Carbonsink - 4 cardinal points for climate savvy finance in 2022 (and beyond)

2021 saw concepts such as net-zero and science-based targets going mainstream in the finance and corporate landscape. Analyses of global commitments showed that 90% of global GDP was covered by a net-zero target of some kind, with the next challenge becoming to shift “from quantity to quality” in climate targets and metrics.  Over 2,000 companies worldwide committed to set emissions reduction targets aligned with the Paris Agreement through the Science Based Targets initiative (SBTi, which before COP26 also presented the world's first standard for corporate net-zero).

In 2022 (and beyond) climate change will continue to dominate the global agenda. New frontiers of climate action are emerging, involving supply chains and carbon removals, as well as climate risk measurement and disclosure. As observed in recent research by MSCI, climate appears as a “first among equals”, eclipsing governance and social issues at the top of the ESG agenda. In its annual statement, the European Securities and Markets Authority (ESMA) set out climate-related matters as priorities for the financial reports of listed companies, “in light of the growing importance for investors”.

Climate-related finance initiatives are growing. Launched in 2019, the Net-Zero Asset Owner Alliance doubled its members in 2021: it has grown to 65 members representing over US$10 billion in assets, up from 34 members in 2020. The Net-Zero Banking Alliance and the Net-Zero Insurance Alliance kicked off in 2021 and the Net Zero Asset Managers Initiative also increased in size, reaching $57 trillion in assets under management. The Glasgow Financial Alliance for Net Zero (GFANZ) was launched in April 2021 and it now includes over 450 financial firms committing around $130 trillion of private capital to transform the economy for net-zero. All those efforts are going to bring greater transparency and scrutiny to decarbonization commitments.

Among several issues in the finance and corporate climate action, four are set to become key tools of climate-savvy strategies for the years to come.

Alignment with TCFD Recommendations

The Task Force on Climate-Related Financial Disclosures (TCFD) was created in 2015 to develop consistent climate-related financial risk disclosures for companies, banks, and investors. In 2021 the number of organizations supporting the TCFD recommendations exceeded 2,600, including financial institutions managing $194 trillion in assets. In 2022 a TCFD database is expected to be released, allowing financial operators to access data and to benchmark their practices to others across the industry.

Alignment with EU Taxonomy

The European classification primer for environmentally sustainable activities is currently high in the news due to the debate over the inclusion of nuclear and gas. Whatever EU leaders decide over this debate, the Taxonomy will become a central pillar in the next years. For companies, to define policies, attract capital and report to stakeholders. For investors, to integrate sustainability in investment decisions and navigate the transition.

Assessment of Climate Risks

Considerations regarding climate-related risks (both physical and transition risks) are already on the investors’ radar and are set to be increasingly integrated into the decision-making processes of companies. Assessing and quantifying climate risks is a strategic as well as complex effort, due to its case- and site-specific nature. According to our analysis, over 60% of largest Italian companies describe the climate risks they are exposed to, but only 10% quantify the financial impacts.

Carbon pricing

According to the World Bank, the potential of carbon pricing is still largely untapped. Several finance institutions and initiatives, such as the Net-Zero Asset Owner Alliance, call for global carbon pricing to rapidly accelerate to pave the way for ambitious emissions regulation. Adopting an internal carbon price in line with growing climate ambition is becoming a must in financial and corporate strategies, as a tool to manage climate risks and unlock innovative opportunities of net-zero transition.

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