure Framework

The Framework is open for public comment and should come into effect next year. These recommendations will inform the UK’s regulatory requirements on transition plan disclosures.

The Wave 1 framework

Global trade is critical to achieving the Sustainable Development Goals (SDGs), advancing inclusive development, and helping to mitigate climate change.

But there are some challenges to overcome to ensure that global trade supports sustainability.

One challenge is that, while there are various standards for sustainable goods and suppliers, there is no widely accepted method of measuring the sustainability of a global supply chain.

Similarly, no standards have been developed to define sustainable trade in a clear and robust manner.

The International Chamber of Commerce’s (ICC’s) Wave 1 Framework aims to close this gap by defining a minimum viable, yet fully workable and implementable, framework. It will initially be applied to the textiles industry before expanding more widely.

It sets out an agreed industry definition of sustainable trade, considering both environmental and socioeconomic factors, and covers the entire lifecycle of an international trade transaction.

Wave 1 relies on a simplified scoring system to allow it to be readily tested by banks and corporates.

Calls for overhaul of international finance institutions

A group of 10 major economies, including all of the G7 group, has called for a fundamental reform of the World Bank and the International Monetary Fund (IMF). They say the current models—which were created 80 years ago—are no longer appropriate in this time of global crises.

The World Bank and IMF loan or grant money from rich, industrialised nations to developing countries to help alleviate poverty or to help the countries recover from disasters. But the model was designed for a different age.

With climate change causing more floods, droughts, fires, and hurricanes, developing countries—already saddled with debt—need money to recover from climate disasters and invest in preparing for the next one.

The proposals aim to make the finance institutions fit to address global challenges, including climate action, biodiversity conservation, and pandemic preparedness.

If implemented, the proposed reforms would make significantly more money available to developing countries to mitigate the effects of climate change, deploy those funds faster, offer struggling countries lower interest rates, and allow them to pause debt payments following major disasters.

A reformed World Bank and IMF might also attract more private investment to help developing countries prepare for disasters and transition to renewable energy. The new loss and damage fund may be the catalyst for this.

More clarity for transitioning to net-zero

Although experts agree that the goal to limit global warming to 1.5C is slipping, if not already out of reach, they also say that every emission removed from the atmosphere is progress.

Here are three initiatives announced at COP27 and designed to fast-track the transition to net-zero.

Net-Zero Data Public Utility

Philanthropist Michael Bloomberg announced the Net-Zero Data Public Utility, a plan to create a common model for climate-related corporate data. This would tether companies, ratings agencies, and market index services to a single shared standard that will allow all stakeholders to easily access and interpret climate commitments and actions taken.

The Utility will provide an open-access, “single source of consistent, core climate data that all providers, actors, and users can build on” and will advise on the key data needed to support and accelerate the transition to a net-zero economy.

The plan was co-authored by French President Emmanuel Macron, and the Climate Data Steering Committee (CDSC) includes major international standards bodies, policymakers, and data service providers such as Bloomberg, Moody’s, S&P Global, the London Stock Exchange Group, Morningstar, and MSCI.

The UN and ISO publish Net-Zero Guidelines

The United Nations and the International Organization for Standardization (ISO) launched the Net-Zero Guidelines to help organisations construct net-zero emissions plans.

Described as a core reference text and practical guide, the Guidelines aim to “bring global actors into alignment, ratchet up ambition, and address greenwashing”. More than 1,200 experts from over 100 countries contributed to the Net-Zero Guidelines.

They will also serve as a reference point for other standard setters, such as the International Sustainability Standards Board (ISSB), which wants to create a global baseline for corporate climate disclosures.

Download the guidelines here.

UN recommendations to stop greenwashing

The UN High-Level Expert Group on Net-Zero Commitments of Non-State Actors (HLEG) published new recommendations that businesses, financial institutions, cities, and regions should satisfy to be able to call themselves net-zero contributors, saying the planet cannot afford delays, excuses, or more greenwashing.

The recommendations set tight definitions for what it means to be net zero and net zero‐aligned, including having both long-term pledges and short-term targets.

Recommendations for non-state actors are clear that:

  • They cannot claim to be net-zero while still investing in new fossil fuel supply or engaging in deforestation.
  • They cannot buy cheap carbon credits instead of immediately reducing absolute emissions across their entire supply chains. High-quality credits should be used over and above these efforts to help decarbonise developing countries.
  • They must align their governance and business strategies with their climate commitments and link executive pay to climate action and demonstrated results.

Read all ten recommendations here.

The Business of Climate Recovery

And finally, the World Business Council for Sustainable Development (WBCSD) published The Business of Climate Recovery: Accelerating Accountability, Ambition and Action report, which serves as a business implementation agenda.

It sets out specific interventions, proposals, and policy ideas for accelerating the global decarbonisation of business, which it says can “radically advance the international climate change agenda in the next five years”.

The Accountability section highlights three priorities:

  • Alignment of the corporate carbon accountability system,
  • The establishment of strong foundations for the carbon accounting system, and
  • The development of a Global Carbon Accounting Aggregation Mechanism to link corporate data to national emission reduction progress reports.

The Ambition section calls for:

  • Companies to set credible emissions reduction targets
  • Business partnerships to implement carbon pricing
  • The acceleration of net-zero transition in business and industry
  • Unlocking the potential of Natural Climate Solutions

The Action section identifies key new action areas to scale progress in key industries:

  • Develop transition pathways and investment plans with National Oil Companies
  • Develop guidance and methodologies for avoided emissions to accelerate innovation of business solutions

Read the full text here.