October 18, 2021

Investors urge governments to act on climate, including risk disclosure

Cooley LLP

+ Follow Contact

Send

Embed

Cooley LLP

A group of 587 institutional investors managing over $46 trillion in assets have signed a new statement calling on governments to undertake five priority actions to accelerate climate investment before COP26, the 26th United Nations Climate Conference in Glasgow in November. The statement, the 2021 Global Investor Statement to Governments on the Climate Crisis, was coordinated by The Investor Agenda, a group founded by Asia Investor Group on Climate Change, CDP, Ceres, Investor Group on Climate Change, Institutional Investors Group on Climate Change, Principles for Responsible Investment and UNEP Finance Initiative. According to the Agenda, the statement comes after “a month which brought more catastrophic weather events around the world, and the alarming predictions of the Intergovernmental Panel on Climate Change that without immediate, rapid and large-scale emissions reductions, limiting global warming to 1.5 degrees Celsius will be beyond reach. The risks this brings to the portfolios of asset managers and owners are enormous.” The statement urges governments to address the “gaps—in climate ambition, policy action and risk disclosure—[that] need to be addressed with urgency.”

To date, the statement has been signed by some of the world’s largest institutional investors and asset managers, with combined assets under management of over $46 trillion, representing an estimated 40% percent of all global assets under management, according to the Agenda. The list of signatories includes State Street Global Advisors, the New York State Comptroller and CalPERS, but does not include BlackRock or Vanguard at this point. Additional investors may continue to sign before COP26.

The statement maintains that if we do not meet the challenge of limiting global warming, “the world could heat in excess of 3-degrees Celsius this century—far beyond the goal of the Paris Agreement to limit the global average temperature rise to no more than 1.5-degrees Celsius, which scientists say is necessary to avoid the worst impacts of climate change.” The statement encourages “all countries to significantly strengthen their Nationally Determined Contributions (NDCs) for 2030 and to ensure a planned transition to net-zero emissions by 2050 or sooner,” contending that the countries that set ambitious targets “will become increasingly attractive investment destinations. Countries that fail to do so will find themselves at a competitive disadvantage.”

According to the statement, in addition to addressing the “ambition gap” between current government commitments and the commitments necessary to achieve critical goals, government has a critical role to play in increasing access to disclosure of adequate information about how companies are “assessing and managing the risks and opportunities presented by climate change.” To those ends, the statement calls on governments to act in 2021 to take these five steps:

“Strengthen their NDCs for 2030 before COP26, to align with limiting warming to 1.5-degrees Celsius and ensuring a planned transition to net-zero emissions by 2050 or sooner.
Commit to a domestic mid-century, net-zero emissions target and outline a pathway with ambitious interim targets including clear decarbonization roadmaps for each carbon-intensive sector.
Implement domestic policies to deliver these targets, incentivize private investments in zero-emissions solutions and ensure ambitious pre-2030 action through: robust carbon pricing, the removal of fossil fuel subsidies by set deadlines, the phase out of thermal coal-based electricity generation by set deadlines in line with credible 1.5-degrees Celsius temperature pathways, the avoidance of new carbon-intensive infrastructure (e.g. no new coal power plants) and the development of just transition plans for affected workers and communities.
Ensure COVID-19 economic recovery plans support the transition to net-zero emissions and enhance resilience. This includes facilitating investment in zero-emissions energy and transport infrastructure, avoiding public investment in new carbon-intensive infrastructure and requiring carbon-intensive companies that receive government support to enact climate change transition plans consistent with the Paris Agreement.
Commit to implementing mandatory climate risk disclosure requirements aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, ensuring comprehensive disclosures that are consistent, comparable, and decision-useful.”

SideBar

That last point—ensuring comprehensive disclosures about climate that are consistent, comparable and decision-useful—figures high on the SEC’s to-do list. Although rules are not likely to be in place this year, the SEC regularly assures us that a climate disclosure proposal is in the works. Commissioner Allison Herren Lee has long contended that investors are demanding “uniform, consistent, and reliable disclosure” related to climate risks and opportunities. Some disclosure has resulted from private ordering, she has recognized, but, as she has contended previously (see, e.g., this PubCo post, this PubCo post and this PubCo post), “some level of regulatory involvement [is needed] to bring consensus, standardization, comparability, and reliability.” (See this PubCo post.) Because these issues are important for investors, she said, “climate and ESG are front and center for the SEC.” At his confirmation hearing, current SEC Chair Gary Gensler observed that investors, with tens of trillions in assets behind them, increasingly want to see climate risk disclosure. He also noted that issuers could benefit from standardization and the clarity of guidance. (See this PubCo post.) The SEC’s considerations in formulating its climate proposal have been discussed by Gensler at length. (See this PubCo post.)

Strong government policies, the statement contends, can be mutually beneficial. They can not only accelerate action to tackle the climate crisis, they can also help to “accelerate and scale up private capital flows towards the net-zero transition,” and “create significant investment opportunities in clean technologies, green infrastructure and other assets, products and services needed in this new economy. In turn, investors can use capital allocation and stewardship to support sustainable activities that generate jobs and economic growth, transition away from carbon-intensive activities and increase resilience.”

SideBar

This article from Bloomberg, “The Dirty Secret of Carbon Accounting,” argues that, without government regulation, carbon accounting is just not sufficiently rigorous. Plus, it’s based on a lot of assumptions. As opposed to financial accounting, which has strong standards and meaningful consequences of failure—such as prison—carbon accounting is, at this point, entirely voluntary and perhaps a bit hazy. As the article suggests, for a company that provides climate disclosure, “[a]ccurate or not, the company will likely come in for praise just for trying.” Although companies are probably fairly accurate in reporting Scope 1 emissions—their direct emissions—Scope 3 emissions—as defined by TCFD, indirect emissions not covered in Scope 2 that occur in the value chain of the reporting company, including both upstream and downstream emissions—are another story. According to the article, a number of studies, as well as Bloomberg Green’s own reporting, have shown serious underreporting of emissions of methane—the second biggest contributor to global warming, after CO2. That problem is compounded when the emissions that companies report incorrectly as their Scope 1 emissions are then used by other companies to form the basis of their Scope 3 emissions disclosure. Moreover, the emissions that companies report are then used by investors to allocate capital and taken into account by other stakeholders and the public. That’s why, the article contends, regulation is needed: “carbon accounting won’t be as robust as it needs to be without regulations,” according to the director of private sector climate mitigation at the World Resources Institute. In the absence of regulations, she observed, “‘[c]ompanies do not have a lot of leverage over, say, their power supplier to give accurate emissions data.’ As the mantra goes, if you can’t measure it, you can’t manage it. If the world is serious about reducing emissions, it will have to get better at accurately accounting for it first.”

[View source.]

Send Print Report

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.