COP26: Financial services in the fight against climate change

As the gatekeepers of capital in capital-fuelled economies, financial services firms have an essential role to play in this global shift, therefore climate change-related regulations are being bolstered to support sustainability-based decision making from investors, and private and public players alike. The formation of the International Sustainability Standards Board (ISSB), which will include the Value Reporting Foundation (VRF) and Climate Disclosure Standards Board (CDSB), and the announcement of climate- and sustainability-related disclosure prototype requirements are key developments for the financial industry.

For financial services firms in both the public and private sectors, the priority is clear; financial decisions need to take climate change into account if these firms are to contribute to the net-zero target. Companies need to be transparent about the risks and opportunities that climate change and the shift to a net-zero economy pose to their business. Central banks and regulators need to make sure that financial systems can withstand the impact of climate change and support the decarbonisation process. Banks, insurers, investors and other financial firms need to commit to ensuring their investments and lending portfolios are aligned with robust sustainability targets.

COP26 Finance Day on 3 November saw some significant commitments being made in the effort to improve global sustainability disclosure standards for the financial markets. In particular, these developments include:

1. The formation of the International Sustainability Standards Board (ISSB), which aims to develop a single and comprehensive global standard of sustainability disclosures for financial markets. The IFRS Foundation will work towards enabling the ISSB to begin work in early 2022.
2. The consolidation of the Value Reporting Foundation (VRF), home to SASB Standards and Integrated Reporting, and the Climate Disclosure Standards Board (CDSB) into the ISSB.
3. The publishing of two prototypes, one on climate-related disclosures and the other on general sustainability disclosure. The climate-related disclosures prototype builds on the TCFD recommendations.

Leaders hope that these actions will support comparability, foster investment decisions, and address stakeholder or public policy needs with regards to ESG, especially climate, issues. Financial services firms need to produce transparent climate-related disclosures and take continued and augmented action to respond to climate issues if they want to be viewed as favourably by investors.

Whilst climate change poses significant risks to all firms in the financial services landscape, it also presents opportunities to those firms focused on mitigating climate change and accordingly disclosing their actions.

Looking forward, as the UK aims to become the first net-zero global financial centre, financial institutions operating in the UK are amongst the most affected companies in the world. They will be subject to new requirements and required to publish transition roadmaps towards sustainable systems. Without question and with absolute commitment, all financial institutions must play their part in securing a green future for the planet.