U.N. climate conference spotlights role of capital

Investors found reasons to be cautiously optimistic at the United Nations climate-change conference, with the unveiling of global standards for climate disclosure and other advances.

The global conference known as COP26, which concluded Nov. 12, also highlighted the critical role that investors will play.

"It is a watershed event because it is the first COP that focused on finance. What happened at COP26 was the realization that capital plays a big role in this thing," said Henry A. Fernandez, chairman and CEO of MSCI Inc. in New York.

Having finance "in the big tent" was important, said Saker Nusseibeh, London-based CEO of Federated Hermes Inc.'s international business, with $646 billion under management. "Sitting across all economic activity as we do, we possibly have greater influence to drive the change that's needed than any other group outside of politics," he said at a COP26-related event.

The sweeping announcements from countries to limit coal, methane emissions and deforestation, among other measures, will take time to bear out. And, even if all the pledges turned into action, global greenhouse gas emissions will be nearly double where they should be in 2030 to meet the Paris Agreement goal of limiting temperature rise to 1.5 degrees Celsius, according to the Climate Action Tracker.

Still, there was some good news for institutional investors.

First was the Nov. 3 announcement that global standards for climate disclosure in financial markets are in the works. The International Sustainability Standards Board unveiled at COP26 by the global accounting body International Financial Reporting Standards Foundation in London is aimed at giving investors a comprehensive global baseline of sustainability disclosure standards.

To be built on existing standards, including those from the Task Force on Climate-related Financial Disclosures and other sources, the resulting baseline “will deliver transformative change in sustainability disclosures for the financial markets,” TCFD Secretariat Mary Schapiro told COP26 delegates.

Other investor-focused organizations for corporate sustainability disclosure, including the IFRS Foundation's Climate Disclosure Standards Board and the Value Reporting Foundation — created when the Sustainability Accounting Standards Board and International Integrated Reporting Council merged in June — will consolidate into the new ISSB sometime next year.

Tied to well-established accounting standards, the new sustainability standards will be hard for companies to ignore and should simplify things for asset owners and managers, sources said.

"It is a global mainstream organization that is now on it. We can't dedicate all these resources to a multitude of initiatives," said Piet Klop, acting head of responsible investment with Dutch pensions manager PGGM. The in-house manager for Pensioenfonds Zorg en Welzijn, Zeist, Netherlands, PGGM manages a total €268 billion ($310 billion) in assets.

"Many investors are looking for that convergence because it enables them to compare companies or sectors. This is the sort of thing that investors need, to get their minds around (climate risk) for fiduciary reasons," Mr. Klop said. While the new standards will apply to public markets, "eventually this is going to spread out over different asset classes. This is not a fad," he said.

The prospect of a global baseline "is a huge step," said Jennifer Coulson, senior managing director for ESG with the British Columbia Investment Management Corp., Victoria, overseeing C$199.6 billion ($161.1 billion) in provincial pension and other assets. She was pleased that the new standards will build on what already exists, including well-regarded industry-specific ones from the Value Reporting Foundation. "That is a very strong indication for us that they are heading in the right direction," Ms. Coulson said.

The new baseline won't happen overnight. The first step, a public consultation on potential standards, will start next year. Final standards for climate disclosure could take a year or more after that, followed by ones for other sustainability issues, according to people involved in the process. Ms. Coulson of BCI said that investors will be watching to ensure there is strong investor representation as the governance is worked out.

Giving institutional investors one place to turn when making investment decisions related to climate risk "will make it easier for investors, regardless where they are on that spectrum, to understand the risk," said Katie Schmitz Eulitt, director of investor relationships and head of Asia-Pacific outreach with the Value Reporting Foundation in San Francisco. "Without standardization, the data is all over the map. And this will help make data more robust over time," she said.

Ms. Eulitt credits institutional investors for pushing for ISSB's formation. "I really think it speaks to the strength of investors rallying around something they think is important," she said.

Anne Simpson, managing investment director for board governance and sustainability at the $489.9 billion California Public Employees' Retirement System, Sacramento, said the pension fund represented the Council of Institutional Investors at a 2016 IFRS advisory group meeting where it led the call for creating what is now ISSB.

"Investors dream of a common language in financial markets to integrate risk and return. The new ISSB will provide CalPERS as a global investor with corporate reporting which is standardized, relevant and fully integrated into the audited accounts," Ms. Simpson said in an email.

The new standards could also "help move the dial in tackling broader concerns of greenwashing by the industry," said Berenice Lasfargues, New York-based ESG analyst and sustainable development goals lead at BNP Paribas Asset Management, with €502 billion in assets under management. "ESG ratings are only as good as the information they are being fed, and for us to properly assess the sustainability characteristics of an investment, we need harmonized comparable disclosures," Ms. Lasfargues said.

A related effort announced Nov. 9 at COP26 is a task force developing a Global Resilience Index to enable asset owners to compare portfolio risks across geographies and scenarios, and allow countries to prioritize climate-related investments. The open-source risk management resource would cover man-made environment, infrastructure, agriculture and societal exposures. Among its backers are the Coalition for Climate Resilient Investment, whose members include the $312.2 billion California State Teachers' Retirement System, West Sacramento, the A$233 billion ($175 billion) AustralianSuper, Melbourne, and the £4 billion ($5.5 billion) Environment Agency Pension Fund, Bristol, England, as well as leading asset managers and consultants, including Aberdeen Standard Investments, CBRE Investment Management, DWS Group, Fidelity International, Impax Asset Management, Invesco Ltd., Legal and General Investment Management, Macquarie Group Ltd., Schroders PLC and Willis Towers Watson PLC.

COP26 also brought news that financing to achieve net-zero goals is reaching the point where it can make an impact. The Glasgow Financial Alliance for Net-Zero, a private sector-led initiative to reach net-zero emissions by 2050, now has more than 450 financial institutions representing assets of more than $130 trillion across 45 countries, ready to tackle climate risk. Representing 40% of all global assets, those assets are more than the $100 trillion needed to meet the Paris Agreement's 2050 net-zero target, GFANZ co-Chairman Mark Carney, the United Nations special envoy for climate action and finance, told COP26 attendees Nov. 3.

"That community certainly sent a strong signal" that they are ready to tackle climate change, said Ms. Coulson of BCI.

The challenge now, BlackRock Chairman and CEO Laurence D. Fink said during a COP26 finance panel on Nov. 3, "is finding the projects, finding the ability to deploy that capital." It will be harder than traditional investments and require a new rapid deploying system to quickly distribute assets in emerging markets and avoid regulatory delays in developed countries, Mr. Fink said.

Evidence that pension funds and money managers clearly recognize the urgency of committing to net-zero emissions targets preceded COP26, when half of the members of the U.N.-convened Net-Zero Asset Owner Alliance, with $10 trillion in assets under management, moved up their timelines for cutting emissions in their portfolios.