A new route through the climate crisis by Lyonsdown

ENVIRONMENTAL, SOCIAL & GOVERNANCE • NOVEMBER 2021

BUSINESS-REPORTER.CO.UK

A new route through the climate crisis SPECIAL REPORT

The climate emergency is already here – and businesses must take the lead to pilot us through its treacherous waters

THIS SUPPLEMENT WAS PRODUCED BY LYONSDOWN/BUSINESS REPORTER. IT DID NOT INVOLVE THE REPORTING OR EDITING OF ECONOMIST STAFF AND NO ENDORSEMENT IS IMPLIED.

November 2021

Shoring up our flood defences is a crucial priority for UK homes by Andy Bord, chief executive, Flood Re

orld leaders are gathering in Glasgow to bring new momentum to global efforts in tackling climate change and creating more resilient economies, and they will be covering key policy areas that must be addressed on an international scale. It is the race to net zero emissions that has so far attracted the most attention and will likely dominate much of COP26, with businesses and governments alike setting targets to reach this goal. Yet these discussions overlook a critical factor: the effects of climate change are already being experienced, with countless people living with its consequences at this very moment. We must now challenge the view that climate change is a long-term problem, one to aspire to tackle in the future. The time to act is now – we have no time to waste. The increasing frequency and severity of floods are clear evidence of this. Six of the wettest years in history have occurred since 1998, with an estimated one in six properties in England and Wales now at risk of flooding. It is the greatest natural disaster risk in the UK, and with the planet projected to become warmer and wetter, the situation will only worsen without urgent intervention, both in the UK and elsewhere around the world. Commitments are of course needed to reduce emissions, but it is equally important to recognise that we cannot stop climate change altogether and must

reduce the cost and impact of future floods by including property resilience measures as part of flood repairs. We are also recommending that this is taken a step further, with our plans for discounted premiums for households with property flood resilience (PFR) measures in place. Not only will this support the market for such products and help change attitudes and behaviours, it will also incentivise take-up of PFR. It is this investment that will help ensure the long-term availability and affordability of flood insurance as the impact of climate change increases. take steps now to adapt. Critically, this must include short-term measures that can be achieved as quickly and cost-effectively as possible.

The need for flood resilience measures

One example of this is flood-resilience measures in homes, such as airbrick covers, raised electrical sockets and sealing brickwork. By installing these simple home improvements we can ensure that at-risk households across the UK are better protected from the risks of flooding now and in the future. This takes on more importance when considering the need for new homes. As more and more are inevitably built on flood plains, intervention and incentives will be essential to protect households from the trauma and cost of flooding. Flood Re’s Build Back Better proposals for the UK, which have government support, are designed to

Green investment as a long-term priority

remains in place. Research confirms that this is cost effective to do so; every £1 spent on maintenance now saves £7 in spending on new defences. Elsewhere, Flood Re is currently supporting a pilot project in Wyre in Lancashire to bring private investment into natural flood management through a special purpose vehicle (SPV). Working with a range of stakeholders, including the Rivers Trust and an investment bank, the aim is to test where “at risk” communities and businesses can become buyers of natural flood management ecosystem services, such as earth bunds, which slow the movement of water, creating dams and rewetting drained wetlands. This is just one example of measures designed to improve flood resilience and reduce the damage caused by flooding in the long term. The project is a ten-year trial that will include the construction and ongoing maintenance of a natural flood management scheme, and will test the extent to which flood risk is reduced. We are advocating for a scalable approach that can further unlock investment for natural flood management across the country. It is a commitment to adapt to the growing climate crisis through aligned strategies that would be a pivotal outcome from COP26. The time to act is now.

Government must also prioritise the maintenance of flood defences and consider ways to harness green investment to manage future flood risk. Limiting risk requires continued investment in flood risk management, and recent government promises of capital funding for new defences are welcome. A longer-term commitment on funding now will help consolidate this and provide certainty into the future. The imminent spending review must also include adequate funds for maintenance. As the frequency and i nte n s it y of f lo o d i n g increases, it is hugely important that these defences continue to be fit for purpose. Well-funded flood defences rarely breach, but maintenance is essential to ensure INDUSTRY VIEW the protection they offer to @floodre homes and communities www.floodre.co.uk

November 2021

COP26 is our moment to turn commitments into clear and present reality

The next wave of environmental, social and corporate governance by Eli Reisman, Eliot Caroom, and Mackenzie Hargrave, FactSet

nvironmental, social, and governance (ESG) investing has been in a state of unrelenting change since the term was coined back in 2004 and the first wave of ESG products hit the market. However, the fate of ESG disclosure is coming into focus with a pending European Union (EU) regulatory regime, a new Sustainability Standards Board being proposed by International Financing Reporting Standards, and investors coalescing around standards, such as those of the Value Reporting Foundation. Before long, the majority of public companies will face some kind of ESG disclosure standards. As ESG disclosures for publicly listed companies are formalised, the market will turn its attention to private companies and asset classes where ESG plays a key role but is difficult to assess. According to McKinsey, private markets have grown 2.7-fold since 2010 and are worth more than $6.5 trillion. The growth comes in part from institutions turning to alternative assets to chase higher returns. For example, in 2019, alternative investments made up 29 and 53 per cent of endowment and pension portfolios respectively, according to Morgan Stanley. These same institutions are weaving ESG into investment

processes, both to satisfy regulators and to meet client demand – 70 per cent of investors surveyed by EY said that alternative managers’ ESG policies are critically important. This institutional systematic approach demands ESG data for alternative investments alongside equities. Additionally, having private company data enables the supply chains of public companies to be assessed comprehensively. To assess ESG risks and opportunities for public companies, investors need to analyse customers, suppliers and partners, public and private alike. Although some private companies publish ESG data, disclosure mechanisms don’t compare with public requirements. However, recent technological advances including artificial intelligence, natural-language processing, satellites and sensors, mean that some ESG data can be collected without company disclosure. As ESG data becomes standardised and commoditised for public companies, look for the next wave to rely heavily on new technologies that give private companies and other asset classes the same attention and scrutiny. INDUSTRY VIEW linkedin.com/company/factset factset.com/esg

GONZALO MUÑOZ NIGEL TOPPING UN CHAMPIONS FOR CLIMATE ACTION, COP25 AND COP26

n the race to a healthier, fairer, more resilient zero-carbon world, commitments to reach net-zero emissions before 2050 are now the minimum that countries, cities, regions, businesses and investors should be doing. The science makes clear this is a time for action, not just commitment. To reach net zero in the 2040s, we need to halve greenhouse gas emissions between 2020 and 2030 – equivalent to a 7.6 per cent emissions cut every year of the 2020s, according to the United Nations Environment Programme. At the same time, we need to regenerate nature and build resilience, to ensure that we thrive in spite of the extreme temperatures, floods, droughts and other impacts we cannot mitigate. The challenge is extraordinary, and the United Nations COP26 summit in Glasgow gives us a chance to meet it head-on as a united society intent on acting in line with the science. National governments must set that global intent over the two weeks in Glasgow. But they cannot do it alone. Businesses, investors, cities and regions can show governments they are willing and able to ramp up the transformation and carry their sectors, value chains, customers and citizens along with them. Every commitment made to reach net-zero emissions must

be followed up with robust plans for getting there, starting in 2021. These plans need to prioritise real emission cuts over offsetting emissions through carbon capture or tree-planting, and they need to address mitigation and resilience-building at the same time. Nature-positive business, such as mangrove and peatland restoration, diversified diets and sensors and satellites that increase crop yields, can play a transformative role here – generating new jobs, building buffers to rising sea levels, improving land use and creating carbon sinks. Banks, insurers and investors can drive this shift by bringing their strategies and portfolios in line with halving emissions in the 2020s, reversing biodiversity loss and building resilience in developed and developing countries. This race to zero emissions and greater resilience has already reached a tipping point, with net-zero commitments spreading across sectors and countries. Even in the midst of the Covid-19 pandemic and economic collapse, governments, businesses and investors recognise that a zero-carbon economy will strengthen public health, generate well-paid jobs and stabilise the economy, and they’re setting their sights on it. But the time to simply commit has run out. COP26 is our time to turn commitments into clear and present reality.

The climate crisis is a ‘now’ problem

November 2021

The climate emergency is already here – and businesses are starting to realise that the only choice is to meet the challenges head on and commit to green investment, or be left behind. Tom Idle reports

he record-breaking rainfall that caused widespread flooding across Germany and Belgium this summer was shocking. It killed more than 200 people and caused a huge amount of damage, highlighting just how much devastation climate change is already causing to people, livelihoods and the natural environment. Scientific analysis suggests the severe flooding was made up to nine times more likely by the global climate crisis, and made downpours in the area up to 20 per cent heavier. Elsewhere, extreme heatwaves and forest fires in Russia, Greece and the US also reinforce the findings of the latest assessment by the Intergovernmental Panel on Climate Change (IPCC) that climate change is “unequivocally” affecting every corner of the world. Hundreds of the world’s top climate scientists agree that since records began we have already caused 1°C of heating, sea levels have risen by 20cm, and heatwaves and flooding events – now affecting more than 90 per cent of global regions – have become more intense and frequent since the 1950s. The IPCC’s message is loud and clear: climate change is not something that will cause a problem in the future – it is having a huge impact right now. And time is running out to reverse the situation. Adhering to the Paris Agreement of limiting global warming to no more than 1.5°C demands sticking to a “carbon budget”. The world is set to use up that budget within the next 10 years. If we “spend” too much, the chaos already happening around us will only get worse. At the heart of the climate challenge are corporations that will need credible transition plans to help them accelerate to net-zero emissions. Many businesses have set goals to reduce their greenhouse gas emissions, and a steadily increasing proportion of these are so-called science-based targets, aligned with keeping to within the 1.5°C temperature rise. More CEOs are prioritising addressing

“Investors are only too aware of incoming government policy and shifting market demands that will create stranded assets. Investments in oil could end up being valueless if it is never extracted, for example” environmental, social and governance (ESG) issues over which their companies have an influence. However, as the latest KPMG CEO Outlook shows, too few are connecting their ESG strategies with financial returns. Just 37 per cent of bosses believe their approach to ESG will boost returns, and a quarter say focusing on sustainability could negatively hit the bottom line. Of course, investors have a key role to play in actively encouraging companies to seriously commit to addressing climate change. A group of 54 investors, managing more than

$14 trillion in assets, recently called on companies to disclose their net-zero plans and provide a way for investors to vote annually on progress against those plans. Investments in net-zero and sustainability-themed funds and projects will be crucial. Almost 30 asset owners, including Europe’s largest pension fund, ABP, have signed up to the Paris Aligned Investment Initiative to increase investment in climate solutions. There is also a pressing need to decarbonise investment portfolios. “Climate risk – in particular, transition risk, with policy shifts and changing consumer demands – poses a significant near-term threat to a wide range of sectors and, by extension, to the financial services industry and financial stability,” says Eimear Palmer, responsible investing Officer at ICG. Like many asset managers, the firm has improved how it assesses climate risk. It has developed a climate risk assessment tool to assess each investment opportunity, considering both physical and transition risk, and drawing on data sources including the World Bank Carbon Pricing Dashboard. Investors are only too aware of incoming government policy and shifting market demands that will create stranded assets. Investments in oil could end up being valueless if it is never extracted, for example. Analysis by Swiss bank UBS suggests up to 80 per cent of oil and gas reserves might end up stranded. However, as the world emerges from Covid-19 restrictions and starts moving again, and fossil fuel companies continue to post strong profits, heeding the warnings of the IPPC’s “code red for humanity” will require continued robust commitments, as well as concrete action. But as Mark Carney, the UN Special Envoy on Climate Action and Finance, has said, “companies, and those who invest in them and lend to them, and who are part of the solution, will be rewarded. Those who are lagging behind and are still part of the problem will be punished.”

November 2021

Weathering the investment risks of climate change

limate change has become one of the most important themes in the investment world in recent years, following the publication of the Intergovernmental Panel on Climate Change (IPCC) 1.5°C report, stressing the importance of limiting average temperature rises to 1.5°C to mitigate the impacts of the changing climate. As if to back up the report’s message, there has been a spate of extreme weather events around the world, including wildfires in Australia and California, record temperatures in the Arctic and floods across Europe, Africa and Asia. There has been an enormous cultural shift in investor preferences in sustainability and climate, with asset owners leading the way, says Manuela Sperandeo, EMEA head of sustainable indexing at BlackRock.

Climate risk is investment risk

“There has been an incredible acceleration in asset allocation preferences towards sustainable opt ions because investors now realise that climate risk is investment risk,” says Sperandeo. “Investors are increasingly asking asset managers to mitigate the effect of climate change on portfolios.” Climate risk is generally split into two categories – physical risk and transition risk. Physical risks directly impact a company’s operations, mainly because of the extreme weather events that are made more frequent and more intense by climate change, such as heatwaves, droughts, floods and wildfires, as well as rising sea levels. Transition risks arise from efforts to deal with climate change, including new laws, tighter regulation and evolving consumer

Manuela Sperandeo, EMEA head of sustainable indexing, BlackRock

preferences for more sustainable products and services, which will create new opportunities and drive innovation. “The way the European Commission has defined minimum standards [with its green taxonomy] has created a level playing field for investors to know what is required. Over time, we believe there will be a repricing effect that rewards portfolios which are climate aware,” Sperandeo says.

Making climate investing accessible

Exchange Traded Funds (ETFs) will be an important tool in bringing climate investing into the mainstream as they are among the most accessible of investment products. For this reason, BlackRock has created a number of innovative iShares products as part of its mission to expand client choices. The firm now has more than 45 ETFs and index mutual funds built with climate considerations in mind, including a range of funds that align with the objectives of the Paris Agreement. “We also work with our most sophisticated investors to customise their portfolios so that they consider climate change,” Sperandeo says. “Some of our large institutional investors have partnered with us to design new ETF solutions, which could then be scaled across a broad investor audience, ultimately

democratising access to the sustainability ambitions and insights of some of the most sophisticated and forward-thinking investors in this field.” BlackRock categorises climate investing into three key approaches – Reduce, Prioritise, Target. The Reduce approach seeks to lessen a portfolio’s exposure to the highest carbon emitters. “We now have a more granular insight into how businesses operate and how they are pivoting away from fossil fuels,” Sperandeo explains. Prioritise means investing in target companies looking to make the transition by reducing reliance on fossil fuels, for example, or setting science-based targets. The Target approach includes funds that invest in sustainable activities, such as clean energy, or investments directly tied to pr oj e c t s t h at adv a nc e environmental purposes, such as green bonds.

Data-driven approach

Data and technology enable BlackRock to measure the climate intensity of portfolios more accurately. “Data is at the heart of what’s happening in sustainable investing,” Sperandeo stresses. “Access to reliable third-party, verified data that allow us to quantify the impact of climate change in a more material way for investors is critical to our ability to build solutions which can become the benchmarks of the future.” To strengthen this trend, the firm has been pushing companies to publish more information, especially data that is aligned with the TCFD and SASB frameworks. “The increased volume and standardisation of data will lead to more consistent ESG index construction and allow us to run comparisons across different index providers,” explains Sperandeo.

F low s i nto su st a i n able investment have tripled from two years ago1, she adds. “There is an increasing preference for more climate-aware investment solutions and BlackRock is committed to helping investors prepare their portfolios for a net-zero world, including capturing opportunities created by the net-zero transition. We have made sustainability a standard pillar across all our produc t development a nd investing processes, to help our clients integrate sustainability into their portfolios.” INDUSTRY VIEW Visit iShares.com/uk to learn more ¹Source: BlackRock, Global Business Intelligence, as of 28 September 2021

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. BlackRock has not considered the suitability of any investment against your individual needs and risk tolerance. Please read the Key Investor Information Document. In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 02020394. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. © 2021 BlackRock, Inc. All Rights reserved. 1860663

November 2021

Trusted data and analytics can catalyse the response to the climate crisis by Rahul Ghosh, managing director, outreach and research, Moody’s ESG Solutions

limate change is among the greatest risk multipliers facing communities and economies. The devastating effects of physical climate risk from extreme weather events are growing in severity and frequency – provoking profound economic upheaval. Equally, the financial and social implications of low-carbon transition are unpredictable, disruptive and shaped by policy and investment decisions made today. The transition must be equitably and carefully managed to avoid unnecessary hardships for those affected – otherwise community objections could slow the implementation of net-zero objectives. The burden on decision makers is overwhelming, but data and analytics are a vital part of giving market practitioners greater conviction in their decisions. Equipped with physical and transition risk data, and analytics that can provide a deeper insight into performance and pinpoint ESG and climate vulnerabilities, organisations are gaining a clearer view of the decisive action needed to address the climate emergency. The crucial first step in better decision making is granular climate risk disclosure. Having assessed the progress of 3,800 companies towards adopting

t h e Ta s k F o r c e o n Climate-related Financial D i s c lo s u r e s ( T C F D) recommendations, we believe companies are steadily advancing on disclosing climate metrics, including Scope 1, 2 and 3 emissions. Their more challenging task, however, is reporting on what this means for future business models and balance sheets. It isn’t only companies that are struggling. Financial institutions must manage and disclose risks across their lending and investment activities. In response, Moody’s ESG Solutions provides an ever-growing suite of tools to measure and quantify climate risk across large portfolios, including forward-looking exposure to climate hazards, economic scenarios with 80-year horizons and climateadjusted probability of

“The crucial first step in better decision making is granular climate risk disclosure” default models. The ECB’s climate stress testing of Europe’s financial system – facilitated by our data – shows that firms most vulnerable to physical and transition risk could be up to four times more likely to default in a “hothouse” climate scenario. Scenario analysis will improve with climate models that better incorporate social and political variables and narrow the range of possible climate outcomes. Large companies are one thing, but decision makers can’t expect robust disclosures from SMEs, where ESG reporting is essentially non-existent.

Policymakers and investors have, therefore, relied on data providers to bridge the gap with new analytical techniques. By generating predicted metrics for more than 140 million SMEs worldwide, we have enabled market participants to scan for climate risks inherent in their portfolios and supply chains. Leverag i ng model- dr iven, machine-learning solutions, the generated scores estimate carbon emission footprints based on company size, industry sector, location and participation in global conventions. Emerging analytics can inform our understanding of nature, too. Take biodiversity risk: remote sensing technologies including drones, airborne lasers and satellite sensors have begun to provide a high-resolution understanding of biodiversity worldwide, while also

clarifying the interrelationship between nature and business. Our research has found that of more than 5,000 large companies assessed worldw ide, around 38 per cent have at least one facility associated with habitat loss. Such exposures could become significant risk factors as biodiversity loss climbs the agenda for investors, policymakers and society at large. Crucially, however, data and technology are only part of the solution: the missing piece is collaboration. At COP26, we urge stakeholders to deliver renewed commitments, and we support the action f inancial reg ulators, governments and the private sector are taking to better manage, quantify and disclose climaterelated financial risk and opportunity. Through innovative collaborations such as the Glasgow Financial Alliance for Net Zero, of which we are proud to be a member, the financial industr y can pool its expertise – and enable the urgent transformation needed to tackle our global climate challenges. INDUSTRY VIEW MESG@moodys.com www.linkedin.com/ showcase/moodysesg-solutions

November 2021

Businesses can use ESG to revolutionise climate action JAVIER MANZANARES DEPUTY EXECUTIVE DIRECTOR, GREEN CLIMATE FUND

usinesses and governments around the world are finally taking climate risk seriously and environmental, social and governance factors (ESG) are driving an investment revolution. It is promising that some CEOs are committing to science-based targets for emissions, confident that this will support long-term corporate value creation. The business case for action now is

becoming stronger, with carbon prices likely to increase, and growth opportunities for investing in adaptation as well as renewable energy and energy efficiency becoming increasingly attractive. Setting ambitious targets can foster innovation within the private sector – and innovation is critical if we are to get on track to achieve the goals of the Paris Agreement.

Building the necessary transparency, materiality, reporting and accountability structures for integrating ESG issues into the investment process offers the possibility of delivering superior returns for shareholders and stakeholders, and helping business respond to the challenges posed by climate change to business strategies and asset valuation. The EU is taking a leading position in this area, and US regulatory requirements for climate-related disclosures focus on providing investors with information to inform capital allocation decisions. New reporting standards such

as the proposed International Sustainability Standards Board will focus on sustainability disclosure as an instrument of economic decision making rather than on establishing thresholds for sustainability performance. At the Green Climate Fund, we are working to support the innovations – whether in policy, regulation, technology, or finance – that will help us combat climate change. With a portfolio in developing countries that will soon top $10 billion, we are using our resources to leverage private sector innovation in climate solutions. And a new ESG investment revolution, mobilised by a more digital society, will bring disruptive and transformative change to the private sector, and more partners who are ready to invest with us. To read more, please visit https://bit.ly/3kV12hF

November 2021

Putting a price N on nature Everything we produce comes from our planet’s limited resources and the living things that share it with us. We need a new business model that doesn’t take them for granted, writes Mike Scott

atural Capital has been around a lot longer than the human race, but all of a sudden it is the latest concept in business and investment circles. But what is it and why is it so important? “Natural capital is the world’s stock of natural assets – land, water, soil, air and living things that make up our natural environment,” says Jenny Merriman, nature capital lead at consultancy WSP. “All of these things, as well as having an intrinsic value in their own right, also provide us with t a ng i ble go o d s a nd services.” These include many products and benefits that we take for granted, including clean air, clean water, food, pharmaceuticals, flood protection and sequestration of CO2, as well as the raw materials for everything from clothing to cars and from ships to shoes.

Until recently, the only natural capital that was explicitly valued was what was extracted from nature, such as coal, oil and gas, metals, minerals and timber, says Jose Maria Ortiz, head of impact investment and business growth at Palladium. “Other areas such as air, water, forests and biodiversity were not valued properly.” Much of natural capital is simply not valued and paid for. That, says Gudrun Cartwright, climate action director at Business in the Community, has meant that “our world view has been that the planet is there for us to take what we want.” It is estimated that it would take the resources of 1.6 Earths to maintain our current living standards: we are demanding far more from nature than it is able to give. According to the World Economic Forum, nature contributes more than half

November 2021

of global GDP and there has been a $2.7 trillion decline in output because of the loss of ecosystems. As a result, “we are facing a global crisis,” says the naturalist David Attenborough in the foreword to the UK government-commissioned Dasgupta Review on The Economics of Biodiversit y. “We are totally dependent upon the natural world. It supplies us with every oxygen-laden breath we take and every mouthful of food we eat. But we are currently damaging it so profoundly that many of its natural systems are now on the verge of breakdown. We are plundering every corner of the world, apparently neither knowing nor caring what the consequences might be.” This is problematic, explains Merriman, because “the global economy is rooted in the biosphere. GDP is rooted in ecosystems.” On top of mankind’s deliberate plunder of the earth’s natural resources, including our own swathes of deforestation, we are also inadvertently destroying natural capital through the impacts of climate change, such as floods, droughts, wildfires and rising sea levels on ecosystems. And while efforts are progressing to put a cost on ecosystem losses, that doesn’t convey the true value of what is at stake, Merriman stresses. “It’s not just about the percentage of GDP that is lost through risks to food

supplies, it’s people not being able to eat.” This is one of the reasons that natural capital has emerged as such an important theme for investors, businesses and governments over the past couple of years. The Covid-19 pandemic, thought to have emerged from a live wildlife market in China, has also highlighted the linkages between the natural world and human development, and what can go wrong when the relationship is out of balance. “There has been a really big conversation about Covid and its links with deforestation. There’s a much greater understanding now of the link between the natural world and our health,” Cartwright points out. But at the same time, action for nature-positive transitions could generate up to $10.1 trillion in annual business value and create 395 million jobs by 2030, WEF says. The sectors that are most immediately likely to be affected by the depletion of natural capital are those that exploit it most directly. This group includes food and drink producers, textiles and apparel makers, who are all dependent on agriculture for their raw materials, as well as water and energy utilities and extractive industries such as oil and gas, mining and minerals. It takes four million hectares of land to grow the raw materials for Unilever products, which are used by 2.5 billion people every day, for example. “Despite many years of working with susta i nable ag r ic u lt u re standards in our supply chain, this has not been enough to reverse some very worrying trends such as soil depletion, biodiversity decline and poor water quality,” the company says. “And

time is running out. More than a million species are threatened with extinction, threatening the very ecosystems on which we depend for life. The only option now is systemic change – transforming the way we use land everywhere.” Really, says Merriman, “it’s anyone with a supply chain that will be affected”. In future, businesses will come under pressure to report their natural capital risks, just as they are now being asked to report on climate risks under a new initiative, the Taskforce for Nature-related Financial Disclosures. Much of the conversation around the relationship between business and natural capital focuses on

“The sectors that are most immediately likely to be affected by the depletion of natural capital are those that exploit it most directly” companies’ impact on the natural world, from depleting or polluting water resources to chopping down trees, tearing up mangrove forests and overfishing the oceans. These impacts, often buried deep in supply chains, the raw materials they procure and how they are used, are of course vitally important, and becoming better recognised, she adds. Less well understood are businesses’ dependency on the natural world, but “dependencies are what gets people listening,” Merriman says. “If you tell them that their supply chain may be disrupted because climate change may introduce a pest that will affect yields of a certain crop they need, or reduce water supplies in an area where water security

is a massive issue, they sit up and take notice. If you’re a CEO, a CFO or an investor, you have to understand the whole of your value chain.” It is key that businesses understand and address natural capital issues, because “business is what drives change. They can do it much more quickly than government, so we need them involved in the discussion,” adds Merriman. There are more and more examples of companies starting to do so. But one of the most important stages is realising that you cannot do this on your own, says Cartwright. “Collaboration is key,” she points out. One example in North West England, the Wyre Natural Flood Management Project, involves United Utilities, the Environment Agency, Triodos Bank, Cooperative Insurance and Flood Re. The project aimed to protect downstream communities that are regularly flooded by water draining from five river catchments that collectively cover 150 square kilometres. The benefits of the project will include property and business flood protection, biodiversity and habitat creation, water quality improvements, carbon sequestration and improved recreational value and land management. The project will deliver a minimum 15 times return on investment over 30 years, the participants say. Meanwhile, the VF Corporation, which owns brands such as Timberland, Vans and The North Face, is one of a number of companies looking to implement regenerative ag r icult ure principles, in its case in its supply chains for rubber and leather. Regenerative practices mimic the natural development of ecosystems by

planting a variety of crops to preserve biodiversity and maintain soil health, encouraging animals to graze and minimising pesticide use. This allows the land to sequester carbon more effectively, which helps to cut emissions. Harnessing the power of capitalism, which has been the cause of so much ecosystem degradation, is key, says Ortiz. There are more and more products coming onto the market to help businesses and other stakeholders – many carbon credits, especially forestry projects, have ancillary natural capital benefits, but there are also water credits, biodiversity credits, coral reef credits in Australia and wetland mitigation banking in the US. But all of these exist because policymakers have acted, Ortiz points out, so strong government action will be essential to bring new markets into existence. “If we can put a price on ecosystem services, then they can be traded,” he adds. “That will lead to more people buying these goods and services and more of them being produced. And unlike with oil and gas, where you make money until you have depleted the resource, the more natural capital you create, the more value you create.” Ortiz is confident that the COP26 summit will give natural capital a big boost. “I think it will be a tipping point where the world decides to act,” he says.

November 2021

ICGN: Global Governance Principles for a new era Then and now: how investors value the evolving role of nature FIONA REYNOLDS CEO, PRINCIPLES FOR RESPONSIBLE INVESTMENT

decade ago, when I started working in responsible investment, the terms “nature” and “biodiversity” were hardly used in the investment context, and a small number of investment institutions were integrating issues around climate and the environment more broadly. Investors now understand that dealing with the risks of climate change is not just about tackling issues caused by fossil fuels but also those related to land use, agricultural practices and life under the ocean. If we are to have any hope of keeping the world to 1.5°C of warming, we must tackle climate change from all angles. The IPBES Global Assessment Report warned that human actions have significantly altered 75 per cent of the land-based environment and about 66 per cent of the marine environment. We cannot compartmentalise biodiversity loss and deforestation – they are very much systemic risks. Over the years, the PRI has co-ordinated engagements on deforestation in relation to commodities including soy, cattle and palm oil. Today, given the importance of deforestation

in driving biodiversity loss and climate change, we established a Practitioners Group with 43 signatories representing $28 trillion of AUM. Here investors can share and align their practices to ensure impact in the real economy. In partnership with UNEP-WCMC, we also developed maps to highlight hotspots of relative natural capital depletion on a global scale, adding to investors’ awareness that the long-term resilience of nature is at risk. There is, however, still work to be done on the global water crises and our undervalued oceans. Agriculture remains the heaviest user of freshwater supplies, consuming approximately 70 per cent of the world’s freshwater. The financial sector has made significant strides towards addressing naturerelated risks. But we still have a long way to go in valuing natural capital, to ensure it is used sustainably in operations and supply chains, and that ecosystems function resiliently in future. The financial sector must integrate natural capital and the climate agenda to adequately address the systemic risks our world faces.

KERRIE WARING CEO, INTERNATIONAL CORPORATE GOVERNANCE NETWORK

his year, the International Corporate Governance Network (ICGN) Global Governance Principles have been updated as part of a three-year review cycle. First published more than 20 years ago, the ICGN Principles are a default for many ICGN members as a bellwether for their own voting policies and company engagements. And many governments use them to help inspire the evolution of national codes. ICGN has long said that companies and investors share a mutual responsibility to both preserve and enhance long-term corporate value, ultimately contributing to sustainable economic growth, social prosperity and a healthy environment. This requires effective standards of corporate governance and investor stewardship based on the principles of fairness, accountability, responsibility and transparency. Sustainability is particularly important within the context of a world facing the systemic challenges of a global pandemic and climate change. These colossal events both stem from ecological degradation and give rise to a double jeopardy to the future of

humanity. They are interlinked and to create a healthier and more sustainable world we must manage these risks simultaneously to reboot the global economy at the same as decarbonising the planet. It is against this background that the ICGN Principles were updated with dozens of amendments taking account of systemic events such as Covid, social inequality, digital transformation and climate change. ICGN members, led by investors responsible for assets of $59 trillion, approved the changes at ICGN’s annual general meeting on 2 September. The ICGN Principles encourage companies and investors to focus not only on aspects relating to a company’s long-term financial value, but also on factors impacting the health of society and the environment. In essence this is about the governance of sustainability, and the role of boards and investors in overseeing the integration of human and natural capital management in alignment with a company’s purpose and long-term strategy. The ICGN Principles can be found on the ICGN website at www.icgn.org

November 2021

From seabed to space: the role of data in delivering a sustainable future by Dr Jaime Reed, vice president consulting services, CGI in the UK

ur understanding of climate change relies entirely on extremely precise long-term data collection and analysis. However, there are still many unanswered questions – not least about what we can do to mitigate catastrophic events. Data and systems modelling will help improve food supply security as the climate changes in the face of these events (for example, through harvesting and supply chain efficiencies) while reducing env ironmental consequences caused by intensive farming. Satellites 800km above our heads, designed specifically to monitor the environment, already provide regional pictures of atmospheric composition and help us monitor land use and how it is changing. This data, combined with increasing deployment of in-situ sensors and crowdsourced data, such as our collaboration with Project Seagrass, allows us to develop digital twins to understand the state of the environment, forecast events and test policies. This has been made possible by a new generation of supercomputing, artificial intelligence and space technologies and these data systems are already controlling our increasingly interconnected and smart society, particularly in the sectors with the greatest GHG emissions. Energy consumption contributes almost three quarters of total GHG emissions. Decarbonising energy is therefore vital to enable all sectors of the economy to reach their net zero targets. The transformation of the energy sector is already well under way. The adoption of renewable sources of electricity generation, the decarbonisation of gas and the inclusion of hydrogen are all helping to reduce the environmental impacts of energy use. But this transition is fundamentally changing the dynamics of energy systems. Generating electricity from renewables such as wind and solar is by its nature dependent on the weather, season and time of day. On the demand side, the electrification of transport, heat and battery storage is increasing demand volatility. If we, as energy consumers, are to continue to benefit from the levels of reliability we enjoy

today, greater visibility across the energy system is needed to manage these new dynamics. That means greater access to data and the insights it can provide. But the new, active, bi-directional energy system also brings with it new opportunities for consumers, or at least their no- and low-carbon technologies, to participate. Automation, through technologies such as machine learning and artificial intelligence, can make it simpler for individuals to access the benefits of the energy system and enable a fairer energy transition. Agriculture, forestry and land use change is responsible for around one fifth of global emissions (of which a third is deforestation and crop-burning), and data has the potential to drive reductions in both GHG and overall environmental impacts. Only 6 per cent of total agricultural production is consumed as food, with 44 per cent lost before human consumption. Data and systems modelling will help improve food supply security (for example, through harvesting and supply chain efficiencies) while reducing environmental consequences such as intensification as the climate changes. Droughts and heat are responsible for a 9 to 10 per cent loss in cereal production. Climate change will drive more extreme weather events so we will need to understand these systems and help producers change the way they farm

or the varieties they plant. CGI is developing a digital twin (a dynamic, high resolution reconstruction of the Earth and its complex processes) for agriculture that will help deliver a more efficient and zero net emissions sector by coupling a range of physical and economic models with diverse data sources. We’re also partnering with Project Seagrass to advance the conservation of seabed ecosystems that absorb and store carbon 35 times more efficiently than rainforests. Digital technology has transformed society and is key to plotting the routes to a net zero economy. Data is already essential to all modern industries, collected by business systems, in-situ internet of things (IoT) sensors, and satellites. It will allow us to create digital twins of global physical and economic systems. We need to see urgent and significant R&D into how we can gather, exploit and connect this data to drive and inform low-emission ways of living and working. Data will increasingly empower businesses and individuals to make their own contributions. But we need industry and government to work together to innovate solutions and build collaborative, trusted and open “digital twin” data infrastructure. INDUSTRY VIEW @CGI_UKNEWS https://www.cgi.com/uk

November 2021

Building ESG: the realities of net-zero-carbon real estate by Ashley Bateson, head of sustainability, Hoare Lea

lobally, buildings are responsible for 38 per cent of greenhouse gas emissions. In the context of ESG investments staying resilient throughout the pandemic, the case for ESG-led decisions in driving a sustainable economic recovery is a strong one. The resulting investment landscape will be rooted in trust, transparency and insight. For those with capital invested in the built environment, this means understanding every building, estate, and portfolio’s operational performance – and tak ing bold decisions now to accelerate the move to netzero carbon. Net zero carbon is by far the most challenging task the real estate and construction sector has ever embarked upon. No single element of the industry can deliver it alone, but nor can any afford to take a back seat. The opportunities presented by momentum from investors, ignited by public consciousness, and strengthened through legislation, are abundant. This need for accelerated evolution, or even wholesale transformation for many assets, is not to be underestimated. It demands that we ask

the most basic of questions: are we on the same page, and can we find a way to speak the same language?

that runs from investor to developer and asset manager, insight and expertise can be exchanged, strengthened and evolved.

Courageous collaboration

Existing assets

With such a fragmented industry, the task is best tackled by aiming big and working collaboratively. An initial focus on progress through fine margins and a disciplined eye on building momentum will be key to managing the mosaic of real estate and construction. The move by the Global Real Estate Sustainability Benchmark towards greater detailed verification and demonstration of performance is a clear indication that the industry is embarking upon a new era. It’s an era that necessitates a new way of communicating. The shackles of our industry’s silos must be shaken off. In their place, we need an empowered ecosystem that brings together investment and funding, development and asset management. The ultimate outcome of a net-zero-carbon built environment benefits all, yet it is an ambition that could splinter the industry if we aren’t careful. By coming together to understand the thread

The move to a consistent and coherent way of tackling and delivering the path to net zero has already begun. The World Green Building Council is advocating all new buildings to be operated as net-zero carbon by 2030. In addition, the UK Building Council’s Whole Life Carbon Net Zero Roadmap sets out a clear route for the UK to meet its legislated net-zero target for the built environment by 2050. Yet with 80 per cent of the building stock that will be around in 2050 already constructed, it’s clear the biggest challenge is in transforming current assets. Architects, engineers, constructors and suppliers are developing retrofit strategies to create carbon-efficient buildings.

Leading property developers now require whole-life carbon assessments for their developments at the planning stage. Whole-life carbon assessments help architects, engineers and constructors assess how the various stages of the property life cycle impact carbon emissions, so that appropriate mitigation strategies can be implemented.

Symbiosis

Efficient design is just the first step. Next, it’s vital we prove that they perform as intended by monitoring the performance of buildings year on year. From a climate perspective, outcomes matter: the move towards a culture of verifying building energy performance is a much-needed step towards netzero carbon. We are already seeing a successful demonstration of this through the adoption of Design for Performance strategies in commercial buildings.

When it comes to building operation and performance, there is undoubtedly tension between designing the perfect environment for people and achieving net-zero carbon, but it is within this tension that some of the most innovative, nature-led and cost-effective solutions can be found. In the same way that society now better understands the symbiotic relationship between humans and our natural world, when it comes to zero carbon, our industry working together has the potential to greater appreciate the relation between the built environment and the climate.

Whole life carbon

INDUSTRY VIEW

Verifying outcomes

Recognition of the impact of pro- ashleybateson@hoarelea.com curing new construction materials is now increasingly influencing new development proposals.

November 2021

he midst of a global pandemic might seem like an outlandish time to start imposing ambitious climate policies on your people and businesses. But that’s exactly what the Dutch have been doing, by introducing new measures set to reduce annual greenhouse gas (GHG) emissions by almost 10 megatons. The Netherlands will spend €3 billion to subsidise renewable energy schemes and home energy efficiency measures. A number of coal plants are being closed. Even the national speed limit is being lowered to cut carbon. The Dutch government had no choice. A court case brought by environmental campaigners in 2014, and recently upheld by the Supreme Court, reflects shifting citizen sentiment about the state of our climate. The government was ordered to cut GHGs by 25 per cent below 1990 levels by the end of 2020. The fact that scientists felt it necessary to leak a draft of the third part of the landmark Intergovernmental Panel on Climate Change (IPCC) report, fearing that it might be watered down by governments on official release, highlights just how powerful and influential public policy can be in addressing climate challenge. One of the key takeaways from the IPPC report is that there is still a significant gap between what is needed to limit global warming to 1.5°C as stipulated by the Paris Agreement, and what is actually happening on the ground. “The IPCC has given the world a ‘code red’ warning […] yet government action continues to lag behind what is needed,” says Bill Hare, CEO of Climate Analytics. The company runs Climate Action Tracker (CAT) which scrutinises government climate action and measures it against the Paris Agreement. Because nations have different resources and capabilities, it was agreed that each country would define its own pledges, targets and contributions to meeting the Paris Agreement. These pledges, known as nationally determined contributions, or NDCs, set out how each

Countries such as Australia, Brazil, New Zealand and Russia submitted the same, or even less ambitious, 2030 targets than those they pledged in 2015. “These countries need to rethink their choice,” adds Hare. In fact, there is just one country – The Gambia – deemed to be sufficiently ‘1.5˚C compatible’ by CAT’s rating system, with the UK, EU, Germany and Norway not far behind. Of course, meeting targets set by NDCs demands action in the form of policy intervention, regulation and law. Researchers from the Grantham Research Institute on Climate Change and Environment found that countries have an average of nine pieces of climate-related legislation in force, covering everything from vehicle emissions to green construction.

“Countries have a chance to show leadership in plugging the increasingly obvious gaps in ambition and devising policies that will make the difference”

Soft soap for hard targets? Climate legislation works, but governments will need to be even more ambitious – and rigorous – if we are to stick to the 1.5°C targets, writes Tom Idle country will meet its goals, as well as the financial contributions it will make to support developing countries in doing the same. And they are all different. For example, Chile’s NDC includes a pledge to electrify 80 per cent of its transport sector by 2040. In Bhutan, the focus is on protecting its carbon-sequestering forests to cancel out its national GHG contribution. The problem is that very few of the world’s NDCs are aligned with what’s needed to maintain

1.5°C of warming. Even if all countries meet the goals set out in their NDCs, the world will still heat up too much. More ambition is needed. The good news is that countries can update their NDCs every five years, to reflect the growing sense of urgency and ambition required. The bad news is that the newly submitted NDCs received so far in 2020-21 have narrowed the gap to what is needed only by up to four gigatons of carbon dioxide equivalent, or up to 15 per cent.

Brazil has 28; Spain has 38. They also found that climate legislation, on the whole, works. During a 17-year period, global climate legislation has saved around 38 gigatons of GHGs – roughly a year’s worth of global emissions. As the evidence compiled by IPCC and others attests, this rate of improvement is not enough. National ambition and action is dependent on a wide range of factors, not least the politics of the ruling party, the appetite of citizens to adopt new ways of living and consuming, and the strength of the economy. Being held in Glasgow one year later than planned, COP26, the latest UN Climate Change meeting, is hugely important. We have a decade to act to avoid the worst impacts of climate change. Countries have a chance to show leadership in plugging the increasingly obvious gaps in ambition and devising policies that will make the difference. The longer governments wait to act, the harder it will be to succeed.

November 2021

SMEs can be the driving force of the green revolution

– some of these changes will cost money • Market access – there must be certainty around business opportunities, backed by regulation and firm commitments from large companies • Navigation – in a complex, rapidly evolving landscape, to identify the best options for them SMEs should seek advice from expert sources such as their bank if necessary

by Andrew Harrison, MD business banking, NatWest

s the UK works towards its target of becoming a net-zero nation by 2050, one sector will be a crucial contributor to that target, but has been largely overlooked until now: small businesses. New NatWest research shows that SMEs can deliver half of UK carbon reductions, while there are around £160 billion in opportunities to make firms more efficient and sustainable. Yet just 6 per cent of small firms see climate action as a source of future growth. For smaller companies, going green can seem like an expensive process. But the latest Springboard to Sustainable Recovery report shows that up to 70 per cent of low-carbon options will have a

solid business case by 2030 – and some, such as switching to renewable energy and improving energy efficiency, can save money today. Many SMEs supply larger companies that want their supply chain to decarbonise – and some will even help with the cost. If not, their own consumers increasingly want more sustainable products. There are huge opportunities in areas such as installing heat pumps or solar panels. NatWest is committing £100 billion in funding by 2025 to support the investment the UK needs, including business investment to make the transition to net zero. However, many SMEs do not know how to proceed, or what

market demand will be for green products. The UK cannot meet its targets For SMEs to play their role, they without SMEs, but if they are to need to look at six key areas: play their part fully, they need support from government and • Awareness – be aware of the organisations such as NatWest to opportunities and how they give them the confidence to grasp apply to your business the opportunities on offer. • K nowledge – know what regulators and customers INDUSTRY VIEW want you to do in relation to @natwestbusiness climate natwestbusinesshub.com • Skills – retrain employees to produce and fit new, greener products such as heat pumps • Funding – be aware of the available funding options

Harnessing digital transformation to drive a greener future by Ian Cairns, enterprise sales director, TalkTalk Business

ccording to a recent BCG report, the information, communications and technology (ICT) industry accounts for 3 to 4 per cent of global CO2 emissions – twice that of civil aviation. Increasing connectivity needs and business and consumer demand for data mean the amount of carbon generated by the sector has grown significantly. The challenges are great – but so are the opportunities. Advancements in connectivity and collaboration solutions are an oppor t unit y for businesses to drive a greener future, while

flexible working reduces commuting emissions, and these changes have a significant ripple effect. So, how else can we decouple the transformation of the IT sector from an increase in carbon emissions? Along with energy efficiency, the use of

electronic devices can have a real impact. It has been estimated that 40 per cent of global emissions can be cut by embracing circular economy principles – reusing, recycling and remaking devices. At TalkTalk, we have doubled the rate at which we refurbish electronic equipment over the past 18 months, and reduced plastic in our packaging, helping reduce our carbon footprint. Making the entire device life cycle more sustainable, from design to purchase and end-of-life, can be transformational. But transforming these processes will involve

having open conversations across the supply chain about processes and sustainability reporting. For example, TalkTalk has inserted carbon disclosure clauses in third-party agreements, and more than 70 per cent of our supply chain by spend are committed to sciencebased targets. As well as regularly speaking to business customers about how they can meet their green ambitions, TalkTalk has signed the Business Ambition for 1.5 Degrees letter in 2020, committing to a net-zero target and clear emissions reductions.

Success in decarbonising business operations will depend on organisations working towards a lower carbon relationship with suppliers, customers and third parties. Working together will be key to building a greener, more positive future for all. INDUSTRY VIEW Talk to us about your business connectivity needs 03301 622 088 www.talktalkbusiness.co.uk

November 2021

The big green problems with big tech answers… We are rapidly using up the remaining carbon budget that would limit average warming to 1.5°C. Angeli Mehta looks at just a few technologies that can help us meet the Paris goals of emissions blown across the landscape.

Greener beef

Methane hunters

Thanks to rapid advances in sensing technologies, methane-detecting satellites may offer us one of the most powerful tools to tackle near-term global warming. While methane (the main component of natural gas) is more than 80 times as powerful as carbon dioxide at trapping heat, it breaks down in less than a decade. Emissions have risen rapidly over the past decade – some 60 per cent of it from human activities including agriculture and oil and gas production. According to the UN, methane emissions could be halved by 2030 using existi n g k n ow h ow, t hu s avoiding almost 0.3°C of warming by 2050. Competition to track down leaks is hot: Canada’s GHGSat launched its third satellite in January, boasting the ability to detect emissions from individual oil and gas wells; next year the Environmental Defence Fund, an NGO, plans to put MethaneSAT into orbit and make its data publicly available. It will operate at a lower resolution but scan wide areas to trace sources

Tackling methane emissions from agriculture could be done with a more mundane tool. Scientists at the University of California found that using a species of red seaweed as a feed supplement can cut by up to 80 per cent the volume of methane that

cattle emit. Researchers are, however, still trying to work out how to get the seaweed into the guts of cattle on open pasture.

Slicing steel emissions

Infrastructure demands drive cement and steel production, accounting in 2019 for 21 per cent of global CO2 emissions. Steelmakers in Europe are turning to “green” hydrogen – made by splitting water with renewable electricity – as one route to

CarbonCure Technologies and US firm CarbonBuilt “Infrastructure demands drive cement and take this approach, embedsteel production, accounting in 2019 for 21 ding carbon dioxide from per cent of global CO2 emissions. Steelmakers industrial sources. CarbonCure’s latest technology in Europe are turning to ‘green’ hydrogen” carbonates the wastewater cutting emissions. Swedish in the reaction. At a thresh- generated at concrete steelmaker SSAB and iron old size, the current passing plants to make concrete ore miner LKAB, alongside between electrodes gener- that uses less water and energy firm Vattenfall, ates enough heat to sustain less cement. Its goal is to expect to be making com- the 1600°C the reaction reduce 500 million tonnes mercial quantities by 2026 requires. The research team of CO2 emissions annually and have their entire pro- are searching for the opti- by 2030. duction fossil-free by 2045. mum industrial cell size. In the Hybrit system, hydro- “We can look to aluminium gen replaces coking coal in [also produced by electrolthe reduction of iron ore to ysis] to see what the dos iron, while the resulting and don’ts are,” says Donsponge iron becomes ald Sadoway, professor of molten metal in an electric materials chemistry at MIT arc furnace (also powered and co-founder of Boston by renewable energy). Car Metal. But having an Atmospheric makers Volvo and Mercedes anode that isn’t consumed CO2 scrubbing Benz are now testing the in the process “gives us new Such is the scale of the first low-carbon steel SSAB degrees of freedom.” climate crisis, we also have has made. Boston Metal expects to remove carbon dioxide In the United States, to be making fossil-free already in the atmosphere. Massachusetts Institute of steel in commercial quan- In September, SwitzerTechnology spin-out Boston tities by 2025. land’s ClimeWorks and Metal is slimming the proIceland’s Carbfix opened a cess to make steel using plant that will suck 4,000 only renewable electricity. tonnes a year out of the air Its method – molten oxide and pump it deep underelectrolysis – involves the ground where it will turn passing of electricity to rock. Its founders say the between two electrodes in Orca plant is 1,000 times a reactor cell. Molten iron more efficient by area than pools at the cathode at the Cleaner cement planting trees. But it needs bottom of the cell, while With cement, it turns out to scale. Co-founder Chrisoxygen evolves at the anode that by incorporating car- toph Gebald is confident at the top. The key to bon diox ide i nto it s the company can get to eliminating emissions eco- production leads to chem- megatonnes a year, but to nomically came with the ical transformation and reach the gigatonne level discovery of an alloy which permanent storage, as well climate scientists tell us we could be used as the anode as strengthening the result- need requires support from and which isn’t destroyed ing concrete. Canada-based policymakers.

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