Aligning finance flows directly with the Paris Agreement on climate change
The need to decarbonise is urgent. It is clear that the financial centre has a key supporting role to play here, both in Switzerland and internationally, but what exactly are “Paris-aligned finance flows”, and how can we make them transparent?
The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 parties at the United Nations Climate Change Conference in 2015 with the aim of strengthening the global response to the threat of climate change following the expiry of the Kyoto Protocol. Article 2 paragraph 1 (c) of the Agreement states its purpose as follows:
“Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”
Switzerland ratified the Paris Agreement on 6 October 2017, meaning that the country and the financial centre are fully committed to the target of reducing their greenhouse gas emissions to net zero by 2050.
The goal is clear, but the route to it is complex
However, defining what we mean by “Paris-aligned finance flows” is not an easy task. The various climate conferences have shown how complex the issue is. In fact, no conference to date has even discussed the question of practical implementation (also referred to as operationalisation), let alone definitively answered it.
While this is still a work in progress, many approaches have already been developed in practice. On closer inspection, it becomes clear that different indicators are suited to each of them, depending on the perspective and aim, since they all have their pros and cons.
The Swiss approach
The federal government studied the topic of Paris-aligned finance flows together with representatives of the financial centre last year. This resulted in the Swiss Climate Scores, which are designed to establish a best practice in terms of transparency on the Paris alignment of finance flows and thus encourage investment decisions that contribute to achieving the global climate goals. The Swiss Climate Scores are indicators that reflect the current state of companies from around the world in a financial product or portfolio as well as where they stand as regards achieving net zero by 2050.
Making investments transparent but not categorising them allows investors to make better informed decisions for themselves when it comes to climate compatibility. It is becoming increasingly clear that the “taxonomies” developed to classify investments are at best unhelpful and may even be counterproductive. International developments that address the challenges via transparency and direct impact are rather more promising.
International developments in climate transparency
A number of major global initiatives are set to go live this year, notably the International Sustainability Standards Board (ISSB) frameworks and the publicly accessible Net-Zero Data Public Utility (NZDPU) platform. These will set a precedent worldwide, not least because they are supported by such influential institutions as Bloomberg, Morgan Stanley Capital International (MSCI) and Standard & Poor’s. They will create a comprehensive and global base of high-quality information on sustainability.
The diagram above summarises these direct mechanisms between the Paris Agreement goals and practical implementation in the economy. Their main advantage compared with other approaches is that they will lead directly to internationally supported, concrete and viable solutions in the economy in the very near future.
The better the data, the more transparent the product
All stakeholders will thus have easy access to the climate transition data, commitments and progress of companies and financial institutions. The International Financial Reporting Standards (IFRS) Foundation and the International Organization of Securities Commissions (IOSCO) are also supporting the two initiatives, which effectively makes them both international standards. They will therefore have an impact on the economy by influencing the requirements companies must meet to be listed on a stock exchange. As a result, regulations to this effect will not be needed.
The initiatives thus apply Article 2 paragraph 1 (c) of the Paris Agreement – making finance flows consistent with the climate transition – to the economy. This alternative to taxonomies is proving to be fast and effective without depending on regulation.