Climate investment means new transparency requirements

Expectations for this week’s COP26 climate change summit in Glasgow may be relatively low.  As wealthy countries gradually move toward meeting their promise to provide $100 billion per year for climate adaption and mitigation programs in developing countries, there is an opening for new markets in green investment and financial products.

This will need to be matched by greater transparency for funds mobilized by the private sector and development finance institutions.

The opportunity to harness the power of capital markets to combat climate change has in part, prompted financial market indexes to incorporate sustainability considerations.

A new focus on greener financial products is emerging in some developing countries.  Green bonds have been introduced alongside other sustainable financial products such as ethical securities.  But these products and markets are still at an early stage of development.

For example, African states are showing a limited capacity to absorb climate finance with only 26% of current climate finance going to Africa, compared to 43% to Asian states.

To know whether finance and development goals are being met, and to keep institutions on track, we will need better information on financial flows and how funding is allocated.

Similarly, in wealthy states, some governments are considering regulations that make sustainability a key component of investment decisions.  Voluntary initiatives in the UK and other states encourage businesses to disclose the impact of their activities on the environment.  By making these disclosures mandatory, investors would have more information to manage a variety of risks that could also have major positive impacts on the environment.  

There is progress.  But for climate change targets to be met, environmental, social, and governance—otherwise known as ESG—requirements will have to keep pace with new markets and services.  Voluntary initiatives, particularly if they exist without other transparency requirements, are not enough.

At minimum, our advocacy should focus on mandatory sustainability disclosure requirements—meaning that investment products would have to describe the environmental impact of the programs they finance, and justify clearly any sustainability claims. Asset managers would be required to explain how they incorporate sustainability into investment strategies.

And even still other tools are needed. African countries have called for a system to track funding from wealthy nations to help the developing world tackle climate change. As advocates we must continue guarding against “greenwashing” and ensure that climate finance is being used for its intended purpose.