Great accelerations: reviewing sustainability policy in 2021

Ambition

During 2021, leaders and policymakers significantly scaled-up their climate ambitions. It felt almost like the world suddenly woke up to the hard truth of having to meet complex, global sustainability challenges by committing to and implementing significant policy reform.

At COP26, 81 countries (technically 74 ‘parties’), representing 73.8% of global emissions, communicated net-zero targets. This means that some of the largest global emitters – the United States, Russia, and China – are committed to net zero by the middle of the century (well, almost…). On top of this, 105 countries signed up to the Global Methane Pledge to limit methane emission by at least 30% from 2020 levels by 2030.

Policymakers have also committed to bringing transparency to sustainable investment, from an asset-owners level right through to a corporate level. In October, the UK government released its Roadmap to Sustainable Investing. We also saw a clear recognition of the need to harmonise reporting over a single comprehensive baseline for sustainability disclosures through the IFRS International Sustainability Standards Board.

Action

At times, it felt like every day heralded a new policy announcement. The actual pace wasn’t quite that rapid, but there was a real move from discussion to action in sustainable policymaking during 2021. The UN PRI’s database on sustainable finance regulation noted that by the third quarter of last year, there were already 159 pieces of new or revised sustainable finance policy – more than in all of 2020.

Let’s look at climate disclosures in the UK: for years LGIM has been beating the drum on strengthening TCFD disclosures, and we now finally have regulation that requires disclosure right across the market. Indeed, the UK government has listened to our calls to mandate disclosure of credible net zero transition plans; it even went further, introducing a new rule covering asset managers, asset owners and listed companies.

Of course, rapidly implemented policy can bring challenges, from harmonisation across global markets and domestic policy alignment, to appropriateness versus market response, and whether these interventions are the ‘right ones’.

Apprehension

This great acceleration is undoubtedly positive overall: 2021 was a significant year marking a long-term change, a real step towards authenticity in sustainability policymaking. However, given the scale of reform needed, I’m apprehensive about ‘sitting tight’ and hoping that commitments will be realised.

Take the EU Taxonomy. We are dangerously close to having a regulation that moves away from the independent scientific advice, which would completely undermine the entire point of the Taxonomy. We highlighted this again to the Commission in October.

I think two statements from leading climate negotiators sum it up well:

• We can’t afford to have a “bunch of meaningless promises” - COP26 President, Alok Sharma; and
• “Let me emphasize as strongly as I can: job not done” - John Kerry, the United States special envoy on climate change.

2022: great realisations?

A range of significant policy issues will shape the future through the course of this year. Greater transparency in sustainable finance will continue to be a priority around the world, from the EU’s Green Deal and Sustainable Finance strategy (including SFDR and the Taxonomy), to implementing the UK’s Roadmap to Sustainable Investing, and key changes on climate disclosures in the US.

There will also be a greater focus on nature, with the UN’s postponed biodiversity conference due to happen in April and May. Topics such as carbon pricing, policies to deliver net-zero commitments, the Just Transition, and climate adaptation will continue to be in the spotlight too.

The ‘S’ of ESG will continue to feature high on the agenda as well, with human rights, diversity and inclusion, and health in light of the pandemic remaining prominent challenges for companies and governments. Governance will also play a key role and is a priority area for LGIM, from ensuring markets support minority shareholder rights and proxy voting independence to expanding and strengthening stewardship standards.

Despite the reasons to be apprehensive about achieving the full scale of commitments set out in 2021, we believe there are many significant areas of positive development taking place. LGIM will continue to engage with policymakers and stakeholders around the world to help bring these ambitions to fruition.