In the months following last November’s COP summit, a welcome urgency has entered the conversation surrounding financial markets and their role in slowing climate change. But alongside this, a growing schism is emerging that pits clean, ‘green’, investible assets against dirty, ‘brown’, soon-to-be stranded ones. We must nip this facile outlook in the bud, or risk foregoing an opportunity to rapidly reduce emissions across a vast majority of the investible universe.
To view the world’s companies as either green or brown is to throw the net-zero baby out with the bathwater. By fixating on the extremities of this spectrum, we disregard the trillions of dollars of resource that the companies in between could deploy towards not only reducing their impact on the planet, but in some cases actively mitigating climate change elsewhere in the economy. It is time we engaged in a more grown-up conversation about the practicalities of a successful climate transition.
Remembering that the world’s 100 biggest companies are responsible for more than 70% of global emissions it is clear that, important as it is, we cannot rely on fuelling ‘pure green’ companies to do more good as the sole solution. It is also critical that we mobilise capital to help the rest to do less bad.
This is not permissiveness, or a concession. The global race to prevent irreversible damage to our planet is formed of multiple heats. One of these sprints, characterised by initiatives like the EU Taxonomy, is to rapidly channel capital to companies that directly slow climate change through their operations. However, another is to help companies with the resource and means to reduce their own impacts on the planet do so too.
Out of 30,000 of the world’s biggest listed companies, only 1% of their collective revenues are derived from pure green activities as defined by the EU Taxonomy in its current form, and 12% from brown. Putting aside the wider issue of the potential bubble this may point towards, these figures demonstrate that the world’s ‘pure green’ businesses do not yet have the capacity to deploy the volumes of capital currently invested elsewhere. There simply isn’t enough room on the green bandwagon for the number of investors clamouring to get on board.
So how can we put the remaining 87% of economic activity to good use? If we are to truly engage with those companies that are neither green nor brown, then markets need confidence that the transition is underway for them. Data and technology can and already do tell us this.
Data show us that since the Paris Accord was signed in 2015, the share of companies in the FTSE 100 whose environmental impact is aligned to a 1.5C temperature rise limit rose from 57% to 66%. Among the S&P 500, that figure grew from 28% to 46%. With the UN’s climate panel warning that emissions must fall by half by 2030, these improvements are clearly not enough, but it is a signal that with the correct data and a market focus on these transition companies, net emission volumes among the world’s biggest companies will continue to fall.
There are promising signs that this transition is gaining momentum. The volume of companies disclosing the sustainability data that enable markets to gauge their progress is growing. There are glimmers of harmonisation at the regulatory level, with disclosure frameworks like the TCFD being adopted by more countries. At a technical level, the International Financial Reporting Standards foundation, whose accounting standards are used by most of the world, is developing a framework for simple and consistent sustainability reporting.
With these initiatives falling into place, the infrastructure will be there for financial markets to play their part in mitigating the climate crisis and meeting the many heady goals and ambitions set out in at COP. But to do this, we must recognise that whether we like it or not, we need more than a few companies being perfectly sustainable: we also need millions doing it imperfectly.