It has been a busy week for the world of sustainable finance. The working group three report, as part of the Intergovernmental Panel on Climate Change (IPCC)’s sixth assessment, was released – which explores viable options for robust carbon removal, and stresses the importance of carbon pricing. On top of this, as of 6th April, over 1,300 of the largest UK-registered companies and financial institutions are now required to report against the 11 disclosure recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). The mandate will encompass most large organisations by 2025.

Despite such promising updates, some believe the solution to the climate puzzle is still missing a piece.

It is widely recognised that climate action at the scale required to curb global warming is lacking. This week’s IPCC report  reinforced this sentiment, stressing that immediate and extensive emissions reductions are necessary across all sectors. Greenhouse gas (GHG) emissions must peak before 2025 – and be reduced by 43% by 2030 – and methane should be cut by 33%. Carbon dioxide emissions, as we know, need to be net zero by 2050.

Yet, thus far, progress on adaptation is “uneven and there are increasing gaps between action taken and what is needed to deal with the increasing risks”, highlighted the IPCC in February.

Peter Boyd, resident fellow and lecturer, Yale, reinforced this in a press briefing, attended by Finextra, following the publication of the working group three report: “The key point is that we're not moving from left to right fast enough in all sectors. We've got to work out a way to change the economics of the ground; to preserve biodiversity; to preserve natural medicines; to preserve water cycles.”

Transparency around climate action holds the keys to informed capital allocation decisions and positive progress. In this respect, the timing of the TCFD disclosure deadline this week was perfect.

“It has been an encouraging development to see international alignment appear in climate reporting, with the TCFD emerging as the leading framework for comprehensive disclosure on the management of climate related risks and opportunities,” commented GHD’s Anna Jakobsen, EMEA lead, sustainability, resilience and ESG, and Craig Riley, Americas strategy lead, sustainability, resilience and ESG, in a joint press statement.

All hands to the liquidity pump

According to the IPCC report, the bad news is that financial flows are a factor of three to six times lower than levels needed by 2030 to limit warming to below 2°C (3.6°F). The good news is that there is sufficient liquidity available to close the investment gap.

Climate disclosure, encouraged by directives such as TCFD, is swooping in to direct these flows – and it continues to receive strong interest from firms and investors around the world. According to Deloitte, the number of organisations endorsing TCFD has risen by 70% from 2020 to 2021. The benefits are clear; firms that submit their climate-related risks gain easier access to liquidity, assuming their products align with the low-carbon economy paradigm.

Investors are quids in too. With more accurate assessments of firms’ climate-related risks, they can make better decisions on where their money should go.

Even governments are catching on. “The European Union (as well as individual member states), Malaysia, Norway, South Korea, Brazil, Hong Kong, Japan, New Zealand, Singapore, Switzerland and Australia have all announced new policies, partnerships or other formal support for the TCFD,” noted Jakobsen and Riley. “Canada recently announced that it is working on regulations to mandate reporting in line with the TCFD framework and the US Securities and Exchange Commission has proposed climate disclosure rules putting U.S. capital market requirements in line with the TCFD, with first reports due as early as 2024.”

International initiatives, such as the G7 and G20, also support incorporating the TCFD recommendations into climate-related reporting standards.

Undoubtedly, the climate disclosure movement started by TCFD is the beginning of something more universal.

A missing piece of the puzzle

 Yet, there is a critical move yet to be put into motion: solid climate transition plans.

This, argue Jakobsen and Riley, is where businesses need to step up: “A recent report by CDP (formerly the Carbon Disclosure Project), published in March, revealed that just a third of the 13,000+ companies that disclosed through CDP in 2021 have low-carbon transition plans. This is clearly an issue since, as the report states, transition plans are a fundamental part of what is needed from corporate governance to decarbonise the economy and allow investors and other stakeholders to assess a company’s progress in reaching ambitious climate goals.”

A similar gap also exists in the social elements of companies’ transitions. The World Benchmarking Alliance’s (WBA) Just Transition Assessment, for example, finds that that only 5% scored above 50% on their current performance across WBA’s six just transition indicators.

Bridging these gaps is so foundational to ensuring action against climate change, it will soon become mandatory.

“Companies need to bind their net zero targets to their upper-level missions and vision,” noted Boyd. “How does their sustainability purpose link into their total purpose? How do all those responsibilities run through their investment chains?”

Work today, for tomorrow

To prosper in the long term, listed companies, large private companies, and limited liability companies need to heed the warning of the IPCC’s latest report, and go beyond the disclosure requirements set in place by the TCFD.

To get the ball rolling on climate action, data needs to be sourced and scenarios analysed; impacts need to be quantified; and scope 1, 2 and 3 emissions must be calculated. All this information should be funnelled into a robust climate strategy – reinforced with specific and incremental targets – that is designed to meet the Paris Agreement’s net zero mission.  

“How these plans are formed, measured, and reported on is a challenge that will require significant thought and expertise,” argue Jakobsen and Riley, “but if companies deliver, they – and the rest of the planet – will prosper.”

Kelley Kizzier, VP, global climate, Environmental Defence Fund, said in the IPCC press briefing that “what we need is a ‘no-regrets’ approach that uses all the tools in the box, because this is the decisive decade for action. If we get it right, carbon markets can drive private capital to the countries and sectors that need it most. We know from several reports, including that public finance won't be enough. We need tools that drive private sector finance to developing countries. That's where most emissions will be by the end of this decade.”

The working group three report is not the final say for the IPCC this year. They aim to have a synthesis report completed by September, which will be endorsed by governments in advance of Cop27 in Egypt – the next UN climate conference.

As ever, the market needs to be constantly reviewing standards and ensuring they work alongside the latest lessons learned from science.

“We can't limit ourselves to one study,” warned Kizzier. “We can't limit ourselves to any one policy. We need to get innovative because we haven't done what we needed to do fast enough. If we protect our current carbon stocks, protect our forests, and reduce the rate of short-lived climate pollutants, we can get the data. That's the truth.”