The post COP26 landscape has seen environmental concerns rise up the agenda internationally. The priorities of the private finance industry have shifted as regulators, financial institutions and businesses factor nature into their decision making.
This guide will cover significant updates from COP26 and how they will affect investors and financial institutions. It will highlight new individual, business and regulatory trends in private finance and the importance of considering biodiversity in this context.
The environment is now a critical part of the agenda for asset managers, owners and financial regulators.
COP26 saw a group of financial institutions worth $130trn commit to the Glasgow Financial Alliance for Net Zero (GFANZ). This was a significant landmark in prioritising environmental concerns and signposting financial services' intended direction.
The GFANZ reflects the industry trend toward environmentally-focused investing. ESG assets are projected to reach over $53 trillion by 2025, representing more than a third of the expected total assets under management (Bloomberg 2021).
BlackRock also highlighted the importance of ESG impact and environmental planning in their 2021 letter to clients. It emphasised 'climate risk as investment risk' and the increasing role of stewardship in an effective investment strategy (BlackRock 2021).
In particular, the developing role of fiduciary duties is a key takeaway for asset managers post COP26.
During the conference, thirty major institutions signed a financial sector commitment letter that described 'the increasing urgency' of addressing climate and biodiversity risks as a key part of their fiduciary duties.
Signatories included AXA Group, East Capital Group, Fidelity International and JGP Asset Managers. The combined asset value of the financial institutions involved was $8.7 trillion (Race To Zero 2021).
Moreover, asset owners increasingly expect information on the ESG impact of their portfolios. The IFRS found that investors were demanding 'high quality, transparent, reliable and comparable reporting by companies on the climate' (IFRS 2021). Environmental and nature-related concerns are at the top of the agenda for investors and investment managers.
Post COP26 regulation is aiming to standardise ESG reporting.
Developments in regulatory standards also reflect this post COP26 demand for transparency.
COP26 introduced a new international sustainability standards board, which aims to deliver a comprehensive global baseline for disclosure standards. It will provide investors with the capability to factor climate impact and risk into their decision making.
Additionally, in October, the UK was the first G20 country to announce mandatory climate disclosure for the most prominent businesses. This announcement was a milestone achievement for ESG reporting. It is in line with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations (DBEIS 2021).
These moves towards standardised climate disclosures will mean greater resources for asset managers. It will help them consider the impact of climate change and take advantage of associated market opportunities. It will also allow them to fulfil their changing fiduciary duties by effectively considering climate risk.
Biodiversity is key
Biodiversity loss is becoming recognised as an integrated part of climate-focused decision making.
For example, the Coalition of Finance Ministers for Climate Action and Network of Central Banks and Supervisors for Greening the Financial System (NGFS) made a joint COP26 statement aligning 'global climate and nature goals'.
The statement highlights the importance of considering complex challenges like biodiversity loss alongside traditional carbon targets.
Financial institutions are beginning to consider nature an integral part of achieving their Net Zero commitments.
Biodiversity at COP26
The Glasgow Climate pact, signed by 197 countries, was a key achievement of COP26. Notably, it emphasises the significance of understanding biodiversity loss.
For example, its preamble emphasises 'ensuring the integrity of all ecosystems' and 'the protection of biodiversity' (UNFCCC 2021).
There is a similar mention in the mitigation section. It describes the 'importance of protecting, conserving and restoring nature and ecosystems to achieve the Paris Agreement temperature goal' (UNFCCC 2021).
Moreover, the nationally determined contributions (NDCs) emphasised the value of nature.
92% of NDCs included nature-based solutions.
Additionally, more than three times as many NDCs refer to global nature agreements like the Convention on Biological Diversity (CBD) than previously (WWF 2021).
The commitment by major financial institutions to eliminate commodity-driven deforestation also highlights how nature-positive decision making is a priority for private finance.
This pattern shows how biodiversity is a key consideration for both public and private financial flows.
What does this mean for finance?
Looking ahead, biodiversity is on the ESG agenda. This is due to events like the COP15 global biodiversity summit (part 2) taking place in April 2022 and the change to yearly NDC reviews.
The World Economic Forum announced that nature loss threatens an estimated $44trn of economic value (over half of global GDP) (WEF 2021).
As a result, biodiversity implications are an increasingly important risk consideration for investors.
However, financial institutions don't have the information needed to understand how nature can impact immediate financial performance or long-term financial risk (TNFD 2021).
Get in touch to discover how NatureAlpha's specialist analytics and insights platform will help investors consider nature-related risk and impact.
Comments