Climate and finance has never seen a more dynamic time

18 August 2021

Written by Tim Mohin, Persefoni AI

Joe Biden has wasted no time in reinstating the country to the Paris Agreement, the international treaty on climate change since becoming the 46th President of the United States of America. 

The re-emergence of the US as a serious power in the fight against climate change was discussed in a panel session on day one of WE ARE GUERNSEY’s Sustainable Finance Week. We were delighted to have Tim Mohin tune in from Phoenix, Arizona. He is Executive Vice President and Chief Sustainability Officer of Persefoni AI, a start-up focused on carbon accounting. Here in our latest blog, Tim shares his view. 

What does US Climate Policy look like now? 

“There has never been a more dynamic time in terms of what is happening with climate change and the intersection with finance. For many years now, companies just reported voluntarily as a matter of corporate responsibility or brand. Now that's changing on both sides of the Atlantic.  

On this side, we're seeing the US Securities & Exchange Commission moving rapidly under their existing authorities to drive for more mandatory and uniform climate disclosure based on a set of standards. But that can change if the US administration changes, so we're looking for more permanent, lasting change in the form of legislation. 

Unfortunately, we have a divided set of representatives in the House and the Senate, and chances are somewhat diminished to see revolutionary climate disclosure or climate action legislation, US politics being what it is.  

That may change in a moment's notice. But the good news is that we will definitely see administrative action while the Biden administration is in control. They put together what I would call a dream team of climate advisors – John Kerry, Gina McCarthy, and many others – that will be negotiating on the US’ behalf as we head into COP26 in November. We are also seeing more international movement at the G7 as well as movement towards mandatory climate disclosure across not only the US, but the developed economies of the world. 

The drive for standardisation  

The desire for a coalescent set of standards has been a battle for many years. Speaking to the megatrends that we're seeing, the voluntary movement is being mainstreamed by investor interests. 

Corporate responsibility and ESG disclosure are not new – companies have been doing this for decades. We have 90% of the S&P 500 disclosing some sort of sustainability information now. The new thing is investor interest, and when you move into that mainstream, all of a sudden you need more reliable, consistent, comparable disclosure standards, and what is happening now is the International Financial Reporting Standards Foundation (IFRS) is moving to adopt sustainability standards with the backing of the regulatory associations under IOSCO, the International Organisation of the Securities Commission. These are all moves in the right direction and should lead to overall convergence on sustainability standards that will improve disclosure.  

However, the European Union are moving quite quickly to update the non-financial reporting directive, the NFRD – it’s now called the Corporate Sustainability Reporting Directive, the CSRD.  This directive has the full support of the European Central Bank.  The sticking point is that the EU will include its own sustainability standards and if they do not align with the IFRS work, we will have more confusion which will slow progress. 

So we have a bit of a race. The international financial standards setters are moving forward with sustainability standards, as is the EU, and what the world really needs is one set of standards. So how can we bring these together? Because climate is such an important issue, is moving so fast and has the political support across the world.  All stakeholders should call upon their leaders to demand a globally consistent accounting and disclosure system as an outcome of  COP26 in November.  

If we can do this for carbon, we can build on this to develop a single set of standards for all ESG topics, because we cannot afford to have this kind of confusion – it leads to delays and economic dislocations. This is how IFRS got together 20 years ago, to bring together the world's financial disclosure systems into one. We need the same now with ESG. 

Accountability is key 

When it comes to fossil fuel stocks we recently saw a sort of tipping point with big oil, when Exxon and Chevron were handed a defeat by their shareholders and Royal Dutch Shell was forced to redouble their climate reduction commitments by a court of law in the Netherlands. What this teaches us is that engagement works better than divestment, which leaves poor policies in place already.  It is far better to use the voting power of investors to drive progressive change.  

We have to understand that current society, whether we like it or not, is largely running on oil and gas. The question is what to do about it, and the engagement we saw from these shareholders really rocked the world.  In Exxon's case, their slowness to adapt to a lower carbon economy is leading to investors voting to add climate advocates to their board, which we have not seen before. But again this outcome would not have been possible is BlackRock had divested its shares of Exxon.  

Seize the day 

Looking towards COP26, in light of the perilous warning from the IPCC report, the whole world is saying that we need to take decisive action on climate change now, that it may be the last chance we have to take action. We have seen in the run up to COP26 action from the G7 and the G20, and the US is on board. This is a massive change from where we were just six months ago, and we can't let this opportunity slip through our fingers.  

To ensure we don’t squander the opportunity, I would like to see mandates, pure and simple. We must have mandatory climate reduction targets and disclosure towards net zero. And we need to start regulating what carbon offsets. Because the world is still running on carbon, and as we transition to a low carbon economy, offsets will be absolutely necessary.  But the quality of those has to be regulated so we know that there are additional and meaningful. Offsets have a murky reputation, and standards are needed to make them a more meaningful and reliable tool.   

Bottom line, we need swift and decisive action on limiting carbon emissions and better accounting and disclosure to keep us on track. The time is now and, I am hopeful that COP26 will succeed in bring the policy framework the world needs.