Weekend Test: Financial System Needs Rewiring

Last week I posted an article on Money Marketing looking at what financial advisers and asset managers want to see out of Cop26.

I was disappointed to see the number of page views. Not because it was my article, but because it suggests it’s something people don’t care about.


We published a poll Monday morning at 7:30 am asking: Does Cop26 matter to you? By 9.45am this had drawn 21 votes, all of which said “yes”.

The total vote is now 70, and 87% say it counts. I can’t decide if it’s heartening to see so many people think it matters, or if it’s worrying that someone is saying it doesn’t matter.

We are now halfway through the conference.

Friends attending the event told me that the feeling in the early days was rather pessimistic.

The problem we are talking about is huge and affects us all.

Yes, there are people who do not believe that climate change is happening, or that it is caused by us, but the majority see it as the biggest problem of our time.

This is the 26th Conference of the Parties, and the world is still on track to warm well above the 2 ° C target of the Paris Agreement, let alone the 1.5 ° C. to which warming really needs to be limited.

I heard a scary suggestion (no pun intended) the other day that even if all the major emitters in the world stopped emitting carbon dioxide today, we would still be on track for an increase. of 2.2 ° C. This means that we have already passed point 2C.

A recent UN report warned that the world is on track for an average temperature rise of 2.7 ° C based on national commitments ahead of Cop26.

What do the financial services of Cop26 want?

I would say it’s even more important that the 2C and 1.5C goals stay in place and that each of us do everything we can to keep warming to an absolute minimum.

What does this have to do with financial services in particular?

Well, Wednesday (November 3) was “finance day” at Cop26. He has also been touted as the “finance cop”.

Thomas Hohne-Sparborth, head of sustainability research at Lombard Odier, points out that the transition to a net zero economy requires not only investments in low-carbon technologies, but also a large-scale realignment of the economy. economy at large and, by extension, investment portfolios. .

The third day of Cop26 was filled with announcements about the goals and commitments of different nations.

This included new targets for climate finance from the UK, Spain, Japan, Australia, Norway, Ireland and Luxembourg.

These build on the plan established before Cop26 to provide the $ 100 billion per year to developing countries.

The UK has also pledged £ 100million in new funding, to help tackle the challenges many countries face with the bureaucracy of securing climate investments.

Cop26 also announces the launch of discussions on a new global financial target to replace the existing target of $ 100 billion from 2025.

Leaders from South Africa, UK, US, France, Germany and other EU countries announced innovative partnership to support South Africa in a just energy transition accelerated.

The international partnership announced that $ 8.5 billion could be made available over the next three to five years to help South Africa – the world’s most carbon-intensive electricity producer – meet the goal of most ambitious emission reduction of its enhanced national plan.

The United States, the European Commission and the United Kingdom have also pledged to work in partnership with countries to support a green and resilient recovery from Covid-19 and boost investment for clean and green infrastructure in developing countries. .

The UK has committed £ 576 million for a range of initiatives to mobilize finance in emerging markets and developing economies, including £ 66 million to expand its ‘MOBILIST’ program.

This is a program that helps develop new investment products that can be listed on public markets and attract different types of investors.

The initiatives announced by the World Bank Group and the Asian Development Bank will share the risks with developing countries. They aim to raise up to $ 8.5 billion in new funding to support climate action and sustainable development.

There was also the launch of an innovative new financing mechanism – the Climate Investment Fund Capital Markets Mechanism – which will boost investment in clean energy such as solar and wind power in developing countries. development.

Private financial institutions have taken an important step in ensuring that existing and future investments are aligned with the global goal of net zero.

Thirty-five countries have agreed on mandatory actions that would guarantee investors access to reliable information on climate risks, to help them direct their investments towards greener areas.

And, to ensure common standards, 36 countries welcomed the announcement of a new international body, the International Sustainability Standards Board (ISSB).

More than $ 130 billion in private funding is now committed to science-based net zero goals and short-term milestones, through the Glasgow Financial Alliance for Net Zero (GFANZ), led by Mark Carney.

GFANZ members are required to set strong, science-based short-term goals within 12-18 months of joining.

More than 90 of the founding institutions have already done so. One of the main objectives of GFANZ is to support developing countries and emerging markets.

Chancellor Rishi Sunak also announced his intention to bring the British financial center into line with net zero.

As part of the proposals, new requirements will be placed on UK financial institutions and listed companies to publish net zero transition plans.

The plans will need to detail how these companies will adapt and decarbonize, as the UK moves closer to its goal of being net zero by 2050.

Someone I spoke to recently pointed out to me how interesting the language of Sunak’s ad was.

Specifically, the use of the word “wiring”. This suggests a complete overhaul of the current financial system which I think many will agree is long overdue.

I’ve mentioned before, a few times I think, that I used to write for a utility post. This is the kind of language the energy and water companies used five years ago.

I feel since I joined Money Marketing that financial services are lagging behind other sectors in their response to the climate crisis, and Sunak’s speech reinforced that thinking.

But even in my first five months, people in the industry seem to have started talking more and more about sustainability and the environment.

I seem to receive a press release about an environmental, social and governance (ESG) study, or about the launch of an ESG fund, almost every day.

To coincide with finance day at Cop26, the Financial Conduct Authority released a discussion paper examining ways the industry could encourage more investors to put ESG issues at the heart of their investment decisions.

The regulator had already said a week earlier that it would ask “probing questions” to ensure that the financial services sector is doing its part in the fight against climate change.

In its discussion paper, the regulator says it wants to create a framework for sustainability disclosures, backed by product labels.

It also indicates that information related to sustainable development, presented in a standard way or according to standardized definitions, could be useful to institutional investors as well as to retail consumers.

This matches something that Tilney Smith & Williamson chief investment officer Rebecca Davidson said at the company’s responsible investing conference.

Customer needs are a big challenge when building an ESG portfolio

She said the interpretation of ESG varies from client to client, and the financial services industry still has “a long way to go” before it can ensure that it has the range of offers to represent all customers.

I recently spoke to Gavin Francis, founder of Worthstone – a social impact investing resource for financial advisors (and a certified B Corp).

He said he was encouraged by the release of the FCA discussion paper, although he wanted more details on exactly how performance would be measured and standards applied.

That’s a good point. Transparency will be the key.

Getting asset managers to self-assess probably wouldn’t work – it leaves too much room for interpretation.

Francis said, and I agree, that financial advisers and other interested parties now have a responsibility to respond to the FCA document by explaining how they see it working and how greenwashing can be avoided.

One suggestion is that asset managers should be fined for greenwashing. A recent CoreData poll found that 46% of advisors believe this should happen.

CoreData defines greenwashing as “companies and fund managers who provide misleading information about their green credentials to strengthen their reputation and increase sales”.

In its report, the research firm said: “In practice, defining exactly what constitutes greenwashing, and then establishing when a fund has strayed into greenwashing territory or exceeded a certain limit would be a good idea. difficult business.

“Deciding on the criteria and metrics to use to prove that a fund has been greenwashed presents additional challenges. “

Of course, if standards are to be set, companies must be held to account.

An independent accreditation body might be a good way to do this – either one that already exists or the launch of a new one.

So, coming back to Cop26, it is undoubtedly good that these talks and discussions take place and that goals are set.

But saying you’re going to do something is the easy part. Even saying how you are going to achieve these goals is easy. In fact, hitting them is what takes work.

And it is up to all of us to do our part. Money won’t matter if there isn’t a planet to spend it on.

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Don F. Davis

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