“The transition is not stalled. It is maturing,” the keynote speaker from a leading UK bank told the audience at last week’s Sustainable Finance Europe summit in London. This message was reiterated by speakers, panellists and delegates in various ways throughout the day, indicating a notable evolution of ESG at a time when the geopolitical landscape is being shunted onto an entirely new axis. As a macrostrategist from another leading financial institution put it, geopolitics is “now among the biggest sources of uncertainty shaping the transition”. Indeed, how could sustainability not mature during such an uncertain period, when sustainability is increasingly synonymous with resilience?Another clear signal from the summit is that practitioners are less preoccupied with funding renewable energy projects, which in isolation would not take us to net zero. “Green alone is not enough. The real economy does not start at green,” said one speaker. The onus is now on tackling emissions across the real economy, particularly hard-to-abate sectors. It is estimated that it will cost $30 trillion to decarbonise 40% of these industries.This marks a shift away from “ideas and pledges to policies, products and actions”, said the moderator, Dr Martina Macpherson, Head of the Financial Markets Chapter at the Value Balancing Alliance. Dr Macpherson was among several experts to emphasise the importance of comparability, credibility, and certainty, the latter facilitating the critical part, execution. This is the underlying question my fellow panellists and I were asked to answer in a discussion on scenario alignment — namely, which factors will lead decision-makers to invest in transition and, in turn, encourage businesses to commit to credible transition plans?
Comparability and credibility
The call for comparability was timely. The UK’s Sustainability Reporting Standards (SRS), based on the International Sustainability Reporting Standard (ISSB), landed that afternoon, following a lengthy government consultation. “We are not short of climate data. We are overwhelmed by it,” asserted one speaker. The issue at hand is one of quality and consistency. SRS will play a significant role in going the extra yard by facilitating investment-grade data based on international standards (see our 2023 ISSB roundtable). Moreover, SRS is comparable internationally as ISSB standards have been or are being adopted in 40 jurisdictions, roughly 40% of global capital markets.“Investors are increasingly looking beyond labels to the credibility of the company behind them,” observed another speaker. Corporate transition plans, which Labour pledged to make mandatory for larger companies in its 2024 manifesto, are the essential window into whether a given company is trading in loose pledges or evidence-based commitments. Transition plans with thought-out milestones and capital expenditure allocated will fall into the second category. The PLG will be discussing this important mechanism at the next roundtable.Climate scenarios play a fundamental role in this process. Paris-aligned pathways provide benchmarks against which the credibility of transition plans can be assessed, allowing investors to test whether corporate strategies are consistent with global decarbonisation trajectories. Scenario analysis has the potential to shape investment decisions rather than simply serve as a reporting exercise. Decision-makers are far more likely to engage with these scenarios when they reveal clear trajectories across policy, consumer behaviour and physical climate risks. The question is whether those trajectories are sufficiently aligned and stable to support long-term investment decisions.
Certainty and execution
A pre-panel survey of the audience placed “policy uncertainty and geopolitical volatility” as their primary concern (see image above). I was asked to plot trajectories across UK policy, with the help of insights we’ve gathered from the PLG’s roundtables over the past twelve months.The UK’s Modern Industrial Strategy should, in theory, provide the clearest market signal. Clean energy features prominently, yet the Strategy does not integrate decarbonisation or resilience across the wider economic framework. The UK’s aviation policy tells a similar story. A sustainable aviation fuel mandate has been introduced, but sustainable fuels are neither sufficiently scalable nor affordable enough to bring down emissions as air travel grows. The Department for Energy Security and Net Zero (DESNZ) is on a more aligned trajectory, with GB Energy, the £15 billion Warm Homes Plan and historic upgrades to the grid.The emerging disclosure architecture around SRS, which is expected to be mandatory for listed businesses (see the FCA’s consultation) and possibly larger private companies, together with assurance and transition plans, represents the most reassuring trajectory. However, as a set of disclosure standards, backed by assurance, they fall under the category of credibility and comparability more than an active policy that will shape decisions. A reminder that the burden of responsibility to “design out the tension between profitability and sustainability” by incentivising greener behaviour sits with policymakers (see our CISL roundtable on Competitive Sustainabilty).
Geopolitics, the environment and nature
The key geopolitical shift that delegates were encouraged to take heed of was the rise of “national priorities rather than a single global trajectory”. The consensus symbolised by Paris and COP26 is collapsing. The US has pivoted away from climate action. Meanwhile, China is both the largest investor in renewables and the largest emitter of CO2. The result is a sharper examination of national policies by investors, and a rising imperative for national capitals to set the agenda domestically.The other restraint on economic activity guiding investment is, of course, the environment itself. Delegates were reminded that “nature risk is not confined to specific sectors. Every portfolio depends on natural systems”, and crucially for decision-makers, “climate risk modelling should prioritise credible ranges over false precision.”
From transition to better corporate governance
My takeaway from the discussion was that investors are not losing sight of the scale of the environmental challenge. If anything, they are becoming more disciplined in how they respond to it. Frameworks such as the IIGCC’s Net Zero Investment Framework reflect a broader shift in sustainable finance from pledges to execution. Active and ideally coherent policy measures, such as incentives, are needed however. Corporate governance, the less talked-about pillar of ESG, must advance as well. A seminar on greenwashing illustrated how difficult it can be to determine whether sustainability claims attached to a product or portfolio are genuine, often leading firms to err on the side of greenhushing. These are important technical debates, but meaningful system change will ultimately require directors’ duties to be better balanced with environmental and social priorities under the Companies Act (see our recent ‘Business as a Force for Good’ roundtable). In that sense, transition plans are beginning to function as a prototype of a new governance model, forcing companies to confront externalities and address long-term risk.The Policy Liaison Group prides itself on running a compelling schedule of high-level roundtables year-round. Contact the team if you’re interested in finding out more.
