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Unlocking $130 Trillion in Net-Zero Finance
Estimated reading time: 10 minutes, 6 seconds
In this series of blog posts, Brainnwave CEO Steve Coates reflects on his attendance at COP26, the impacts on our industry and the implications for other business leaders who are thinking about the practicalities of decarbonization.
Trust – between governments, companies and society – is a pre-requisite for this sustainability transition; its absence creates hesitancy to act, fatally undermining the transition to a sustainable future. Our ability to reliably measure, report and analyse progress on sustainability is the foundation of that trust, yet research shows that measurement capabilities lag behind sustainability commitments.
Business leaders use a combination of Analytics, Artificial Intelligence, and Cloud to provide insights into current and projected sustainability performance to make informed decisions and drive a more effective transition towards a more sustainable future.
This session at COP26 examined the importance of accurate ESG reporting and how businesses, in concert with their investors and banks, are responding to the challenges and opportunities of sustainability measurement.
Speakers
- Marcelo Behar, Vice President Sustainability & Group Affairs, Natura & Co
- Celine Herweijer, Group Chief Sustainability Officer, HSBC
- Julia Hoggett, CEO, London Stock Exchange
- Nina Jais, Managing Director, Accenture
- Richard Mattison, President, S&P Global Sustainable1
- Ambrose Shannon, Managing Director, Accenture
- Ben Story, Chief Strategy Officer, Rolls Royce
- Sonia Thimmiah, Head of Sustainable Brands, Reckitt Benckiser
A message from this session came through loud and clear – the pressure on business is increasing. In the coffee chat after the presentation, one of the presenters told me that the CEOs across the world are roughly split into thirds. One third are passionate about climate change and the impact that their business is having on the environment. For that third, you do not need to convince them to change. They are already very focused on how to adapt their businesses to a world of net-zero.
The second third agree that something needs to be done but are more driven by the metrics. For this third, you need to convince them of the business case, and if the case is there, they will passionately support the initiatives.
Then you have the final third; it is not a top priority for this group for their businesses. These leaders will need more convincing.
Last week at COP26, the International Financial Reporting Standards Agency (IFRS) announced the formation of the International Sustainability Standards Board (ISSB). The ISSB will develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs and see the consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) into the Foundation. This is precisely what is needed to galvanize all business leaders (even the last third) and give them a mechanism to focus on delivering a trusted and measurable net-zero plan.
If we get this right, the prize is worth it. $130 trillion of assets are now available to finance the transition to Net-Zero. That is a significant number and one that is hard to imagine. For example, one trillion dollars would stretch nearly from the earth to the sun. It would take a military jet flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out one trillion dollar bills. Or a quick look at the Brainnwave Intelligence Platform shows me that, in economic terms, $130 trillion is $36 trillion more than the 2021 GDP of 187 of the world’s largest economies.
Economy size and growth information on the Brainnwave Platform
What is the core of an ESG plan, and how does this create value for the company and society?
It was refreshing to listen to Ben Story, Chief Strategy Officer at Rolls-Royce, in the discussion that followed. His company is 115 years old and has been through many significant transitions, from cars to aero, from turboprops to gas turbines, from runways to vertical take-off and from kerosine to electricity. He described Roll-Royce’s purpose as pioneering the power that matters, and today that means sustainable power.
Ben positioned this as a massive opportunity for Rolls-Royce, not a burden. Today they have just a 0.25% market share in the Oil and Gas sector. By leading the transition to Net-Zero and being an industry disruptor, there is a huge opportunity to grow that share significantly.
Marcelo Behar, Vice President of Sustainability & Group Affairs at Natura & Co (parent company of the Body Shop and Avon), gave a more personal perspective. Based in Brazil, home to the Amazon Rainforest, Marcelo’s outlook seemed much more urgent. His company was the first company in the world to go carbon neutral (in 2007.) For him, the focus has to be connecting the carbon metrics directly with nature. Without the Amazon Rainforest, there will be no Net-Zero! Solutions have to be built as carbon removal solutions. For his business, all financial targets for executives are linked to sustainability. In May this Year, Natura raised $1bn through Latin America’s largest sustainability bond. The sustainability link is that the bond will commit Natura & Co to deliver against its headline goals on climate action and sustainable packaging: reach Net-Zero by 2030 and set an interim emission to reduce emissions intensity by 13% by 2026, against a 2019 baseline.
Next up was Sonia Thimmiah, Head of Sustainable Brands at Reckitt Benckiser. They sell an astonishing 20 million products every day to over 1 billion homes through brands such as Vanish, Dettol and others. The fashion sector contributes 4% to global emissions, and we have to move away from the throwaway culture and drive circular behaviours. This is the mission behind Reckitt’s ESG strategy, and it makes business sense. Encouraging people to look after their clothes fits naturally with a business that sells cleaning and stain removal products. The journey to Net-Zero is a behavioural change on a global scale, not just about inventing new technologies and tracking data. Reflecting on this discussion, what we need to do is course correct the behaviour of one generation. Only in the last 30 years have we moved to a single-use culture when it comes to fashion. My parents would never have dreamed of this!
Dr Celine Herweijer, Group Chief Sustainability Officer at HSBC, gave her perspective from a global retail bank. HSBC is positioning itself in the market as a worldwide leader on climate change, and by appointing a CSO to the executive committee, they seem to be taking this seriously. HSBC has been around for 150 years and has $3 trillion on its balance sheet. With a significant presence in emerging economies, many of their customers are in markets where the most significant climate challenge will come from; hence, the bank cannot ignore this challenge. With the introduction of scope 3, the size of the challenge facing HSBC is enormous, monitoring and tracking everything on and off the balance sheet. Again, it was refreshing to hear Celine talk about short term actions and not just ambitions to do something by 2050. So what does Net-Zero transition look like for one of the worlds largest banks?
- The detailed transition plan is to be published early next year.
- There will be a fundamental shift in the assets under management (this alone will force businesses seeking finance to take the matter seriously).
- A sector by sector plan on how you push portfolio emissions down, starting with the oil and gas sector
- At the Business Unit level, there will be client-specific plans:
- How does the relationship with your clients need to change?
- What are your clients’ objectives?
- Verification on how robust your client plans are.
- Are their CAPEX spend plans aligned with HSBC sustainability goals?
- What technologies are they investing in and how do they align to sustainability goals?
- A global culture programme to define the capabilities needed internally and change the internal approach to climate change.
- Unlocking $1 trillion of finance by 2030 in terms of a new product, new hydrogen facilities, investing in technology and carbon reduction facilities.
Julia Hoggett, CEO at the London Stock Exchange, explained that 47% of the companies in the FTSE have committed to the race to Net-Zero and believes the announcement from the IFRS to disclose ESG will help increase this. She highlighted one of the significant hurdles to be overcome in releasing the investment capital – fragmentation. Over the years, capital flows have become fragmented, for example, into green funds. This makes it very difficult to track and monitor, transparency will be crucial to investor confidence.
On this theme of transparency it was encouraging to hear from Richard Mattison, President of Sustainable1 at S&P Global. His was the most significant internal budget request across the S&P Global group. He has created a new department with 500 analysts to define a set of standard metrics for organizations to track and monitor ESG initiatives. The need for trusted and accurate data is a topic close to my own heart. The biggest problem at the moment is the lack of standard definitions. We need to be clear about how we define sustainability, the transition and the route to Net-Zero, only then can we start to accurately measure progress.
ESG metrics will be integrated into credit ratings, and the establishment of the ISSB is a fantastic first step in that direction. This will be driven by investors who want to know how they are funding the transition and have the confidence that they are not investing in the wrong assets.
A phrase I have heard bandied about is “greenwashing” where a company outwardly paints a picture of a company that cares and is taking action but inwardly does not actually do anything. I hadn’t appreciated until today, that whilst this is a thing that happens, many companies get labelled with greenwashing because they are not very good at actually telling people what they are doing. Without having a standard approach to describing what is being done, that is comparable to other companies, the intent can lack credibility.
One of the significant risks to the whole transition is the data black hole. Most of the discussion today centred on publicly owned companies where regulators have some ability to force reporting. We already see divestment of Oil and Gas assets into the hands of Private Equity, where the requirements to report are nonexistent. This shift of assets into private ownership will increasingly become a significant challenge to the transparency of tracking progress.
The encouraging thing for Brainnwave is that technology can help address many of the issues raised today. A core challenge that was present throughout the discussion is that the data landscape is, quite simply, a mess. It lacks data quality, transparency, integration and governance. Underpinning all this is a fundamental technology challenge that risks businesses ability to deliver on their sustainability strategy. For me, it underscored the importance of applying technology to meet the rigour required in this new and evolving realm of ESG/Sustainability data, which remains out of reach for many firms.
Cloud technologies today open up new ways of aggregating and analysing information sources. Big data technologies can enable us to monitor smart meters and sensors across the value chain and utilize that to data to change behaviours.
Novel forms of data that were once the sole preserve of national governments can now but incorporated into business workflows, such as satellite data monitoring deforestation, or as we have done for one of our clients, monitor gas flaring and incorporate that into a sales excellence process.
I don’t think we can underestimate the value of the data engineer in helping businesses to make sense of the noise and drive to action. We can help companies close the credibility gap between what they are doing and reporting.
I think the final remarks from Julia Hoggett summed up nicely the overall discussion. We have to get comfortable living with complexity, we have no choice, this is a path we must walk down, and it is complex, but we have to do it in the best way possible. We have to use our ecosystem of knowledge and recognize that no one person has the answer, we must engage, discuss and adapt quickly. This complexity will be a challenge in a world where debate is largely driven by tweets!
