Developments out of Glasgow in the past day that have practical elements include:
$130 trillion commits to Glasgow Financial Alliance for Net Zero (GFANZ). Mark Carney announced that funding equating to approximately 40% of the total global financial assets joined his initiative for “mobilizing private capital to support net zero transitions in emerging markets and developing countries, defining net zero pathways, particularly for carbon-intensives sectors, and working to clearly define financial sector expectations on real-economy transition strategies and disclosures.”
Our view: This is welcome news and certainly elevates the role of financial institutions in meeting climate goals. The cynic in me wonders if this will turn out to be little more than high-level aspirations made on a public stage (see this), or will the 450+ firms signed up be willing to make the hard choices consistent with the commitment. As I wrote previously here, plans have already been made to expand the use of fossil fuels even in the face of other commitments and public pronouncements. And given the history of similar (and smaller) commitments, there is reason to be cynical.
At the same time, some banks, investors and asset managers will make meaningful efforts to meet their commitments and change aspects of their business model/strategies, beginning a systemic shift. How might that work? See the comments below about an idea Larry Fink is talking about.
Major ESG standards consolidation. The IFRS Foundation announced that the Climate Disclosure Standards Board (part of CDP) and the Value Reporting Foundation (formerly known as SASB) will merge into the IFRS Foundation by June 2022. In addition, the new International Sustainability Standards Board (ISSB) will open their first offices in Frankfurt and Montreal.
Our view: Aside from the fact that this announcement was made only hours after I wrapped up FINAL final revisions and updates to my book, this is great news. Consolidation of ESG standards is unquestionably a big step forward and should be welcomed by just about everyone – but it is just a start. Other standards such as GRI, PRI, ISO and the newly announced CFA standards I covered here remain independent. Also, in the US, the Financial Accounting Standards Board (FASB) and the SEC will still need to put any proposed standards through administrative and public input reviews before changes to existing financial reporting requirements are codified. I wrote about that in detail here.
Some groups and individuals (typically those unaccustomed to working with regulations or within mandates of US rulemaking procedures) are pushing hard for immediate automatic adoption of international standards. Those people give no consideration to US (or other countries’) sovereign rights, legal framework and democratic principles.
Fink acknowledges private equity uptake of divested fossil fuel assets. BlackRock CEO Larry Fink said this out loud: “There’s more movement away from hydrocarbon assets into private hands than anytime, ever. That does not change the net zero world. That’s window dressing, that’s greenwashing.” He called for leveling the playing field between public companies and private equity (PE) firms in terms of applicability of ESG standards and disclosures.
He also discussed the concept of “good bank, bad bank” as a transitional business model where oil companies could split their assets: fossil fuel assets would be placed into the “bad bank” that would function like what he called a “declining trust” and “100% of the proceeds would go into increasing funding of the green business” in the “good bank”.
Our view: Research I completed just last month bears out that Fink is right. PE has been the beneficiary of “fire sale” pricing of fossil fuel assets as publicly-traded companies decarbonize their holdings via divestiture. Fink saying this on the global COP26 stage could trigger changes impacting PE’s fossil fuel buying strategy, especially for PE firms signed on to GFANZ.
At the same time, fossil fuels present attractive short and mid term up-side within a transition economy, especially when those assets are available at bargains. Moving away from fossil energy will take time. His “good bank, bad bank” concept offers a reasonable framework that may be less problematic and simpler than other transition proposals. Perhaps we will see a realistic framework come out of COP26.