Firms already working towards a sustainable future can thrive but COP26 was a last wake-up call for everyone else, says Richard Threlfall

Richard Threlfall

Expectations were generally low as COP26 opened in Glasgow on 31 October. Alok Sharma was on the news talking about limiting global warming to 2C above pre-industrial levels but few seemed to believe him and, after the watering down of the final communique language to remove the reference to phasing out of coal, many may feel that their pessimism was sadly vindicated.

But progress was made. As negotiations opened, the science was predicting a minimal attainable warming of 2.7C above pre-industrial levels, and that lowered over the two weeks as political commitments were made, in some estimates to below the 2C that the UK government was hoping for.

The two announcements that will have the most far-reaching consequences were the product of business collaboration rather than political negotiation

Even that trajectory is not a cause for too much celebration, involving in all likelihood the loss of all coral reefs, mass extinctions of a further chunk of the world’s remaining biodiversity, and migration of millions of people from parts of the world becoming uninhabitable. But it is still a lot better than the consequences of nearing or exceeding 3C.

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For me, however, the two announcements that will have the most far-reaching consequences were the product of business collaboration rather than political negotiation. Together they will be the game-changer that drives a critical mass of businesses to the adoption and acceleration of net zero pathways.

First was the announcement that the Glasgow Financial Alliance for Net Zero had secured the support of 450 financial organisations controlling over $130 trillion of private capital. What is the significance of that? The entities concerned, covering around 40% of the world’s private capital deployment, have agreed to:

  • Use science-based guidelines to reach net zero emissions across all emissions scopes by 2050.
  • Set 2030 interim targets that represent a fair share of the 50% decarbonisation required by the end of the decade.
  • Set and publish a net zero transition strategy.
  • Commit to transparent reporting and accounting on progress against those targets.
  • Adhere to strict restrictions on use of offsets.

Again, so what? Many organisations have made similar commitments in recent years. But the difference is that, as financial organisations, these entities will discharge their net zero commitments not just through their own direct carbon footprints, but through the terms on which they make finance available.

In short, money for businesses that have high carbon footprints is about to become a lot more expensive and scarce. Access to and cost of capital for sustainable businesses will continue to fall.

Businesses in the construction sector beware: this will become very painful for some. And for UK listed businesses that pain may be exacerbated by the government’s announcement the same day that all listed companies would be required to produce decarbonisation pathways aligned to the UK’s overall decarbonisation plans by 2023.

The second announcement was the confirmation of the establishment of the International Sustainability Standards Board within the International Financial Reporting Standards Foundation, together with the publication of two prototype disclosure requirements, one general and one for climate-related disclosures.

I referenced this initiative in my April piece on biodiversity. The IFRS has moved quickly, and perhaps more importantly has assembled the strong backing of a range of countries and global organisations that declared their support.

So what? It means that it now seems almost certain that, within just a few years, there will be a global framework of non-financial reporting standards, starting with climate but quickly extending across a broad range of environmental, societal and governance metrics. And it seems certain that regulations will follow requiring disclosure by businesses against those metrics.

All businesses in the UK infrastructure and construction sector must start to plan now for disclosure, and think through what that might mean for them

The government has already made a step in this direction by obliging reporting against the TCFD (Taskforce on Climate-Related Financial Disclosures) standards by certain companies from 6 April next year. And the European Union Corporate Sustainability Reporting Directive, requiring disclosure from 2023 against a broad set of ESG metrics, is expected to affect nearly 50,000 companies.

This means that all businesses in the UK infrastructure and construction sector must start to plan now for disclosure, and think through what that might mean for them. The transparency that disclosure will bring is expected to affect the perceived value of businesses, and hence drive changes in approach to operations and risk.

Now, put these two announcements together, and you may start to share my optimism about what they could achieve for the cause of mitigating climate change. However they come with a dawning realisation that the impact for businesses, particularly in sectors such as ours, could be immense.

Value, reputation and cost of capital are all on the line. And the political mood is such that no one should assume there will be any generosity in the time allowed for transition.

Smart businesses in the sector will recognise what is happening as an opportunity, not a threat. Those who differentiate themselves by the sustainability of their product and their approach will thrive. If you are not already investing to be a leader in green construction, asset management or operation, then COP26 was your final wake-up call.

Richard Threlfall is a partner and global head of infrastructure at KPMG IMPACT