2. Business should prepare for the implications of the changing market and regulatory landscape
One of the highlights of the first week of COP26 was the announcement by the Glasgow Financial Alliance for Net Zero (GFANZ), a forum uniting over 450 financial service providers from 45 nations to accelerate the transition to a net-zero global economy by 2050. The alliance is responsible for $130 trillion1 of assets, a significant proportion of the global total.
This announcement could signal a big wave of M&A activity as investors look to divest high-carbon assets and acquire green technologies to deploy within their own organizations. We are already witnessing this with the energy sector, as they begin to action their decarbonization strategies. But who's going to be the good custodian of these high emission assets as major listed companies sell them? Businesses must prepare and take stock of the wave of transactions that are to come.
The regulatory landscape for climate commitments is gaining much needed additional rigor: COP26 saw the UK announce that it will become the first ‘net-zero financial center’ – requiring all financial institutions and listed companies to publish plans on how they will transition to net-zero from 2023. Businesses should expect other governments to follow London’s lead, and anticipate the pressure from asset owners and managers to trickle down the chain. As they look to align their portfolios to be aligned with the Paris Agreement and the Glasgow Climate Pact, they will be looking to the businesses they engage with to ask for their net-zero plans.
Understand your supply chain and exert positive influence: Leaders must delve deep into their supply chains and gain a detailed understanding of where their scope 1, 2 and 3 emissions come from and establish a target reduction plan. To meet market standards, these plans should include a short-term target of 2025 or 2030 and a framework to obtain accreditation by the SBTi (Science Based Targets Initiative) across all three scopes.
Sustainability has gone mainstream, and we must keep up: More broadly, these announcements also reinforce the point that COP26 and sustainability language has gone mainstream – everybody needs to be "foundationally competent". This means both current CEOs and boards – all the way through to future employees currently in education. This is a huge signal for businesses to upskill their leaders and workforce to equip themselves to navigate this agenda.
3. Businesses should expect and prepare for higher momentum on the convergence of sustainability standards
The launch of the new International Sustainability Standards Board (ISSB) by the IFRS Foundation in the first week of COP starts a crucial path toward globally consistent sustainability reporting standards. This global baseline for sustainability disclosures will provide clarity and consistency that the market has been calling for. It will underpin everything from the definition of net-zero to the mechanics of carbon offset markets.
We need to build trust by embracing both financial and environmental transparency: Businesses should expect the framework for sustainability standards to develop far more quickly when compared to other standards set in the past, given the technical work prior to the ISSB announcement. Business will need to meet this speed by aligning internally to prepare for increased demand – and mandates – for sustainability disclosures. The ISSB is focused on disclosures that are comparable globally and compatible with financial statements. Developing these will require the full force and power of the financial reporting, accounting and audit profession to get on board.
As this landscape rapidly evolves, we can also expect to see the regulatory landscape for sustainability disclosures to move from limited to full assurance. In Europe, under the EU Corporate Sustainability Reporting Directive, we will expect limited assurance for a lot of European based companies in 2023 financial year and then a likely move to full assurance mid-decade. Erkki Liikanen, Chair of the IFRS Foundation Trustees, indicated that “sustainability information (must be) produced with the same rigor, assurance of quality and global comparability as financial information.”