Providing the market with better quality and more consistent information about companies' climate strategies and preparedness would give institutional investors what they need to direct capital into the right areas, writes Daniel Klier, group general manager, group head of strategy and global head of sustainable finance at the HSBC Group. (Photo courtesy of Greenpeace Indonesia/Ulet Ifansasti)
Disclosure Is Key to Unlocking More Green Financing
OCTOBER 17, 2018
New York Climate Week took place recently with the world at a critical juncture in its response to climate change. The contrast with two years ago was stark.
The Paris Agreement had just been signed, and the stage seemed set for accelerated action against climate change. Now optimism has given way to concern. Emissions are rising, not falling, and the world is some way short of the Paris ambition of restricting global warming to 2 degrees Celsius above pre-industrial times – let alone the 1.5 degrees that most scientists agree is the minimum safe level.
Those goals are not yet out of reach, but could be unless action against climate change steps up a gear. Much depends on how rapidly we can shift financial flows away from high-carbon industries and activities towards "greener" ones.
There is some cause for cheer here. Recent research for HSBC by East and Partners, a research and analysis firm, shows that investors and companies are increasingly incorporating environmental, social and governance (ESG) factors into their investment strategies. Investors in particular, now consider ESG less an ethical niche and more as a core part of their portfolios.
Yet, this shift must happen much faster. Something like $100 trillion of financing and investment is needed over the next 15 years to develop new technology, build new infrastructure and cover the costs of climate-change adaption. But green financing still accounts for only a tiny portion of the overall capital markets, and is dominated by governments, big corporates and development banks – not by the businesses that constitute the "real economy."
Expanding these markets in a meaningful way requires greater participation from both companies and investors, which will help integrate green and ESG into most of the financing and begin to redirect the trillions needed.
At the moment, there are significant barriers to market growth. Inconsistent definitions of ESG, "sustainable" and "green" are an issue for all parties, and investors are not getting good or consistent enough information on which to base decisions. The failure to provide comparable information makes it hard for the market to discriminate on environmental grounds, preventing the accurate pricing of risk and delaying the transition to a low-carbon world. That in turn, leads directly to a lack of investment opportunities and identifiable "green" assets.
The best remedy for investors' carbon addiction is better disclosure. Providing the market with better quality and more consistent information about companies' climate strategies and preparedness would give institutional investors – the managers of trillions of dollars in assets – what they need to direct capital into the right areas.
The G-20 Financial Stability Board's Task Force on Climate-Related Financial Disclosures has already provided a workable standard on which to base this global effort. Implementing its recommendations should be a worldwide priority, yet time is running out to make sufficient progress before national regulators start to force the issue.
This means the private sector has a short window – roughly 18 to 24 months – to show it can improve disclosure. For now, though, just one in 10 investors and issuers have even heard of the task force's recommendations. Central banks, financial institutions and investors need to start raising awareness fast. Big corporates, regulators and governments need to work together – and quickly – to provide better guidance on what good disclosure looks like, using climate-related financial disclosure as the basis. Companies need to take responsibility too. Rather than wait for regulators to intervene, they should act now and put pressure on industry bodies to agree on a more detailed disclosure framework that makes sense for each sector.
To many readers, climate-related financial disclosure must sound arcane – just another term used by financiers and administrators. But this is incredibly important work, not just for banks, businesses and bureaucrats, but for society at large, and particularly the communities and livelihoods worst affected by climate change. Better disclosure can unlock the money that will make good on the low carbon transition and ultimately safeguard our planet.
Daniel Klier is group general manager, group head of strategy and global head of sustainable finance at HSBC Group. Klier, who joined HSBC in August 2013, currently overseeing the development of HSBC's global strategy, allocation of resources and the implementation of the group's strategic projects. He is also responsible for the innovation strategy of HSBC.