Academics have claimed that the transition to a low-carbon economy is being undermined by muddled thinking about who is responsible for what.
A new paper from the Columbia Centre on Sustainable Investment argued that the various ways in which entities can influence decarbonisation, and the climate risks they face at entity level, are subject to widespread conflation.
The resulting “mismatched expectations” are based on the assumption “that institutions acting rationally within their mandates will, in aggregate, produce outcomes relevant to reducing climate risk”.
The paper, co-authored by the Centre’s director, Lisa Sachs, claimed it is essential to create clearer delineations between the risks and roles of different types of financial institutions – from asset owners and managers through to banks and insurers.
“This allows for a more effective matching of institutional expectations and regulatory requirements with the institutional mandates and instruments,” it stated.
The report’s conclusions mirror the findings of a recent study on what institutional investors can realistically do about climate change.
That research, conducted by academics at the London School of Economics, found that translating economy-wide decarbonisation goals into portfolio targets had “led to unrealistic commitments, reliance on flawed proxies such as portfolio decarbonisation, and a growing tension between ambition and feasibility”.
It warned governments that “action by investors on climate change is severely constrained by their duties, the limited tools at their disposal, and the pathways of technology development”.
Columbia’s paper argued that the catchall approach to climate action has “impeded the financing of decarbonisation: by loading financial institutions with expectations they are neither mandated nor able to meet, current frameworks divert attention and resources from the structural and policy conditions that determine whether mitigation investments are financeable”.
The authors also called out the architects of the EU’s Sustainable Finance Disclosures Regulation (SFDR) for seeking to address “capital allocation, financial risk management, and impact accountability” through a single regulatory regime.
Policymakers haven’t used SFDR disclosures – or those mandated by the Corporate Sustainability Reporting Directive (CSRD) or Taxonomy Regulation – as the basis for economic interventions, meaning the rules don’t contribute to real-world change, they noted.
The paper also suggested that the Science Based Targets initiative’s (SBTi) approach to financial-sector decarbonisation “collapses the distinction between portfolio decarbonization and system decarbonisation”.
SBTi today published its updated net zero standard for corporates, in which it acknowledged the need for a more honest framing of entity-level responsibility.
In a statement alongside the announcement, its chair, Franscesco Starace, said SBTi had now “made an explicit choice to recognise that companies do not control everything, and that pretending otherwise does not serve anyone”.
Instead, it expects companies to work on a “best efforts” basis, deploying “every lever within [their] control”, Starace explained.
