ISS ESG, the responsible investment arm of Institutional Shareholder Services Inc. (ISS), today released Transparency Paves the Road to Net Zero, a new report examining the drivers of an increased focus on transparency around climate change and Net Zero targets. The report provides an overview of how regulatory action is shaping up, the non-regulatory measures being taken by a variety of actors, such as litigation and active ownership strategies, plus concludes with an investigation into what this means for the finance industry.
Drawing on ISS ESG’s in-depth expertise in climate modeling, scenario analysis, consulting, data mining, and thematic collaborative engagement, the report provides timely insight, including key areas of focus for financial institutions seeking to stay on top of their game, such as the importance of climate-related governance and prioritizing real economic impact over ‘virtual’ emission reductions.
“Developing Net Zero transition plans based on transparent portfolio company information, while openly disclosing any current shortfalls, will allow investors to assess where they truly stand with respect to critical climate targets and to focus on the gaps that need to be addressed,” said Viola Lutz, Head of ISS ESG Climate Solutions.
- Transparency is the foundation of a successful Net Zero transition. Given heightened concerns about what has been described as ”the climate emergency,” transparency about where actors stand on climate issues is crucial. Companies and financial institutions alike need to disclose medium-term action so it can be scrutinised, allowing for the identification of gaps that need to be tackled.
- Standards setters and regulators are driving transparency, from the Task Force on Climate-related Financial Disclosures (TCFD) to the US Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB). The development of a comprehensive global baseline of sustainability disclosures could significantly promote transparency further.
- Active ownership via engagement and voting, together with litigation by shareholders and other stakeholders, are increasingly motivating enhanced disclosure. Shareholder proposals requesting disclosure of emissions reductions goals remained one of the top climate-related proposals in 2021.
- The market needs to become more transparent: 71% of companies in the STOXX USA 500 and 73% within the STOXX Europe 600 are disclosing all material Scope 1, 2 and 3 emissions and 23% (STOXX USA 500) and 47% (STOXX Europe 600), respectively, have an emission reduction target approved by the Science Based Targets initiative (SBTi). Larger companies are driving overall transparency performance, but there is pressure for the rest of the market to step up.
- Financial institutions are increasingly expected to report transparently on their climate change-related governance practices. This could involve climate competency within boards, explicit structures for climate oversight, and clear responsibilities for climate strategy and risk management, along with prioritising real economic impact over ‘virtual’ emission reductions.