COP26 Roundup – What did it all mean for the energy industry ?
Over the last few days, like many of you, I have been reading and reflecting on the results of COP26. The debate will continue to rage as to how effective the gathering was. However, from the perspective of ERC Evolution, this conference was a very big deal. ERC Evolution was formed in a time where there was a lot of uncertainty surrounding how corporates could get to Net Zero. We saw that there was a need for service providers who combine engineering and geoscience knowledge with economics, and use that to form a reliable bridge between sources of finance and corporations. The transition would be facilitated through our background in regulations, policy and the independent assessment of projects for finance and investment decisions.
Additionally, we recognized that in early 2021, we were forming ERC Evolution in a period where there was a lack of clear guidance. Greenhouse Gas emissions (GHG) disclosure was largely voluntary and where regulated, often limited to the largest emitters. Different reporting systems were being used. And for those looking to offset emissions, the voluntary carbon credit market was fragmented. In essence, it was the “wild west”, where each company was free to choose how it wanted to adopt climate into its own Environmental, Social and Governance (ESG) system. We launched ERC Evolution anyway, knowing that we’d be able to rely on the experience of the ERCE team to figure out ways to bring knowledge and value to clients. But we also expected that it wouldn’t take long for the world to change its voluntary approach to corporate climate change disclosure.
It turned out we didn’t have to wait long at all. COP26 is the moment where the role of climate risk disclosure for corporates will forever be altered. The importance of the IFRS Foundation’s International Sustainability Standards Board (ISSB) cannot be emphasised enough. IFRS has been adopted by over 120 countries. We expect that IFRS will roll out sustainability reporting in alignment with financial reporting. The two will be synonymous.
The impacts are wide ranging:
- First, this will change the way emissions are treated. Disclosure will likely pivot from an “Operational Control” approach, used by regulators, to an “Equity Control” approach, used by financial markets. Thus, companies can be compared on a like-for-like basis.
- Second, emissions will no longer be the domain of the heavy emitter industries. In theory, all businesses will need to consider their emissions.
- Third, we will hopefully begin to see some consistency in the way climate risk information is disclosed. The TCFD (and hence ISSB) demands forward looking climate risk assessment. It isn’t simply a report of what happened last year. Instead, it is an evaluation of what the risks to the company are in the future as this is what investors really need. Reporting requirements for Scope 3 emissions will perhaps be codified. The way companies will need to model physical risk to assets will also become structured.
Finally, self-reporting may become a thing of the past. Like financial disclosure, third party audits of climate risks and costs should become the standard. Unlike financial reporting, such audits will require engineers, scientists and technicians working alongside economists and policy specialists to generate credible results.
Beyond the ISSB, we have seen exciting announcements regarding efforts to measure and mitigate methane emissions and advances in the voluntary carbon credit markets. These types of initiatives will complement climate risk assessment. They will provide economic and regulatory incentives to change business practices through push and pull techniques.
I believe I will look back at COP26 as a watershed moment for climate disclosures. It will likely take a few more years for the rules to be ironed out and the systems built to support the ambitions laid out this year. But, we at ERCE look forward to making our contribution to help those ambitions come to life.