Trade Journal – Green Economy Special
Net Zero: The real economy must adapt to the requirements of the financial sector
The financial sector has set itself ambitious net zero targets. Thus, the real economy must show even more progress, provide transparency and take measures to meet the growing demands of the financial industry.
Governments, international organisations and investors are focusing increasingly on the role of the financial sector in the transition to net zero emissions. Increasingly banks and insurance companies must measure the emissions they finance and report more precisely the greenhouse gas emissions associated with their loans, insurance policies, investments and other financial products. Partnership for Carbon Accounting Financials (PCAF), the Paris Agreement Capital Transition Assessment (PACTA) and the Science Based Targets Initiative (SBTi) are just some of the initiatives whose specifications must be considered.
The Swiss financial centre supports Paris Climate Agreement and the goal of reducing greenhouse gas emissions to net zero by 2050. The Federal Council recently launched the “Swiss Climate Scores”, which are intended to lead to more climate transparency in financial investments. The financial centre also has its own initiatives to strengthen Switzerland’s position as an influential location for sustainable finance. These include recommendations from the industry associations to their member companies in the financial sector to participate in net zero initiatives, to publish regular sustainability reports and guidelines and self-regulations, for example for advisory processes, and to provide training and further education.
What are net zero emissions, and why are they important?
To achieve net zero greenhouse gas emissions must be reduced as much as possible globally and the remaining emissions are offset by natural or technical measures. To limit global warming to no more than 1.5°C – as required by the Paris Climate Agreement – emissions must be reduced by around 50% by 2030 and reach net zero by 2050.
Transparency is a key element
Transparency by companies about the climate impact of their activities is a key element for the functioning of the financial market regarding climate neutrality in the financial sector. The internationally recognised recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) serve as a framework. The systematic disclosure of relevant and comparable climate information by companies in the real economy serves as the basis for the efficient allocation of capital, taking climate risks into account; for the creation of sustainable financial products; and for the transparent offering of “effectively green” financial services, as well as for investments in such companies. Consistent disclosure also counteracts greenwashing.
Forward-looking corporate management
Investors, financial institutions and other users of climate-related information question whether sufficient attention is given by companies to climate-related issues when deciding or reviewing their strategy, key action plans, risk management guidelines, annual budgets and performance target, and when monitoring significant investments and the performance assessment of management. They need to assess whether sustainability targets are based on plans and actions and are more than just the payment of lip service by companies to climate change measures.
Companies need greater understanding of the current and potential impact of climate-related risks and opportunities on their business and strategy. Even physical consequences of climate change – extreme weather, such as storms, heat or floods, can lead to significant losses. In addition, it is also essential that they should understand the risks and opportunities involved in the transition to a net zero strategy. With transition risks, the focus is on the change to a society that emits less carbon: new regulations on climate policy, technological advances, and also changing customer demands are key issues that need to be considered.
Measures on the way to net zero
The Swiss Bankers Association recommends that its members join the international Net Zero Banking Alliance initiative and commit themselves to aligning their loan and investment portfolios with the target of net zero emissions by 2050, and setting transparent interim targets. Banks are reliant on the measures taken by their corporate clients in developing their own climate strategies and plans for the transition to a low-carbon economy. Leading companies are setting concrete goals and have developed specific measures aimed at reducing greenhouse gas emissions in their operations and value chain.
Increasingly Chief Financial Officers (CFOs) are taking on the responsibility for this. A Deloitte survey of CFOs found that they already spend on average more than 10 hours per month on decarbonisation measures in their company. CFOs are required to comply with the TCFD recommendations and include non-financial disclosures in standard financial records. Legal requirements are that governance processes should be as rigorous as those for existing public financial disclosures, including reviews by the CFO, the Audit Committee, the Board of Directors and external auditors.
Net zero emissions as an opportunity
Implementing the TCFD recommendations will increase awareness of climate-related risks and opportunities within an organisation, thus leading to better risk management and more informed strategic planning. In addition, companies can improve their access to capital by increasing the confidence of investors and lenders that their climate-related risks are appropriately assessed and managed. Such action will satisfy the demand for climate-related information within a framework that investors and lenders are increasingly asking for.
Companies that do not adapt to the developing requirements in good time and are not ready will have to face the resulting consequences.
Governments around the world are setting increasingly ambitious carbon reduction targets. This, combined with increasing pressure from investors, regulators, governments, consumers and internal stakeholders, has made acting on issues of climate and sustainability an imperative for every organisation.
Embedding ESG into finance strategies