Senior executives of large European pension funds were among those taking to the virtual stage of a “Green Swan” conference last week, making the case for a meaningful carbon price and mandatory corporate disclosure of environmental data as means by which policymakers could harness the power of market forces to combat climate change.

And in some respects at least, their calls are closer to being met than ever before, even though there is still much road to travel.

The day after the Green Swan conference ended, G7 finance ministers reported on the outcome of their recent meeting in London, relaying that they “support moving towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants and that are based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks”.

The communiqué also expressed their agreement on “the need for a baseline global reporting standard for sustainability” – mentioning the work being done by the International Financial Reporting Standards Foundation – and their recognition of “the growing demand for more information on the impact that firms have on the climate and the environment”.

On carbon pricing, there was no specific commitment, with ministers instead referring to “the optimal use of the range of policy levers to price carbon”.

Spanning three days, the Green Swan conference was organised by the Bank for International Settlements (BIS) in partnership with the Banque de France, International Monetary Fund, and Network for Greening the Financial System. It took the ‘Green Swan’ concept presented in a book published by the BIS early last year.

Pension funds were represented on different panels in the form of Magnus Billing, CEO of Sweden’s Alecta, Timo Löyttyniemi, CEO of VER in Finland, Olivier Rousseau, executive director of Fonds de Réserve pour les Retraites, in France, and Niklas Ekvall, of Swedish buffer fund AP4.

Global carbon price a top priority

Billing, Ekvall and Rousseau all highlighted the positive effect carbon pricing could have.

With a carbon price and data released by companies then “we can have public policies that will penalise the carbon emissions,” said Rousseau.

Olivier Rousseau, FRR

Olivier Rousseau, executive director, FRR

“The price will do the wonders of the market economy,” he added.

On his panel – about how green investment opportunities could be provided – Ekvall at AP4 also singled out carbon pricing, saying it was crucial for getting market participants to work effectively towards climate change mitigation.

“If we really want to scale things up and speed up the transition, in my mind there are two actions that stand out, and one is to get a global price for carbon – and a sufficiently high price to have an impact.

“That should be the top priority of every political leader on climate (…) because that’s really the key thing to get the market forces working in the same direction,” Ekvall said.

The second thing that had to happen was, Ekvall said, to reduce the “really substantial” coal dependence in the world.

“In my mind, that is a very important action as well, and to get that in place we have to discuss how to compensate the regions, the groups and the countries that are impacted by such actions,” the CEO said.

Alecta’s Billing highlighted carbon pricing and poor data quality around scope 3 emissions as the missing pieces in the accounting jigsaw around climate efforts.

On a panel on Wednesday, Billing said: “We discount the carbon price from 2040 to today, and obviously we get a different value compared to what the market is showing, and for us that’s a very important stimulus to work with the companies we own.”

There was currently a spread of somewhere between $140 and $850 per tonne in carbon prices he said, in order to reach the goal of keeping global temperature warming to 1.5°C above pre-industrial levels.

“That spread is not very helpful for practitioner investors if you’re discounting that from 2040 for example,” he said.

“And if you look at the market price levels in Europe, around €50 today, it’s a significant increase but it’s quite far away from the $140 or $850 that the research is telling us we need to use.

“So that’s a critical part for us to get into place,” he said.

ESG data, disclosure

Availability and quality of environmental data was a topic discussed on several panels during the BIS conference. FRR’s Rousseau explained the rationale for demanding disclosures from companies.

“We should all have in mind that this is about risks – risks for the planet, risks for countries, risks for investors and banks, say the financial ecosystem at large, and risks for companies,” he said.

“The good thing is that by taking the company angle we can aggregate everything, which is much harder if we try to start from another side of the global economy. Financial institutions and investors are often designated as the villains of the climate problem, but if we tackle it at the company-level we are on the right path.”

He said companies should be required to report Scope 1, 2 and 3 emissions, and not only as a intensity metric.

Magnus Billing, CEO, Alecta

Magnus Billing, CEO, Alecta

On his panel, Billing said the proportion of companies in Alecta’s portfolio that did make Scope 1, 2 and 3 emissions disclosures was currently similar to the level seen in the S&P 500 today, at around 20%.

“We need to increase this,” Billing told the session.

“The quality that we see on Scope 1 and 2 is useful and we can work with that, but as soon as you step into Scope 3 the quality is too poor to do anything with,” the CEO said, adding that this was an issue about which policy makers could support investors such as Alecta.

Scope 3 emissions are indirect emissions that occur in a company’s value chain, besides those stemming from the generation of purchased energy and including those stemming from the use of a company’s products or services.

Rousseau appealed for raw ESG data to be recognised as a public good that companies must make public.

“ESG risks are a financial risk, it’s just that it’s not evident in tomorrow’s accounts,” he said.

Execution risk?

Timo Löyttyniemi, chief executive officer of the State Pension Fund of Finland (VER), was a discussant on a panel about how financial stability, regulation and supervision should be considered in the context of increasing climate-related risks.

He said there was a third source of risk for financial stability in climate change, alongside physical risk and transitional risk, and that this was transition path risk – the risk that mistakes would be made on that journey.

“What I mean by that is that when we are on this path of adjustment and mitigation, there are certain phenomena that make us more vulnerable to the matters which are happening – not just the climate change as such,” he said.

The first was investment risk, he told the panel, which was discussing how financial stability, regulation and supervision should be considered in the context of increasing climate-related risks.

“There are a lot of innovations and a lot of investment towards green technologies, and I’m sure there will be mistakes along the way”

Timo Löyttyniemi, chief executive officer of the State Pension Fund of Finland (VER)

“There are a lot of innovations and a lot of investment towards green technologies, and I’m sure there will be mistakes along the way,” he said, adding that banks and institutions had to be aware of this risk.

There were also risks in the mitigation policy framework itself, the pension fund CEO said. “Governments typically make policy changes and decisions, but sometimes those are consensus or compromises and – as we surely know – some of the subsidies which governments are still giving to the fossil-fuel industry are certainly mistakes,” he said.

Then there was the question of what other mistakes governments may be making as things progressed, he said.

“The third risk is the discounted-pricing risk,” Löyttyniemi said, adding that markets did not have perfect foresight, citing the IT boom as an extreme example of markets getting it wrong.

“That shows that in terms of technological shift and transformation, there are certainly additional risks which come from market prices,” he said.

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