ESG and investors – Why it matters
Trillions of dollars are needed to reduce greenhouse gas emissions significantly and to mitigate and adapt to the impacts of climate change.
Climate change and finance
Trillions of dollars are needed to reduce greenhouse gas emissions significantly and to mitigate and adapt to the impacts of climate change.
Day 4 of COP29 will likely focus on finance, specifically the new annual climate financing target (the New Collective Quantified Goal (NCQG)).
The principles of the United Nations Framework Convention on Climate Change set out that developed countries are to financially assist developing countries in preventing and coping with the consequences of climate change. Given the level of financing required, this will be met through domestic resources, public funding and private financing.
Outside COP, there is huge potential for the private sector to provide the investment needed to drive innovation and create and grow new markets. Research by Deloitte/Tufts has found that 80% of global investors have implemented a sustainable investment policy. Additionally, companies must adequately consider the impact of climate change on their business operations. This means that companies looking for investment increasingly need to consider how they approach climate change and ESG.
What does this mean for businesses?
In the UK, FCA’s ESG (Environmental, Social and Governance) Sourcebook provides rules and guidance for asset managers and asset owners. It currently focuses on Task Force on Climate-Related (TCFD) disclosures, anti-greenwashing and sustainability labels, although this is expected to expand in future. In the EU, the Sustainable Finance Disclosure Regulation requires financial market participants (FMPs) and financial advisers to report on ESG risks and opportunities in their investment products.
As a result, there is increasing pressure on investors to have detailed information on the climate risk exposure and carbon footprint of their investments. By having a better understanding of how ESG and climate change may impact their investments, investors can improve their response to the potential risks and opportunities as well as provide robust reporting to interested stakeholders.
However, the availability of this data is still patchy and often poorly comparable due to differences in methodology or completeness. Investors often have to use estimates where information is missing and, even where data is available, it can be challenging to compare between firms, particularly for Scope 3 (value chain carbon emissions).
Businesses are, therefore often being asked to complete annual surveys and questionnaires by investors so that they can gather this data. As part of these, they may need to explain their ESG-related policies and their assessment of and response to the potential financial impact of climate-related risks.
What next?
At Inspired, we provide the skills and support necessary to develop and drive an ESG strategy. As well as helping companies collect their own ESG data and set ambitious but achievable targets, we can also help investors understand their holdings through company assessments and portfolio dashboards.
