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What to expect from G7 on climate risk disclosures?

This week, we saw the Investment Association (IA) calling on G7 economies to push companies to disclose the risks they face from climate change. Pooja Khosla, VP Client Development at Entelligent, comments on what more needs to be done to reach our net-zero targets:

“It is true that ensuring long term sustainability is now a major focus of the world’s most advanced economies (G7). The climate urgency is finally crucial enough for these economies to agree on standardized rules requiring companies to report on the risks to their businesses posed by climate change and the net zero transitions. G7 members are in discussions to set foundations for sustainability-related disclosures by businesses and investors. It is very important for these foundations to set strong pillars to support capital flows towards a more sustainable economy that is ready to ramp up global transitions on the Net Zero trajectory.

“I believe these foundations need a strong focus on the following:

  • The reporting framework should be comprehensive and include, at a minimum, the environmental issues defined by the Global Reporting Initiative (GRI), the most widely adopted global standard for sustainability reporting.
  • For more broad and comprehensive reporting ESG & Sustainability standards should be industry and region specific and metric based.
  • Reporting and measurement of the environmental standards should be both in short-run and long-term horizons.
  • Climate focused reporting should be sufficiently broad to encompass issues that may be material for any industry or subindustry, but not necessarily be limited only to those companies for whom any specific metric is considered material at the moment.
  • Climate focused reporting should be based on established financial concepts like Efficient Market Hypothesis (which states that efficient markets should take account of all information) and Mosaic Theory, which states that analysts gather a wide variety of information to form a view of the quality of management, including but not limited to required financial reporting.
  • Climate focused reporting should be principles-based, bearing in mind that anything that may affect financial performance is material to investors.

“The best outcome expected from the G7 summit next week would be an actionable plan to ensure a measurable and material drive towards climate commitments. I see both policy makers and corporations setting up robust long-term targets and commitments, however, none so far are laying down time bound clear processes to achieve those targets. There is a lot of noise on what to do, however, we need global leadership to set an example on how to do this. Climate urgency now has to shift from plans to implementation and actions that are easy to report and adapt by the market stakeholders.

“Investors are calling for improved, practical, measurable, comprehensive and standardized company level reporting of climate-related financial risks. The key to achieve net-zero targets will be this drive to ensure high-quality and comparable data with expansive global coverage on the risks that companies face from climate change. Both asset owners and asset managers have profound interest in ensuring to establish sustainability disclosures that are widely available, comprehendible, comparable and verifiable to contribute to a sustainable economic recovery.

“As part of this, I would like to see better diligence and deployment by global policy makers to follow and use the best of the taxonomies and reporting standards. Europe and the UK is setting good examples for measurement metrics and standardization – this includes the progress on taxonomy through the TCFD and SFDR.

“I also agree that while it may take some time to immediately reach a useful set of standards that are globally harmonized and easy to adapt to by all sectors, it is equally true that we need to start somewhere. With the current climate urgency, we do not have time to wait! Let’s not make perfection the enemy of good. We live in a world of upgrades; additionally, we all learn from the journey not the destination. As this journey begins, we will see improvements and upgrades overtime. It is more important that the G7 kick starts this journey with a strong momentum in order to reach our ultimate goal.”

 

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