Much has been written about the immediate targets emerging from COP26, but in this insight, we focus on the strategic steps UK companies might take in light of COP26 and the expanding climate-related financial disclosure requirements. For some organisations, this may mean challenging where and how their sustainability teams function, and even their underlying business strategy.
COP26 will be remembered for the role played by capital markets and the private sector
COP26 will be remembered for the role played by capital markets and the private sector, with 450 global financial institutions managing $130tn of assets joining the Glasgow Financial Alliance for Net Zero (GFANZ).1 These institutions manage 40% of global assets and are aiming to promote decarbonisation and meet net-zero emission targets by 2050, including limiting global warming to 1.5°C.2 There’s little doubt, then, COP26 has solidified the path towards structural changes in the global financial system.
Powering this shift is regulation to increase disclosure of climate-related risks, including the Task Force on Climate-related Financial Disclosures (TCFD) – which comes into force from April 20223 – and the International Sustainability Standards Board (ISSB)4 which was announced at COP26 and aims to provide the foundation for consistent, global environmental, social and governance reporting standards.
Whether your sustainability function is new or established, looking ahead, there is increased pressure to ensure it sidesteps what we might term ‘gathering data for data-gathering’s sake.’ It’s what you do with your data that counts if your company is serious about achieving strategic change that both recognises the risks and capitalises on the opportunities around the transition to net zero.
Historically, when a corporate starts out on its climate-disclosure endeavours, it will typically appoint someone to ‘do sustainability’. This person may build up a team but can still remain somewhat divorced from the rest of the company. The team may be seen as working from an ‘ivory tower’ or perhaps viewed by some as an ‘internal thinktank’.
Where sustainability sits within an organisation indicates whether it is seen as a fringe concern or not. It also suggests how likely the team will fall into the ‘data gathering for data gathering’s sake’ trap and more generally, how seriously sustainability is being taken.
If the sustainability team sits under the Chief Marketing Office, then, unwittingly or not, their work may be more about storytelling and reputational management which could stray into potential greenwashing. And if the sustainability team sits under the Chief Financial Officer, the emphasis may well be cost saving.
Looking ahead, there is a strong argument for moving your organisation’s sustainability and climate-related disclosure under the strategy and risk functions, if it is not there already. This is particularly true for large UK corporates impacted by TCFD and those in high carbon sectors.
These companies need to keep a handle on their data, and for these efforts to be viewed as a strategic concern. Failure to own your climate narrative or transition pathway at the highest level of an organisation risks allowing conclusions to be drawn by third parties. With a global focus on achieving carbon, as well as methane reductions across the economy, banks, investors, insurers and advisers are rapidly establishing their own determinations on those sectors at risk and those with opportunity. It may not be immediately apparent, but this expands the narrative from purely carbon-based metrics to include the impacts on revenue as the transition to net zero changes the economy and its resilience in light of the extreme and chronic events that are already baked in. Unless they take their data seriously, businesses can look forward to effectively losing control of the story they are capable of telling investors, the media and other stakeholders.
UK corporates need to not only get a grip of their analysis and climate strategy but seek assurances their data is fit for purpose and there is the capability to interpret it correctly. Into the near future, the shortfall here is less likely to be around, ‘Have we got someone in charge of sustainability and climate-related data?’ but rather, ‘Does the team have the competence to understand the data and the authority to change company strategy because of it?’
Under pressure from TCFD reporting, organisations are in danger of hurrying to write disclosures without thinking deeply enough about the potential impact. When TCFD first came out at the end of 2017, many companies moved to first identify their climate-related risks. Now, there’s a shift to risk evaluation against a backdrop of scenarios to understand the impact upon their strategy, an aspect that is still poorly articulated through disclosure. Looking ahead, we should expect to see the disclosures broaden to include adaptation and transition plans to demonstrate strategic resilience.
Good transition plans will only be created hand-in-glove with scenario planning and risk analysis: you cannot create an informed transition plan without knowing what risks and opportunities the future may hold. This should be an iterative and ongoing process, with strategy and risk analysis feeding off and reinforming each other over time.
We are seeing some encouraging trends in UK corporates when it comes to making climate central to strategy, with some assigning sustainability specialists leadership roles that explicitly combine sustainability and strategy.
If you’re a large UK corporate, COP26 sends the signal loud and clear that private sector investors want better quality, trustworthy climate data to be able to assess climate risk and therefore identify low carbon opportunities and avoid stranded assets.
There will be some losers from the transition to the low carbon economy as the impact of new regulations, technologies and market changes are felt, but with careful risk analysis and the strategic use of this insight, your business can be among the many likely to thrive.
Contact us to learn more about how you can use compliance with climate-related disclosures as a gateway to building value and inspiring deeper investor confidence. Willis Towers Watson experts will be examining the latest developments in climate-related disclosure and sharing practical lessons learned from companies’ approaches to climate scenario analysis in TCFD/ISSB-aligned reporting at our January 11 webinar.
1 https://www.gfanzero.com/press/amount-of-finance-committed-to-achieving-1-5c-now-at-scale-needed-to-deliver-the-transition/
2 https://news.sky.com/story/cop26-financial-firms-that-control-40-of-global-assets-will-align-with-paris-agreement-1-5-on-climate-rishi-sunak-will-say-12458267
3 https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate-disclosures-for-largest-companies-in-law
4 https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/
