Remarks at International Finance Forum 2022 Spring Meetings, April 27-28

posted by Marsha Vande Berg on May 1, 2022 - 3:57am

Marsha Vande Berg, Member, Academic Council, International Finance Forum/Beijing
Remarks IFF 2022 Spring Meetings, April 27-28
Session 2.3: New Global Landscape – Carbon Neutrality and Green Finance

Edited post-delivery to reflect China’s announcement of its first ESG disclosure guidance, officially published April 16 and to take effect June 1, 2022

  • It’s been a long journey for all of us...but important is that we continue to come together to discuss, share ideas and hopefully learn a thing or two from one another!
  • Thank you too for this invitation to make a few remarks about where I’m engaged at the intersection with carbon neutrality and green finance.
  • I’m presently involved with the Bretton Woods Committee working group on climate finance; a corporate director; writer and sustainability resource to funds and organizations on crafting an effective sustainability narrative. I’m also a member long since of the IFF Academic Committee – which goes back to my work as a Distinguished Career Fellow at Stanford University and prior as Chief Executive Office of the Pacific Pension and Investment Institute.
  • I’d like to speak to what I see happening with sustainability across the global landscape
    • The challenges we are facing – and the opportunities that come with those challenges.
    • The importance of credible disclosure about how corporations are managing their climate risk and the opportunities for addressing the risks before they undercut their bottom line.
    • Where I see the disclosure regulation debate headed and the implications for the deployment of capital in key global markets.
    • Noting the crisis in Ukraine and its immediate and long-term implications for sustainability and energy markets but with intention to leave that discussion for another day.
  • First, it’s back to basics to set the stage for what the challenges we are facing. In other words, Climate 101!
  • What is climate change by definition? What is an easy handle for understanding this phenomenon now that we’ve pretty much moved beyond the science skeptics.
  • Here’s how it’s been explained to me - crediting Sir Nicholas Stern at the London School of Economics:  
    • Energy comes from the sun; bounces off the earth’s surface; comes back as infrared gases.
    • Some of these gases have molecules that oscillate at frequencies which interfere with the atmosphere; these are the greenhouse gases. It’s our bad luck that one of those gases is CO2.
    • It happens that as a result of modernization, the planet is accumulating more and more CO2 in the atmosphere; AND the greater the concentration – the more that concentration traps the planet’s heat. This then is the GHG effect, and why we call it greenhouse gas.
  • The physical challenge is how to hold down that rate that concentration of CO2 is increasing and hence the rate at which the planet is heating up. The question however is how do we do that.
  • One approach has been bringing nations of the world together as signatories to a collective pact. This happened in 2015 with the Paris Agreement and subsequently at the UN COP26 summit last November. While a majority of the world’s sovereigns lent their signatures to the pacts, their – and our fingers remain crossed in hope that these agreements become at least part of the solution. Government leadership and policy makers are central to the finding the answer but it’s unlikely they will deliver the sole solution to the challenge.
  • The reality is that climate change is a global phenomenon that requires a global solution with multiple facets and with the engagement of multiple players across geographies, across interest groups and across generations. This means engaging the private sector together with the public sector.
  • What then might be the opportunities inherent in the challenge of climate change? Where is there potential for a silver lining, if you will, to a very dark cloud?
    • I will highlight two dimensions in the current direction of play that point to opportunities to begin to throttle down the pace at which the earth is heating and get us onto a track toward carbon neutrality. The first has to do with the context in which an increasing number of investors today are deploying their capital; the second is a nod to the role of technology and innovation can play in both the developed and emerging markets.
    • Parenthetically, I’d like to note that the momentum we are experiencing in the deployment of capital and development of new technologies has major support from younger generations – especially the 30-plus and minus somethings who are key players in driving solutions both on the investment front and when it comes to developing new technologies.
  • Regarding the first dimension of today’s dynamic, according to Refinitiv Lipper, 2021 was a banner year for capital invested in ESG-focused funds. In fact ESG investments in 2021 reflect a sizeable jump year over year for the two years prior. Investments in 2021 totaled $649 billion in 2021; that’s up from $542 billion in 2020 and #285 billion in 2019.
  • It’s this driving force of capital that has now begun to capture the attention of regulators with mandates to insure the integrity of their capital markets and protect investors who depend on ongoing access to quality corporate disclosure. That’s why we have financial statements and that’s why the push is now for sustainability disclosure that is integrated or is reported in parallel with legally required financial disclosures.
  • There are three, now four important examples with the recent announcement by Chinese authorities of the Guidance for Enterprise ESG Disclosure, to take effect on June 1. I’ll address the Chinese guidance first because the announcement suggests a key difference between China’s approach and that of the other three – at the global level with the IFRS Foundation and its new International Sustainability Standards Board (ISSB), in Brussels with the European Commission and in Washington DC with the US Securities and Exchange Commission.
    • Importantly, the Chinese plan refers to “guidance” versus the “rules” as proposed by the SEC and by the European Commission versus the “standards” under consideration by the ISSB. Overall, the Guidance appears to be more corporate-focused than investor-focused as is the case with the ISSB, the SEC and the EC. It is also presented as a more general framework intended to also assist businesses in understanding gaps between their performance and the public’s expectations.
    • The implication here, however, is not that Chinese businesses will be acting in isolation from the rest of the world. Rather, it’s assumed that businesses facing disclosure rules and standards in markets whether they operate in addition to China, will provide feedback, fostering a connection between China’s ESG development and the rest of the world.
    • The other critical steps forward in the movement to require better corporate sustainability disclosure include:
      • In Europe, the European Commission sustainable finance taxonomy rulebook on which corporate activities can be labeled as climate friendly – or not – is about to come into effect – sometime later this year. The EU clearly has been the leader in putting rules in place that require corporate accountability in the face of ESG risk exposure and in the process, ensure against greenwashing – claiming assets are green without sufficient proof
      • In the US, the SEC has proposed a rule that requires publicly-listed companies disclose their Scope 1, 2 and 3 emissions. In other words, their full carbon footprint. The rule is now out for public comment. After that review period concludes, on or about May 20,  SEC commissioners together with staff will take up modifications to the rule before allowing it to go into effect.
      • In the meantime, the SEC’s proposal also raised the question about what does the US regulator do about foreign companies doing business in the US. Does it require disclosure following US rules – similar to their application of GAAP rules to financial reporting in the US but IFRS accounting standards in most other jurisdictions globally. The question is key because it also serves as an indicator that the SEC is interested in public opinion about the extent to which the US regulator should allow integration of the international global baseline standards now being promulgated by the ISSB.
      • This brings me to the third critical development in requirements for better corporate sustainability disclosure – the climate risk baseline standard and the general disclosure baseline standard promulgated by the ISSB. These two proposed standards also are out for public comment at the moment and will be formally put on the books once public comment is considered and final proposals are adopted.
    • So, where are all these opportunities headed? Markets will be lucky to have full resolution of global disclosure mandates within this next two years. But pieces of what is under discussion in key jurisdictions will be in play. This has application for companies doing business at home and abroad.
    • Investment funds, meanwhile, will also continue to pile on with their requests of investees that they account for their management of climate risk operationally and in the face of externalities, like climate change. A critical element here is how these funds – and their investee counterpart relay their sustainability demands, hopefully as part of a larger narrative that reflects accountability both by the funds and by the companies they invest in.
    • How they tell their stories is increasingly important to their credibility. The story must be informed by relevant metrics. It has to make the case both on sustainability grounds and economic grounds.. It should also be able to demonstrate results – or critical impact.
  • So there is a lot to do to meet the challenges inherent in climate change. And yet it’s helpful to note too that the opportunities are truly significant. Opportunities that are the result of government action, working domestically and in collaboration across boundaries and geographies. There are also opportunities in the private sector investment and in the development of new technologies and innovation. There is a litany of possibilities – advancements involving electric vehicles and in the storage capacity of batteries; the role of hydrogen-based energy that is both efficient and can be applied in requisite large quantities to the transportation sector, notably aviation, and to steel and cement manufacturing. Innovation in sustainable agriculture is also a player as is identifying appropriate usage of water.
  • Each of these represents opportunity that can be unlocked by capital.
  • The challenge is huge. But the opportunities also are outsized. Getting to the solution is probably the key challenge, however.

Thank you - and wishing each and every one of you a very successful IWF Spring Meeting.