By Margaret Kuhlow, WWF’s Finance Practice Leader
Looking ahead to next week’s One Planet Summit in New York, Margaret Kuhlow, WWF’s Finance Practice Leader, reflects on commitments made at the Global Climate Action Summit and UN PRI in Person last week in San Francisco and calls on the financial sector to secure the benefits.
Cause for optimism
In San Francisco last week, we saw signs of hope.
At the Global Climate Action Summit (GCAS), mayors, governors, chief executives, investors and citizens redoubled commitments to driving decarbonization of the global economy.
Almost 400 investors with roughly $32 trillion in assets under management signed up to the Investor Agenda, committing themselves to manage climate risks and build a low-carbon economy through investment, corporate engagement, investor disclosure and policy advocacy.
And recognition from Green Bond Pledge issuers and investors that every infrastructure project — not just those financed through a labelled green bond — should be climate resilient is welcome and now feels obvious.
Concurrently, the UN Principles for Responsible Investment (PRI) in Person launched a new effort to profile leadership and an award for innovative and impactful projects which will showcase real-life sustainable investment and should also help sustainability reporting.
Elsewhere, growth in other sustainable finance initiatives continues apace. As of August 2018, over 390 organizations had expressed support for the Task Force on Climate-related Financial Disclosures (TCFD); 473 companies had made commitments to deforestation-free supply chains; and more than 100 companies, including global investors such as APG, Aviva, LGIM and Robeco, and representing $5.4 trillion in assets under management, had signed the Cerrado Manifesto calling on soy and meat producers to prevent further deforestation.
Such big numbers send an unequivocal market signal. Sustainable finance is no longer niche nor simply ‘green’. Ending deforestation, tackling climate change and protecting ecosystems and the critical services they provide, are becoming material concerns for mainstream finance.
Nevertheless, these commitments are only as good as the delivery that must accompany them.
Unrealized potential
For the financial sector, seizing the opportunity to convert commitment into action should be an obvious choice — but it’s one that many investors have yet to take.
Recent analysis from the Asset Owners Disclosure Project examining how the world’s 100 largest public pension funds are implementing TCFD recommendations reveals 30 ‘show no evidence of responding to climate change,’ just 10% have a coal exclusion policy, and less than 1% of all assets are invested in low-carbon solutions.
If TCFD recommendations were implemented by all signatories, significant data would be available for investors, financiers and insurers to assess risk accurately and allocate capital in a way that facilitates a smooth low carbon transition.
Alongside, regulatory bodies have an opportunity to tackle ‘regulatory divergence’ and harmonize climate risk disclosure across jurisdictions and markets. A joint Carbon Tracker, Client Earth and WWF report suggests how the International Organization of Securities Commissions (IOSCO) could improve climate risk management by global capital markets.
Similarly, climate resilient infrastructure and capital projects would help long-term public finances by saving tax dollars as climate impacts increase in frequency and severity. According to UNEP’s Adaptation Finance Gap, global adaptation costs in developing countries alone could range from $280–500 billion a year by 2050.
Most tellingly perhaps, the recent New Climate Economy report reveals we are significantly underestimating the advantages of climate-smart growth. Bold climate action could deliver at least $26 trillion in economic benefits through to 2030, compared with business-as-usual.
Subsidy reform and carbon pricing alone, for example, could generate an estimated $2.8 trillion in government revenues per year; and a shift to more sustainable forms of agriculture combined with forest protection could deliver over $2 trillion per year in economic benefits.
Realizing this new growth needs at-scale finance to drive sustainability across all sectors.
Credibility and nature at risk
Beyond growing momentum and tangible benefits, there are two other compelling reasons for moving from commitment to action.
The first is credibility. Investors, customers, clients and employees want clarity about what is meant by sustainable. It is no longer enough to say something is ‘green’ without a robust definition. Science and best practice have moved on, and so has demand. Examples abound.
The EU Sustainable Finance Action Plan calls for clear definitions of sustainable activities, clarification of asset managers’ and institutional investors’ sustainability duties, and increased transparency on Environmental, Social and Governance policies. The IFC plans to roll out investor principles to tighten definitions of ‘impact’ for fear of ‘impact-washing’. WWF has published recommendations to guard against ‘greenwashing’ in the green bond market. And almost 10% of UN PRI signatories have been put on notice that lack of implementation risks expulsion from one of the market’s most well-known sustainability clubs.
The second reason to convert commitment into action is the alarming decline in the natural world.
Goods and services from our oceans, for example, are worth about $2.5 trillion annually but the World Bank estimates nearly a third of fish stocks are overfished with an annual loss in global revenue from overfishing of $83 billion. CDP estimates droughts, floods and water pollution cost businesses $14 billion in 2016 — a five-fold increase over 2015. And as we consume more than 1½ times the planet’s natural food supply, food production fuels deforestation, exacerbating the effects of climate change.
More than money
Finance is not just about making money, it is about securing prosperity and a sustainable future.
Recent commitments are a tremendous step forward, and a clear signal that all parts of society and the economy are ready to be part of the solution.
By shifting money toward more sustainable business models, finance can transform land and natural resource use, support climate resilience, and underpin food and water security.
World leaders coming together at the One Planet Summit next week will account for progress against commitments made last December. When the sustainable finance community next meets, it should likewise account for how it is delivering against commitments made last week. Its credibility and our natural world depend on it.
