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Opinion: private sector more important than ever in climate change fight

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Following COP27, it’s no longer enough to rely on regulators to carry the world to net-zero

This time last year after COP26, industry participants were optimistic. Countries around the world, from the US to China, had net-zero pledges in place, and the UK as host announced ambitious plans to be the first net-zero financial centre as well as the establishment of the International Sustainability Standards Board (ISSB).

With the newfound efforts within banking and finance, as well as from governments around the world, there was finally a concerted global effort to tackle environmental problems.

But the world changed between the conference in Glasgow and the one in Sharm El-Sheikh this year, and after COP27, it’s not enough to just rely on the efforts of world leaders. Instead banks will be more important than ever.

In Egypt, there were some very positive results. President-elect Lula of Brazil recommitted its government to protecting the Amazon, and a historic agreement was reached on compensating developing countries for loss and damages caused by climate change. However, there were notable absences and a much less certain atmosphere.

See also: COP27 accelerates Middle East sustainable finance boost

Russia’s invasion of Ukraine has accelerated the trend away from globalisation and prompted an energy crisis, which has brought carbon-intensive coal back into the EU and ensured the inclusion of nuclear and gas in its green taxonomy.

Furthermore, in the US alone, where the Inflation Reduction Act recently bolstered the green agenda, the fate of sustainable finance policy appears to be teetering on the edge, heavily dependent on who might win the next election.

The world stage has fractured, and sustainable finance regulation is at risk of becoming a pawn in the political game.

Against this backdrop, a collaborative effort between the private sector, public sector and NGOs is the only way to keep a global attempt at sustainability on track.

See also: COP27: radical change needed to help developing countries tackle climate change

International influence

For banks and asset managers operating in the EU under the new Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD), collaboration will be an important part of compliance.

To comply with disclosure requirements, EU financial institutions must work with firms up and down their value chain, whether based in the EU or not. Such regulation has emphasised the unique position of banks as non-governmental organisations with hefty cross-border influence.

The decision of whether to treat compliance as a box-ticking exercise or take it as an opportunity to boost green initiatives lies with banks.

At COP27, financing the climate fight and development were key themes. It’s time for banks and asset managers to step up their collaborative approach and take the opportunity to engage with their investees – not just to find their sustainability metrics, but also to encourage a transition to net-zero.

Even though the private sector is set to be a more stable anchor for progressing sustainable finance, it cannot act alone.

Regulators in ESG-ambitious jurisdictions will need to set the bar high for multinational firms on this matter. Meanwhile, international standards setters such as the ISSB will face difficult questions on whether to set the bar lower to encourage wider participation across policymaking divides or higher to boost sustainable finance ambition.

Financial institutions can no longer just take their seats at the table of sustainable finance; they need to put their international influence to use and lead the way.

See also: EU directives highlight importance of ESG in M&A transactions