At the start of March this year I found myself sat in a room with about 30 people listening to a speech by an advocate for sustainability. That room was in St James’s Palace, those people were CFOs from the world’s largest multinationals and the advocate delivering the speech was HRH The Prince of Wales.
We had convened to discuss how to reach global alignment on sustainability reporting standards and what we needed to do to help the newly formed International Sustainability Standards Board (the “ISSB”) achieve this aim. Quite a dry topic on the face of it but one that threw out some interesting insights and stories which I will, at least in part, share with you. I should say the day was conducted under Chatham House rules, which means I can share what I’ve learned but cannot identify the source.
Those of you with a keen eye for detail will note the timing of this meeting was after Russia began its invasion of Ukraine. At least three CFOs had pulled out because they had significant exposure (people on the ground). From my discussions with the rest of the group they were all in crisis management mode dealing with these horrific events, but it is testament to how important they felt this topic was that they still took time out to attend.
Sitting down for discussions the first topic quickly focused in on lessons we must learn from the EU taxonomy. This is not the first forum where I have heard negative feedback on the taxonomy but the animosity towards that project was palpable in this group. The feeling is, what started with good intentions (encouraging decarbonisation) quickly got lost in detail and consequently falls short of its aims. One participant shared her frustration that they cannot get credit for moving their entire (sizeable) fleet of vehicles to electric because their winter tyres don’t qualify. Issues like this hamper the transition to a low carbon economy.
That transition journey was a recurring theme. The consensus was that too much focus is placed on green finance, but it is the transition to green that has the greatest impact. There are different approaches and definitions of green finance but commonly the financed activity must meet criteria that qualify it as green (eg, a solar farm). This means that finance flows to activities that are already having a positive impact. There was a strong feeling that financing activities to support the transition phase from a negative to a positive environmental impact are more powerful. Any new sustainability standards must allow for that journey to presented clearly.
I was fortunate enough to have sight of HRH The Prince of Wales’s speech before he delivered it. I was therefore in a privileged position to appreciate the extent to which his remarks were off the cuff. His command of the detail in these developments was incredible, better I expect than most people in the room. Fortunately, the single sentence I added during drafting made the final cut. It was a call to arms, a plea for CFOs to be vocal in their support of these new standards. In practical terms that means engaging with the ISSB when they put their new standards out to consultation for anyone to comment on in the coming months.
One lady, who spent most of the day clutching her coat (a top tip if you ever attend a winter event at the palace – it’s very cold!), had intimate knowledge of the regulatory consultation process and was brilliant in taking the CFOs around the table to task for lobbying against climate disclosure in the past. That has to stop, it’s no good paying lip service to sustainability in public to then push back against regulation in private. I think we are at a tipping point where most organisations are now ready to embrace the benefits of sustainability but we are fast approaching the acid test for this theory. In the coming months, the SEC (the US financial markets regulator) will be consulting on mandatory climate disclosures and we will see whether the US really has the appetite to engage on sustainability.
One red flag for me came during the networking drinks at the end of the day. Talking to a CFO from a major US bank who commented that whatever came through in regulation and standards, it can’t lead to them walking away from clients. I pondered that comment for some time afterwards. Walking away is a disaster, it doesn’t solve a problem. Far better to engage and use what leverage is available to help a client transition. But if the client stubbornly and consistently refuses to accept their part in climate change? Surely walking away has to be an option on the table for investors and creditors? A last resort that can act as a useful deterrent for not acting on climate change. Though like any deterrent, it only works if you are willing to use it. Maybe that CFO was a one off but if he isn’t, if that is the mindset in corporate America, then we may be in for a rough ride over the next few months.
We are winning the argument on sustainability but it’s not won yet, so be vocal in your support. Engage with regulators and standard setters and help us progress in the right way. The ISSB, European Union and UK Financial Conduct Authority are all issuing standards and regulations for consultation in the coming months. Use this as an opportunity to engage.