Financing the transition to net zero requires global collaboration

The financial sector plays a vital role in mitigating the effects of climate change by financing the transition to a low carbon economy.  

It is essential that investment in the transition to net zero is global and sees significant capital flows from developed markets to emerging markets. International cooperation to provide a consistent and effective regulatory framework underpinning this investment is essential.  

I therefore welcome the enormous efforts by many public and private sector bodies to work to provide a coherent and transparent set of standards focused on facilitating the transition.  

Critical requirements to finance the transition 

These standards cover a variety of areas ensuring corporates provide better information to lenders and investors on their sustainability plans. In turn this ensures that financial firms provide more transparency to their investors. They include: 

• new accounting rules that require corporates to disclose their emissions and transition plans;  
• new common methodologies or taxonomies to make clear whether economic activities are aligned with a net zero trajectory by 2050 and wider environmental goals;  
• new supervisory tools to assess how well banks and insurers are placed to handle losses from climate change;  
• new transparency requirements on how financial firms assess sustainability risks of their investments. 

Particularly for firms  active in multiple jurisdictions, these new requirements can pose significant compliance challenges for corporates and financial intermediaries alike. A particular challenge is whether they deliver interoperability, or at least consistency, across different jurisdictions. 

Advancing net zero – A new report 

We discussed these questions at our recent Brussels event "Advancing Net Zero: the EU and UK in International Climate Action Forums". An expert panel discussed a report co-written by Kimon Argyropoulos Niarchos from the City of London Corporation and the law firm Hogan Lovells. The report looks at the role international climate action forums play in shaping climate policies. It examines how the EU and UK can collaborate to ensure these forums operate to maximum effectiveness, ideally at a global level. 

The report presents key recommendations, such as: 

• the UK and EU must prioritise fostering dialogue among standard setters like the International Sustainability Standards Board (ISSB) and the European Financial Reporting; Advisory Group (EFRAG) to improve regulatory coherence in sustainability reporting 
• the UK and EU should identify shared priorities to create influential G20 coalitions for collective action; 
• the EU and UK should utilise the G7 climate club to craft a unified global carbon pricing approach and enforce accountability among its members; 
• the UK should apply its Transition Plan Taskforce (TPT) expertise to aid the IPSF in advocating a globally consistent transition planning approach; 
• the UK and EU should enhance the International Platform on Sustainable Finance (IPSF) effectiveness by refining its focus, aligning work plans with Paris Agreement requisites and G20 objectives, increasing resources, and fostering connectivity with diverse expert groups across forums; 
• the EU and IPSF members like the UK should clarify IPSF's direction by refining its focus, utilising it for intergovernmental and cross-sector collaboration on transition pathways. 

After the report launch event, I interviewed Bryony Widdup, Partner at Hogan Lovells. During our conversation she pointed out the key role of international climate action forums in improving the discussion between jurisdictions and for delivering projects like interoperability mapping. 

The role of international climate action forums 

Perhaps the most important of these forums is ISSB which sets new disclosure reporting standards. It is important to establish a global baseline upon which national standards are built, so that they are as interoperable as possible. National implementation will of course need to be monitored so that we experience as little deviation as possible across each jurisdiction.  

Work by global securities regulators in the International Organization of Securities Commissions (IOSCO) to promote convergence is really helpful here. It was welcome to see IOSCO’s recent endorsement of ISSB standards, sending a strong signal that they are robust and proportionate. So too the work of the IPSF established by the EU but including many jurisdictions from around the world who share the same Paris net zero objectives. And the G20 Sustainable Finance Working Group (G20SFWG) is also working to deliver convergent outcomes.  

Sharing best practice on issues like national transition plans, where the UK recently launched its Transition Plan Taskforce, can really help both private and public sector alignment on net zero. In our recent interview, Mark Manning, Strategic Policy Advisor for Sustainable Finance at the Financial Conduct Authority, said "The TPT disclosure framework has been purposely designed to fit with sustainability-related reporting under TCFD (Task Force on Climate-related Financial Disclosures) today and ISSB tomorrow." 

Steps towards convergent outcomes 

There are some positive signs that regulatory outcomes will be reasonably aligned. Many jurisdictions are following the ISSB standards, and the UK has committed to this. The EU ESRS (European Sustainability Reporting Standards) closely follow the ISSB, and I hope that the EU will move quickly to recognise other jurisdictions that do the same. Another area where we have seen less progress globally, but where ASEAN countries have set a positive example is the regional agreement to recognise each other’s slightly different taxonomies.

Navigating regulatory challenges 

But as the panel also discussed, the devil is in the detail. Jurisdictions need to be assured that each are applying high standards if investors are to be protected, for example. If similar activities are classified as green by some and as brown by others, this will undermine confidence in transition finance. We must ensure clarity around taxonomies and the UK will do well to learn lessons from the EU’s experience.  

As Rita Hunter, Partner at Hogan Lovells, said in our recent chat when talking about the IPSF’s role in comparing taxonomies ,“taking the working group collaboration as a template and embedding something like that between the EU and the UK would ultimately benefit so many stakeholders and the market when it comes to complying with the taxonomy regulation, once the UK has proposed its own version."

Equally, rules that are applied extraterritorially may prove too inflexible in recognising another jurisdiction's rules even if they are based on the same standards.  

I remain concerned that as ESG regulation reaches further down the investment chain, it will not deliver convergent outcome. While it is important, for example, to regulate the ESG data and ratings used by many banks and investors - an issue currently under discussion in the EU and UK – the risk is that the emergence of jurisdiction-specific approaches fragments the ability of firms to do analysis in a consistent and global way which could hinder cross border financing. And if that happens, the whole point of the Paris Accord is then undermined.

Voluntary commitments have a role in raising standards now – without the need to wait for regulation to catch up with practice. The UK is helping to lead the way globally with the launch of a new code which will see providers enhancing their credibility and transparency.  

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.