Last weekend the leaders of the G7 countries, plus Australia, India, Republic of Korea and South Africa met in Carbis Bay, UK, to discuss the way out of the COVID-19 pandemic and how to approach the challenges ahead.
2021 is a crucial year for turning ambition into action. Six years after the historical Paris Agreement and the adoption of the 2030 Agenda for Sustainable Development, there is broad multilateral recognition that a fundamental and transformational economic shift needs to occur to address the climate emergency for both people and planet, in which real economy actors are playing an increasingly crucial role.
At CDP we welcome the final communique which lays the ground for promising actions on the climate agenda.
In particular we welcome the G7 members’ commitment to achieving carbon neutrality (‘net zero’) by 2050 and the commitments relative to the introduction of mandatory corporate disclosure regimes. Both are welcome and promising signs for renewed multilateral ambition and a positive step towards achieving the Paris Agreement goals in the lead up to COP26.
With G7 countries accounting for almost 50% of GDP, the recent announcement of the phasing out of international coal financing by 2030 is a significant milestone in the globalised effort to reduce the level of greenhouse gas emissions (GHGs) for a 1.5°C future. Further, the commitments to introduce mandatory disclosure requirements are a step in the right direction, although more details are needed regarding the nature of their implementation and the timing.
As such, CDP’s key recommendations in light of the outcomes of the G7 summit are as follows:
- Increase the adoption of robust, ambitious 2030 emissions reductions targets and net zero long-term goals aligned with a 1.5°C and resilient future, at the national and corporate level.
- The mandatory reporting regimes of G7 countries should not only tackle climate, but address disclosure with a broader environmental approach. We cannot address climate change without recognising its interconnectedness with a wider range of environmental factors, such as deforestation, water security, and biodiversity.
- Further, and most importantly, mandatory disclosure should include both environmental-related financial disclosure (such as in the plans of IFRS), as well as the impacts on people and planet of economic activities.
Businesses play an integral role in the global transition to a low carbon, green and resilient economy. Since the launch of the Race to Zero Campaign last year, there has been increased mobilisation of the private sector to raise corporate ambition by setting net zero-aligned, accredited and science-based targets. Other initiatives, including the Glasgow Financial Alliance for Net Zero (GFANZ), are leveraging private finance flows towards a low-carbon market and motivating more companies to disclose their environmental impacts.
Now that we are beginning to see the big shifts happen, near-term and science-based actions and targets are key to ensuring short-term progress towards long term goals.
In order to achieve the climate transition, the whole global economy, including the financial system, needs to be brought on board.[1] The first step in ensuring progress towards these targets and to managing climate risk is for companies and financial institutions to disclose their progress to stakeholders.
Many are already doing so through CDP: from recent CDP research, almost 70% of publicly listed companies disclosing to CDP provided information on at least 80% of the recommended disclosures suggested by the Task Force on Climate-related Financial Disclosures (TCFD). G7 leaders have affirmed their commitment to move towards TCFD-aligned mandatory disclosure pathways and should take confidence in this corporate momentum in implementing new policy and regulatory regimes.
The G7 countries themselves have recognized that the best way to ensure a level playing field and transparency from all economic actors is for governments to introduce mandatory consistent and comparable disclosure of climate-related information by companies and financial institutions.
Such disclosure, especially if extended beyond financial performance and stability to consider the environment in its entirety, would improve transparency, encourage more informed pricing and facilitate better capital allocation to transition-aligned activities. It will also allow for better tracking of the advancements towards companies’ and countries’ various net-zero commitments, and support the work of regulators, supervisors and policymakers.[2]
In this sense, the UK Government’s recent proposals to ensure listed companies and large asset owners disclose in line with the recommendations of the TCFD is a crucial step towards more mature, high-quality and climate-related financial disclosure.[3]
The UK is not alone in this: the upcoming EU Corporate Sustainability Reporting Directive (CSRD) has a strong alignment to the TCFD requirements, but also goes beyond the TCFD, including standards on water and marine resources, resource use and circular economy, pollution, biodiversity and ecosystems.
In addition, a welcome development from the previous Non-Financial Reporting Directive (NFRD) is the requirement for Small and Medium Enterprises to disclose, starting from 2026, using a set of simplified reporting standards.
Japan is also moving in this space, with plans to introduce a new kind of ‘Prime Market’ listing for companies, with requirements for these companies to collect and analyze climate-related risks & opportunities and enhance the quality & quantity of disclosure based on the TCFD.
These developments set important precedents in the G7. Following the announcement of the G7 governments’ support for TCFD-aligned climate-related financial disclosures,[4] CDP expects these governments to set clear plans in their transition from voluntary to mandatory disclosure requirements. CDP also looks to the EU to leverage its geographical and economic reach to introduce meaningful disclosure requirements for its member states.
However, despite revised targets and near-term policy regimes, the G7 is currently still heading towards a 3°C future scenario.
The science is clear on the scale and urgency of the action required and there is significant further action needed to limit global warming to 1.5°C.
Awareness is rising amongst companies headquartered in the G7, where the majority of corporate targets disclosed to CDP are set. Still, corporate ambition in G7 countries remains insufficient. CDP analysis shows that equity indexes in all G7 countries are far from being aligned with the Paris temperature goal.[5]
Temperature scores span from 2.2°C (Germany’s DAX30) to 3.1°C (Canada’s SPTSX60), but in all cases, fall way short of the 1.5°C alignment that is so urgently needed. Within the US’s S&P500, Italy’s FTSE MIB and the Canadian SPTSX60, more than 70% of companies have a current temperature rating above 3°C: a ‘business as usual’ scenario that would lead to immense and irreversible risks to lives, livelihoods and biodiversity.
Across all G7 indexes, more than three quarters of companies have not set targets that are aligned with 1.5°C. Companies’ movement to 1.5°C pathways must be scaled rapidly for market indices to align with the goals of the Paris Agreement and move out of ‘the red’.
However, corporate ambition alone is insufficient and there is huge mitigation potential to be unlocked through governmental policy.
Governments need to use the momentum of corporate progress, taking those with highest ambition, to advance net zero-aligned policies that provide all companies and financial institutions with further clarity and confidence. At the same time, accountability is crucial: mandatory disclosure regimes are integral in further amplifying this net zero ambition loop.
CDP expects that the decisions made at this summit will strongly influence the upcoming G20 summit and COP26 at the end of the year. For this, the G7 countries (together with the four guest countries: Australia, India, South Korea and South Africa) have a fundamental role to play in setting the stage for a successful year in terms of critical action towards building a sustainable and resilient financial system.
[1] https://www.cdp.net/en/cop26
[2] CDSB and CDP, 2019. “Roadmap for adopting theTCFD Recommendations”
[3] UK Government. Department of Business, Energy
and Industrial Strategy. 2020. “Open consultation on requiring mandatoryclimate-related financial disclosures by publicly-quoted companies, largeprivate companies and Limited Liability Partnerships (LLPS)”
[4] UK Government. HM Treasury. 2021. “PolicyPaper: G7 Finance Ministers and Central Bank Governors Communiqué”
[5] SBTi, (2021) “Taking the temperature:Assessing and scaling climate ambition in the G7 business sector”