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Collectively financing our future – will $130 trillion catalyse realising Net Zero and a just transition?

Is the Glasgow Financial Alliance for Net Zero the global economic catalyst to realise net zero and a just transition?

Urgency, scalable commitments, concerted action, and a focus on real-world outcomes and impact are needed to close sustainable financing gaps.

The action plan to deliver the Glasgow Climate Pact and the stream of pledges announced during the COP26, ranging from finance to methane to deforestation, will be a key priority for finance sector CEOs in 2022.

The scale, complexity and pervasiveness of financing a just and inclusive transition to net zero by 2050 (at the latest) is enormous. Over the next decade, at least $32 trillion of investment, incorporating mitigation, adaption and transition, is required across at least six core sectors: electricity, transport, buildings, industry, low-emission fuels and agriculture, forestry and other land use. We need to rethink capital allocation, redesign goods and services, pivot business operations and value chains, and develop an optimal mix of predictable policy and coherent regulation to drive achieving sustainable outcomes.

In Glasgow, governments agreed to: revisit and strengthen 2030 targets in their national contributions/ emission reduction plans to align with 1.5 degree Paris Agreement temperature goals by 2022 and described the required reductions - 45% by 2030 relative to 2010 levels, and to net zero around 2050; "phase down unabated coal power and inefficient and carbon offsets"; create a globally regulated carbon market for trading emissions and carbon offsets; and, despite the regrettable failure to deliver on $100 billion of climate finance annually to assist developing countries transition, to double this amount by 2025.

Alongside Government commitments, the private finance sector will continue its commitment, as part of the COP26 Private Finance Strategy, to tackle climate change by aligning investments to fund a sustainable economy. Further, the announcement of the Glasgow Financial Alliance for Net Zero (“GFANZ”) represents a pivotal opportunity to leverage the power of private finance, through a committed $130 trillion “wall of capital” from over 450 firms across 45 countries.

Each member of GFANZ is committed to transforming the global economy to align with net zero through a just transition. Given the need to credibly deliver concrete sustainability and ESG aligned outcomes, and address ubiquitous greenwashing risks, the members of GFANZ are expected to meet strict membership criteria including “science-based”, net zero commitments, and are subject to upwards annual reviews and monitoring of their performance, including with respect to governance, and processes.

Together with the UN Environment Programme Finance Initiative Principles for Responsible Banking, the PRI Investment Principles and the OECD Guidelines for Multi-National Enterprises on Responsible Business Conduct, GFANZ reinforces the need for the finance sector to integrate a responsible and sustainable business conduct framework across strategy, business models and operations and business relationships through an integrated legal and risk governance approach. Such an approach seeks to align and balance three key objectives: ensuring legal security, establishing resilient risk governance systems to address sources of social accountability risk, and maintaining stakeholder trust, corporate purpose, and culture.

Over the past decade, the sources of legal and social accountability have increasingly become more complex and shifted focus from voluntary to mandatory requirements.

These developments have included new or expanded legal duties, contractual and reporting obligations, and operational and supply chain due diligence around human rights, modern slavery, or environmental impacts. Specific sustainability linked regulatory obligations continue to develop regarding product/service disclosures – such as with the continuing development of the EU Taxonomy and the Sustainable Finance Disclosure Regulation, climate-related transition plans and reporting, and due diligence. On-going re-alignment of corporate governance and stewardship codes to further consider stakeholder interests and review (and affirm) the scope of fiduciary duties in light of ESG considerations, particularly in respect of investors, is also evolving. Increasing transparency and mandatory measures are driving a greater need for all businesses to manage and enhance governance and systems concerning sustainability/ESG commitments, performance and reporting. Many are participating in multi-stakeholder collaborative initiatives, such as GFANZ, to engage and address stakeholder interests and progress collective development.

Finance sector legal and compliance teams (together with the Board and other executive teams) have a crucial role to play in the realisation of GFANZ commitments through identifying, managing and mitigating responsible and sustainable business conduct risks and supporting opportunities and strategic alignment across the business’ operations and relationships where this relates to ESG considerations. At the same time, legal and compliance teams will play a crucial role in balancing the legal and social accountability risks that are inherent in collective action, including competition law constraints.

GFANZ provides a transformative opportunity for the finance sector not only to realise the collective potential of at least $130 trillion of investment towards net zero but, equally importantly, to amplify similar activity across the sector’s value chain and networks.

CONCLUSION

Whilst significant work is required in the short-term to develop consistent sustainability standards, coherent metrics and data and multi-disciplinary competence and experience, it is clear that GFANZ has irrevocably shifted the sustainability agenda for the financial sector. It is business critical for people, planet and profit – and the impact of the sector’s sustainability agenda will materially depend on achieving real world action and outcomes. Let’s ensure the planet and its people achieve those returns.

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MEET THE AUTHOR

NICOLE BIGBY

Partner, London

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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