For anyone working – or simply interested – in sustainability, Monday was a red-letter day with not one, but two, important announcements. The first was publication of the latest report from the Intergovernmental Panel on Climate Change (IPCC) warning that global temperature rises are likely to breach the 1.5o limit set out in the Paris Agreement much sooner than anticipated, and that rising sea levels pose a real threat to coastal communities. Rightly, this report hit the headlines around the world. The second was a set of recommendations issued by the UK’s Financial Conduct Authority (FCA), designed to improve the quality of ESG benchmarks to avoid greenwashing of investment products. The FCA news was launched to much less fanfare but, arguably, could have much greater – and more immediate – impact.
In its report, the IPCC laid out the likely consequences to nations and communities around the world if emissions continue to rise at their current rate. Launching the report, in a speech heavy with soundbites, the UN Secretary-General, Antonio Guterres, warned the world is on a trajectory that will result in ‘once in a century’ climate events becoming annual occurrences. Against the backdrop of cyclone Freddy, which has wreaked havoc in Madagascar and Malawi for the last four weeks, it’s impossible to ignore the severity of the warnings. But what is to be done about this? The report’s main ask is for the world’s leading economies – most of which have set a net zero goal – to bring the deadline for the delivery of that target forward by at least a decade. So 2050 now becomes 2040 for the UK. The big question, of course, is whether this is achievable? The IPCC describes its report as a ‘synthesis report’ meaning it does not set out clear guidance on actions to be taken but establishes the scientific benchmark that will form the basis of future global climate negotiations. Given how slowly negotiations can move – and the relative lack of energy transition progress achieved at the last two COP meetings – it could be very many years before we start to feel the impact of any changes arising from it. The report also urges for at least a sixfold increase in both public and private financing of emissions reductions alongside halting of fossil fuels funding (this interestingly came at the same time as BlackRock’s Larry Fink published his annual letter in which he signalled continued support to the fossil fuel industry to meet society’s energy needs). However, how can we reasonably expect private financiers to multiply the funding they deploy when they do not have clear, consistent, comparable and reliable data to inform their decision-making?
This is, arguably, why the FCA’s recommendations are set to have a much more measurable impact. The regulator set out four clear areas where it asks for ESG benchmarking methodologies to be improved. All of these measures are designed to provide investors with significantly more clarity around the sustainability performance of any of the funds they consider investing in. We know that the Government is looking at how to regulate ESG ratings to ensure a consistent playing field and greater clarity for markets and consumers. Regulation may, at some point in the future, come under the FCA’s remit but, for the moment at least, it has made it clear it would like to see the development of a voluntary code of conduct for ESG data and ratings providers.
While the FCA announcement was highly specific and succeeded in pricking the ears of only the most technically minded journalists, it has the potential to make a real difference. Not just for fund managers and institutional investors but for every UK citizen with investments – and that means every one of us with a pension. For those of us who want to take steps in our own lives to address the climate crisis, it is often argued that the most significant thing we can do is not giving up our cars, avoiding meat and dairy, or banning plastic bags from our lives. Rather, it is about ensuring our pensions and ISAs are invested in companies that are genuinely cutting carbon emissions. But all too often, it has been impossible to compare the ESG performance of one fund to another and, even when the data exists, it is too complicated for a non-professional to decipher. If the FCA guidance is implemented – and with potential regulation looming, that seems inevitable – this could be a game-changer for anyone looking to ensure their retirement fund is part of the solution to – and not contributing to the cause of – climate change. The sustainable investment labels proposed by the FCA will enable us to navigate the complex investment product landscape based on what the fund itself aims to positively contribute towards, whether it is intended for ‘sustainable improvers’, ‘sustainable focus’ or ‘sustainable impact’.
So, while IPCC reports grab headlines and play a vital role in warning of humanity’s looming devastation, it is the work of the often-unsung authorities, quietly putting regulation in place, that can really change the landscape at pace.