Members of the Race to Zero and Race to Resilience (FSEG) Financial Industry Expert Group are seeking feedback on a suggestion that financial actors use metrics that “better distinguish real-world impact from virtual emissions reductions as a result of portfolio reallocation”.
In a discussion paper, the authors also floated the idea of a framework based on the Task Force on Climate-Related Financial Disclosures (TCFD) to help investors and others drive positive climate-related change.
According to the authors, who are four FSEG members, market participants and others point out that certain actions aimed at decarbonizing portfolios, such as rebalancing from fossil fuel companies to technology companies in listed equity portfolios, are not necessarily aligned with the actions required. to decarbonize the economy.
The authors also point to the growing literature on what it means to have an impact through finance and investment, saying that while deploying different terminologies and concepts, the literature focuses on “the key distinction between the concept of ‘”impact-alignment” and “impact-alignment” generation’.
The former, they said, does not necessarily create an impact, especially in the case of secondary market transactions in large public markets. At the same time, they said: “we are not arguing that impact alignment cannot create impact, just that impact alignment is not necessarily enough to create impact. “.
They also emphasized that the topic of finance and net zero impact is nascent and evolving, and “therefore this paper is simply designed to inform discussion and invite broader input rather than set out a definitive framework.” .
On the way to attribution of impact causation, responsibility
With respect to measures of “impact on the real economy”, the authors recognized that attributing causation or responsibility for impacts and outcomes to specific actions is complex and therefore it is difficult for financial institutions to disclose their impact in a manner consistent with the academic literature’s definition of “impact generation”.
However, they said there are a number of market-driven or academia-developed approaches “that may represent significant intermediate steps.”
- Redirecting emissions/alignment disclosures to distinguish “virtual” changes from real-world results;
- Disclosure of transactions in the primary market versus the secondary market to better understand the extent to which direct funding is provided;
- Full disclosures of the climate action universe and impact case studies to better understand the actions taken by the financial institution to achieve impact results and to inform academic research on the topic.
The first approach is the one the authors cite Sweden’s AP2 as having taken in its 2020 climate report, in which it breaks down the causes of its reduced carbon footprint, highlighting what is attributable to changes in climate. company participation (most of the reduction) and what was attributable to changes in the companies.
The authors are looking for feedback on whether the overview of metrics they presented captures all relevant market practices and whether people think certain approaches are more or less relevant than others.
They also asked the broader question of whether stakeholders believe there is a need for financial firms to provide additional information on how they will generate impact to support Paris alignment in the real economy.
Regarding their idea of a TCFD-based framework for impact generation, the authors said this could be a way to put more emphasis on impact on the real economy. This would mean keeping three of the four TCFD disclosure categories but replacing the “risk” category with a “delivery” category.
Comments are welcome until June 30.
The authors of the discussion paper are Ben Caldecott, of the University of Oxford and president of the FSEG, James Mitchell of the Rocky Mountain Institute, Matthew Scott of WTW and Jakob Thomae of the think tank 2° Investing Initiative.
The FSEG was created in 2021 to advise on “consistent, fair and rigorous” interpretation guidelines of the Race to Zero and Race to Resilience criteria for the financial sector. The UN-backed Race to Zero campaign was launched in 2020 and is led by Nigel Topping and Gonzalo Muñoz, the UN High Level Champions for the UK and Chile.
The working document is available here.