Finance and Sustainability

In recent years, one of the primary topics of discussion in the Finance world has been the potential impact of Industry 4.0 on the profession. While we strive to envision the future of a Finance professional in a digital world, let us not forget that climate change is also a reality that we now live in. Finance and Sustainability decisions and actions need to go hand in hand in order for us to be able to have a better future collectively.

Earlier this month, the Climate Change Conference (COP 26) was held. It was initially planned for 2020 but postponed due to the pandemic. In 2015, during COP 21 when Paris Agreement was reached, it was agreed that countries would review their plans to limit global warming by 1.5 degrees after every 5 years. This was the year to do so. Therefore, COP 26 had significant importance and urgency. A number of goals were planned for the conference, including mobilizing finance and routing it to developing and under developed countries to secure global net zero.

During the Conference, a number of landmark agreements were made including reduction of reliance on fossil fuels as a source of energy. 5 out of the world’s top 20 coal power using countries made commitments to phase out coal power. At the same time, a number of international banks committed to end international public financing of new unabated coal power by the end of 2021. This involvement of financial institutions was in line with the climate financing objective of the Conference.

Climate Finance refers to local, national or transnational financing that seeks to support mitigation and adaptation actions that will address climate change. It uses a variety of funding sources, including public as well as private finance. For now, climate finance has basically been placing the responsibility on developed countries to help under-financed economies in developing infrastructure and solutions required to fight climate change. Eventually, with the evolution of the financial sector and our fiscal systems, it would become a well-known kind of financing every finance professional would have to learn about.

Planning Sustainable Societies – OECD

In April of this year, the Glasgow Financial Alliance for Net Zero (GFANZ) was formed. It is an industry-led alliance of 160+ banks, asset managers and other financial services firms working together towards the goal of net zero emissions by year 2050. The signatories are to set science-aligned interim and long term goals to tackle climate change. This means that private entrepreneurs and companies have to adapt their business models. Their finance business partners are going to coordinate efforts and direct financial investments towards decarbonisation and a smoother transition to green economies.

One of the major milestones achieved during the COP26 in November was that the GFANZ succeeded to commit $130+ trillion of private equity to the transformation of economy towards the goal of net zero. According to an estimate, private sector could deliver 70% of total investments needed to meet net zero goals. The firms have also agreed to report their progress and financed emissions annually.

The private finance strategy of COP 26 focuses on areas such as climate reporting, climate-related risk management, returns and mobilisation. Voluntary reporting has been inconsistent at best. There is a high demand by investors and regulators of transparent and standard reporting. It is but natural that a concerted effort was required globally in terms of fair and consistent reporting of sustainability initiatives. Hence, during COP 26, the IFRS Foundation has announced the formation of International Sustainability Standards Board (ISSB) to standardise reporting of environmental, social and governance (ESG) matters. Prototype climate and general disclosure requirements have also been published at the same time.

It is becoming more urgent than ever that the finance profession adapt to changing circumstances. The world is evolving at a great pace. The Industry 4.0 revolution has already disrupted many industries and professions. In addition, social and environmental consciousness has also been increasingly seeping into our daily individual lives. A collective will to create a better and greener world is emerging where financial resources can now be used responsibly. What remains to be seen is what kind of changes the finance profession will go through to ultimately adapt and find a way to align finance and sustainability.

The author, Aamina Khan, editor of Ed-watch, is an international polyglot citizen who likes to explore the world differently. A Chartered Accountant by profession, she likes to read and write in various languages as an amateur.

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