The corporate world’s tipping point on climate
Read time : 4 mins Added: 24/03/2022
The COP26 conference illustrated the scale of companies’ net-zero ambitions and the growing wave of capital that is mobilising to finance their transition.
The event involved around 40,000 registered delegates, 100 world leaders, the presence of 197 countries and at least two years of preparation. The goal? To secure global net zero by mid-century and limit temperature rises to 1.5 degrees above pre-industrial levels within reach.
With such scale and ambition, the United Nations’ Climate Change Conference in Glasgow was always going to struggle to meet all of its objectives. But as the dust settles on what was billed as the most important climate-change conference to date, one of the main conclusions from COP26 is that the climate is now accelerating to the top of the global business agenda.
Tara Schmidt, Sustainability & ESG Finance Director at Lloyds Bank, argues that the conference marked “a fundamental tipping point for business” in the journey to a net zero world. “Businesses are now in hyperdrive when it comes to climate,” she says.
Indeed, while questions remain over the degree of political commitments to combating climate change, including last-minute wording that watered down commitments to phasing out coal and fossil-fuel subsidies, there are clear signs that private-sector pledges on climate have reached a milestone.
The UN’s Race to Zero campaign, a coalition of net-zero initiatives, now has more than 5,200 companies of all sizes making pledges to end their contribution to climate change by 20501. In the UK, meanwhile, at least 60 companies in the FTSE 100, which account for £1.2tn in market capitalisation and in excess of £700bn in annual sales, have committed to becoming net zero emitters by 2050.
The commitment from the private sector to materially mobilise capital to fund the transition was a pivotal moment at COP26. Among a series of finance-related announcements, Mark Carney, the Bank of England’s former governor and now the UN Special Envoy on Climate Action and Finance, said that a broad group of private-sector financial firms representing $130tn of capital, are committed to support the transition to net zero.
The Glasgow Financial Alliance for Net Zero (Gfanz), as the group is called, brings together 450 companies across 45 countries in an initiative whose committed capital to funding the net-zero transition has grown from just $5tn in April, when Gfanz began.
“We now have the essential plumbing in place to move climate change from the fringes to the forefront of finance so that every financial decision takes climate change into account,” said Carney during the climate conference.
All this finance-building is set to affect business in several different ways, argues Nick Robins, Professor in Practice for Sustainable Finance at the LSE’s Grantham Research Institute. First, he says, the reallocation of capital from fossil fuels to clean energy will accelerate, driven by technology, policy and finance-sector pledges.
“We now have fossil fuels and coal specifically mentioned in a COP communiqué, which is a first,” he says. “That leaves a very clear expectation on governments to come back with tougher measures next year, and it sets the tone for continuing reductions in private-sector funding for those sectors.”
Second, Robins says that the real test for funding for the net-zero transition will be in developing and emerging economies. Developed countries have so far failed to meet their longstanding $100bn-a-year climate-finance pledge, and this will need to be rectified in 2022. The choice of Egypt as the venue for next year’s meeting also sent a signal of a shift in geographical focus — and one that will reverberate well beyond the public sector.
“Attention will be on expanding capital expenditures for net zero by large companies, banks and investors in developing countries, with a real focus on using this to bring about a just transition for workers and communities,” says Robins. “This focus on how net zero delivers decent jobs and community benefits will also extend to international supply chains. A just transition in those supply chains to ensure that people are not left behind is going to be a really high priority.”
Schmidt of Lloyds Bank says that the rising tide of transition, and sustainability-linked financing, evident at COP26 will require companies to increasingly set shorter-term goals on the road to 2050 as banks and other lenders look to ensure that plans are based on targets in line with the science.
‘It’s not enough to set a 2050 goal without having clear shorter-term targets over the next few years,” she says. “We’re looking more closely than ever at our clients’ sustainability strategies, and we’re asking them how their targets are scientifically aligned.”
Many companies are already deepening their shorter-term commitments with the help and incentives created by innovative bank financing. As delegates met in Glasgow, for example, John Lewis Partnership confirmed that it had secured a five-year £420m sustainability-linked revolving credit facility provided by seven banks, including and structured by Lloyds Bank.
The credit facility provides the Partnership with incentives, via lower margin rates, if it meets specific environmental targets set throughout the duration of the facility; the targets centre on combating food waste, moving away from fossil fuels and reducing carbon emissions.
Christof Nelischer, Head of Treasury at John Lewis Partnership, says that the credit facility helps focus minds even more on meeting sustainability targets because it breaks down the Partnership’s high-level sustainability commitments into short-term goals measured down to the last fraction of a percentage point.
“Have we made the right choices on those parameters? Have we picked the right baselines? Only time will tell,” he says. “But unless you make a move and start pushing the organisation in a certain direction, you open yourself up to procrastination, which is what corporates have been guilty of for far too long.”
This content was paid for and produced by Lloyds Bank in partnership with the Commercial Department of the Financial Times.
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