Reporting and Governance
Silke Bernard, Linklaters

Silke Bernard, Linklaters

Around the world we are seeing nations and new networks ramping up their efforts to meet their climate goals and transition to a green economy. But the road ahead is far from smooth, and a number of real challenges can be seen on the horizon. We examine some of the key ESG headwinds we face and discuss their impact on global climate action, financing and the geopolitical landscape. By Silke Bernard, investment funds partner, and David Ballegeer, finance partner at Linklaters

While we may now all be familiar with the term ‘greenwashing’ and the idea that products and services should actually carry out their sustainability commitments, greenwashing is not without risks and responsibilities. It brings greater scrutiny and a demand for greater transparency along with the need for a deep understanding of the ever-changing regulatory environment. The financial services sector is on the frontline of the greenwashing debate because UK and EU regulators see disclosure as a vital component of building a more sustainable economy.

However, it can be hard for financial companies to stay on top of their regulatory requirements as new disclosures and taxonomy standards are rolled out, often followed by further information and clarification. Against this sometimes-confusing background, it is vital that companies put in place a rigorous system of checks and controls to help keep their sustainability goals on track. While regulators are shining a spotlight on greenwashing responsibilities, enforcement agencies are also putting the issue firmly centre stage. Greenwashing matters, and finding the right balance to manage the risks is essential. 

Navigating an evolving regulatory landscape

A further dimension to disclosure accuracy is about to open up with the introduction of a new consumer duty from the UK’s Financial Conduct Authority. Given the expanding layers of disclosure rules, and the risk of claims of greenwashing, some asset managers are thinking of testing their customers’ knowledge and understanding of ESG. But even when all the right steps are taken, and everyone is committed to accurate and fair disclosures, regulatory developments, or even unexpected world events, can see the ESG landscape suddenly shift. It is possible to simply trip up on an evolving regulatory road paved with complex legislation. When the unexpected lands, firms must know how to respond to and engage with a wide variety of stakeholders.

Bridging the funding gap?

While blended finance is a familiar concept in emerging economies, it has recently been gaining more traction in the wider world with particular focus on the staggering gap in funding energy transition plans. Blended finance, or concessional finance, is an investment structure designed to absorb risk, with risk a key barrier to private equity investing in new technologies and markets. This partnership between public and private capital, where the return on investment for public funds is measured by ‘impact’ not financial yield, may offer highly attractive investment opportunities. And, because the scale of the funding challenge is set to grow, we are likely to see more public sector finance supporting capital flows in this direction. 

A recent IMF report highlighted the difficult funding situation we face. It stated that the cost to the global public purse of not achieving net zero would be higher than if the public sector funded all transition costs itself. The figures speak for themselves. A recent McKinsey report forecasts a net infrastructure spending gap of $5.5tn a year between now and 2035. Equally, green infrastructure spend needed globally between now and 2030 is currently estimated at more than $90tn. In this context, it simply makes good economic sense for the public sector to ensure that net zero transition is successful.

A divided global picture?

We are seeing very different ESG pictures emerging on either side of the Atlantic. In Europe, the ESG space is being shaped against a background of growing regulatory and legal obligations. Meanwhile in the US, sustainability is increasingly seen as a ‘political football’, and a lack of clarity and divided opinions are creating a deeply challenging environment.

The Biden administration’s Inflation Reduction Act is a powerful and truly ambitious step towards building a cleaner and greener world. With some $380bn to be invested into energy, climate and security programmes in the coming decade, it puts the US as a clear frontrunner in the race to deliver a more sustainable future.

But there is no clear, global definition of ESG. The parameters of dialogue are wide. Some organisations argue that real value lies in pursuing ESG values. Others argue against that. But these should not be seen as mutually exclusive propositions. It is possible to engage with clients from both schools of thought and continue to deliver ESG products.

Market pressure will help take us closer to meeting climate targets. The recent, unprecedented consensus between 20 of Australia’s most influential business and finance bodies is driving in new sustainability reporting standards. These types of networks and collaborative initiatives will play an increasingly crucial role in sustainability. In a world where global agreement is increasingly hard to find, these networks of co-operation and national self-interest are needed to drive change more than ever. They should not be undervalued.

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