Businesses are pledging to go green, but we need a robust financial system to hold them to account
The recent G7 communiqué is encouraging. Hot on the heels of the pledge to stop international financing of coal, G7 finance ministers have committed to adopt mandatory environmental disclosure, advance discussions on carbon pricing, and mobilize the $100 billion of climate finance pledged to developing countries.
Expectations are high for the Leaders' Summit. As seven of the world's largest economies - all of which are committed to net-zero by 2050 - the G7 can now build on this by creating the financial conditions for business to innovate and economies to thrive.
Over the past year, we've seen a surge in corporate net-zero commitments with 1400+ companies now setting science-based targets. With climate commitment comes accountability. Business needs a financial framework that drives climate action in the real economy.
Growing demand for a consistent way to measure progress against climate commitments means mandatory disclosure on climate performance is essential. G7 countries will ensure companies and financial institutions accurately measure climate related risk and impacts and include these in their business decisions by making disclosure mandatory.
Last April the globally recognized International Financial Reporting Standards (IFRS) announced plans to establish global sustainability standards. These are expected to play a key role in converging existing frameworks to help advance the reporting landscape.
G7 countries have now pledged to support this convergence, and to introduce mandatory environmental disclosure regimes, based on the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
To fully account for the magnitude of climate risk, mandatory risk and impacts disclosure, requirements need to go beyond direct company operations to cover supply chains. And financial institutions must disclose their investment portfolios' emissions and risks.
Recent CDP analysis shows that almost all financial institutions' climate impact and risk is driven by the activities they finance. Financed emissions are 700 times larger than reported operational emissions, yet only 25% of disclosing financial institutions report them and 49% of institutions don't conduct any analysis of how their portfolio impacts the climate. This is a major hidden risk for companies and their transition to net-zero.
Alongside mandatory disclosure, the G7 must implement a meaningful carbon price that reflects the full costs of climate change. Through carbon pricing, $53bn was raised in 2020 alone. But the World Bank says most carbon prices remain far below the $40-$80 per tonne of carbon dioxide equivalent needed to meet the 2°C temperature goal, let alone 1.5°C for which higher prices are needed.
The G7 can light the way by swiftly setting carbon prices at the right level. This will raise money to finance the innovations and transformations required, like green hydrogen, low-emissions agriculture or electricity grid infrastructure upgrades.
Businesses recognize the benefits of carbon pricing. A CDP survey, including half of the world's 500 largest companies by market cap, revealed that over a third use an internal carbon price or plan to implement one by 2023: an increase of 80% in five years.
The G7 finance communiqué addresses the macroeconomic impacts and the optimal use of the range of policy levers to price carbon. This shows good intentions, but will have to be followed by decisive action.
As G7 nations consider how to recover from the COVID-19 crisis and prevent a bigger climate crisis, questions of equity, international cooperation and honouring the $100bn per year commitment to developing countries should be resolved. The $100bn committed by developed countries at COP16 in 2009 is now overdue by a year and is disproportionately low compared to the trillions going into developed countries' stimulus packages.
It will be crucial for developed countries to make good on this with new pledges at the G7 ahead of COP26. The race to zero will only be won if we all win.
G7 action to deliver the $100bn will support communities reliant on fossil fuels to transition to cleaner, more resilient livelihoods. It can help finance nature-based solutions in the countries that are in a strong position to deliver them. And it will help supply chain companies decarbonize as multinationals work to reduce their supply chain footprints to meet their science-based targets.
This will boost economies, make the transition more inclusive, and build trust in the climate multilateral processes needed to achieve a successful COP26.
We need widespread, measurable actions from every sector, every country and every business to halve emissions by 2030, in line with limiting global temperature rise to 1.5ºC.
The G7 has a historic responsibility to accelerate the transition, by pricing climate risks and costs, introducing comprehensive mandatory disclosure requirements and honouring the $100 bn commitment. It is only by building these frameworks and rules that we can achieve a more resilient, net-zero future for all.
Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
Maria Mendiluce is the CEO of the We Mean Business coalition and Paul Simpson is the CEO and co-founder of CDP