Access to capital and the low carbon transition
Fri, November 27, 2020
In late November Julie Baddeley, Chair of Chapter Zero, led an informative and interactive panel discussion with senior executives who are driving the climate agenda at three of the UK’s most prominent financial institutions.
Our speakers were Sarah Breeden, Executive Director of UK Deposit Takers Supervision at Bank of England, David Harris, Group Head of Sustainable Business at the London Stock Exchange Group, and Steve Waygood, Chief Responsible Investment Officer at Aviva Investors. Together they shared the investor and banking regulatory perspective on climate change, to give non-executive directors a greater understanding of how they can help their boards prepare for the changing imperatives of investors and plan their net zero strategies.
The speakers were unanimous in their views that:
- The time to act is now – the size and balance of future risk depends on actions we take now, but these actions need to look much further out than a couple of years. As Mark Carney has said ‘climate change is the tragedy of the horizon’, there was a risk that by the time we realise we want to do something about it, it would be too late.
- Change is required across the whole economy and by both users and producers, not just businesses in the oil and gas industry.
- Consistent reporting is important, but the quantity and quality of data at the moment is not enough. It is vital that disclosure moves from static to strategic, and companies develop a net zero plan.
Catch-up on the highlights
The pace of change
The signing of the Paris Agreement and UN Sustainable Development Goals in 2015 was a tipping point and the level of change that is currently being seen on the transition to a low carbon future is picking up speed. This is when the debate around climate changed matured beyond the science. David Harris spoke about the changes occurring in the investment industry and how Environmental Social and Governance (ESG) factors are being integrated into all index funds. He pointed out that this is no longer a small part of market; it is the market. Most new index mandates, in both public and corporate pension funds, want to incorporate ESG, with climate usually being the main element.
Index investing is changing significantly, but most companies are not aware that this is taking place and how important climate factors are in investment decision making.
What can boards do?
David emphasised that it is imperative that boards understand the level of change that is taking place and set out their strategies proactively. This is required across all sectors. He highlighted how influential annual reports and sustainability reports are, providing opportunities to disclose information about emission reduction plans and targets that will affect investment flows.
Sarah Breeden focused on the risks created by climate change as both physical and transition. There is a choice: do nothing and face physical risks or change the pathway and deal with transition risks. Allowing uncertainty to lead to inaction and inertia is not an option.
Sarah addressed the question of how to get the financial system to manage this far–reaching, yet totally foreseeable risk. One approach was greening finance by transforming reporting and risk management, so that every financial decision takes the risk from climate change into account.
Making Task Force on Climate-related Financial Disclosures (TCFD) mandatory across the economy by 2025 enables investors and businesses to capture the financial impacts of their exposure to climate change and to price climate risks more accurately. The Bank of England will embed its supervisory expectations for management of climate related financial risk by the end of 2021. Its supervision is designed to ensure that financial firms take a forward-looking view of climate risk and embed it in business as usual risk management, grounded in long–term financial interests of the firm.
The Bank of England’s climate stress test exercise will be launched in the middle of next year. It will do three things: use scenario analysis to shine a light on currently operational risks; highlight where firms and their customers business models need to change; and build firms’ risk management capabilities and prompt engagement with businesses on the climate risks faced. If financiers are asking about exposure to climate risks, access to and price of finance will change.
What can boards do?
Ensure your companies are preparing for TCFD reporting now. Companies can use the Bank of England advice and tools, including the stress test scenarios.
The climate challenge
Steve Waygood acknowledged that moving our economy, in a way that doesn’t expose it to the extreme physical risks it is currently heading towards and doesn’t fall into the jaws of transition risk, is the challenge of a lifetime.
Although some investors and asset owners are concerned about climate risks, others are not. Changing reporting and changing risk management are not going to result in change or greening finance as a whole. Incentives, valuation models and internalising externalities will be necessary. These will affect balance sheets; only when it hits the cash flow, will it become more relevant to some investors.
What can boards (NEDs) do?
- Get investor relations team to look at what your top 25 shareholders are looking for
- Look at the way credit rating agencies are modelling climate risk
- Look at the way the proxy voting agencies are consideringdirector re-election, board pay and your disclosure
- Make sure your investor relations team are sophisticated on ESG
Group Head of Sustainable Business at the London Stock Exchange Group
Executive Director of UK Deposit Takers Supervision at Bank of England
Chief Responsible Investment Officer at Aviva Investors
Watch the full webinar