Governance and Climate Insights (WBA)

Anna Triponel

May 5, 2023
Our key takeaway: We’ve spoken a lot in our previous summaries on why taking action on climate change is a good thing for financial institutions to do, not least because it goes some way to mitigating the risks that they and their clients face. But how can they take effective action on climate change? What are some of the structures they need to have in place to do this? The World Benchmarking Alliance (WBA) says good governance is key to effective climate action, with data showing a direct correlation between the two. Good governance can include linking executive remuneration to sustainability targets; allocating oversight of sustainability issues to the board and decision-making bodies; and ensuring boards are gender-balanced. This should all be implemented in tandem with greater transparency on the decisions taken, including challenges, failures and opportunities faced from addressing climate change, as well as greater collaboration between organisations to enable a systems-wide transformation of the financial sector. The last point is particularly true for the phasing out of fossil fuels, which - unsurprisingly - has not been adequately addressed by the institutions assessed in the WBA Financial System Benchmark. The financial system is a “game-changer in funding a sustainable and just economy” and players within this ecosystem have a critical role to play in ensuring a sustainable transition that puts people and planet at its centre. 

The WBA released its report Governance and Climate Insights Report - Triggering a domino effect in finance (May 2023) as a call to action to financial institutions, policymakers and regulators, standard and framework setters, and civil society to take action on climate change through good governance, greater transparency and sector-wide collaboration in the financial sector:

  • The financial system is a “game-changer in funding a sustainable and just economy”: Despite the fact that financial institutions are key players in delivering a just transition, they are failing to utilise the tools they already have to capitalise on this unique position. Such tools they can use include, for example, supporting “economy-wide (not just portfolio-wide) alignment” with the 1.5°C temperature targets; “accelerating flows of capital towards innovative solutions and climate-aligned assets as well as actively supporting the decarbonisation or phaseout of high emitting assets”; “prioritise actions to expedite progress and maximise impact across key sectors, geographies, asset classes and business units” by tailoring net-zero strategies, implementation and reporting to account for “a firm’s characteristics, competitive advantages, and role in the real and financial economies.” In short, the financial sector needs to go through a systems-wide transformation and financial institutions already have the tools and the influence to enable this to take place.
  • Good governance and greater transparency as key to financial institutions taking effective action on climate change: The report highlights seven key findings from the assessment: (1) “The whole financial system scores poorly against expectations on governance and climate”; (2) “The whole financial system scores poorly on its approach to fossil fuels”; (3) “Institutions with gender-balanced boards outperform across climate indicators compared to those institutions with boards that are not gender balanced”; (4) “Institutions that link executive remuneration to sustainability outperform across all climate indicators”; (5) “Stronger regulations lead to greater transparency and therefore better performance on climate indicators”; (6) “Many of the asset owners that are regarded as important influencers in the financial system remain opaque and score poorly on climate indicators”; and (7) “Financial institutions that typically fall outside the scope of mainstream regulations, such as private equity and venture capital, are opaque and score poorly on climate indicators despite being on the frontier of financing climate solutions.” All this is to say that good governance - which entails board-level oversight on sustainability matters, gender-balanced boards, and executive pay linked to sustainability targets - comprises the necessary framework to undertake effective climate action. For instance, the report highlights the link between Board-level oversight and responsibility on sustainability issues to better climate performance; a top-down approach means that business strategies merge with climate strategies, and resources are allocated to functions and activities crucial to implement climate action plans. In addition, achieving a gender-balanced board “should be a priority for financial institutions” because it has a positive influence on decision-making and climate action. This is backed up by data collected from the assessment: “The benchmark found that financial institutions that disclose they have at least 40% women on their board perform better across all climate indicators.” Board-level oversight of sustainability issues and gender-balanced boards do not exist separate from each other; rather, they exist in parallel and so both are necessary for institutions to implement to deal effectively with climate change.
  • Five calls to action that financial institutions can take now: The report sets out five overarching calls to action relevant to all industries within the financial system: (1) “Board responsibility drives climate action; ultimate responsibility for climate and sustainability MUST sit at board level. Tone from the top matters”; (2) “Gender balance matters for climate too; prioritise gender-balanced boards and leadership. This is good for more than just equity, it also has a positive impact on sustainability decision-making”; (3) “More influence to innovate from within the system; financial actors must recognise their place in the financial system and use their power to positively influence the actions of other institutions, not just real-economy companies. The industry succeeds together, and no institution should be an exception”; (4) “Transparency on answers and problems; transparency is critical to rebuild trust in the financial system. Greater transparency and understanding of decisions taken, including the more challenging aspects of addressing climate change, are essential to foster collaboration on finding solutions. Institutions also need to recognise that their stakeholders go beyond their clients and members. They must make climate disclosures accessible to all”; and (5) “Collaboration on approaches to fossil fuels; it is stark that not one institution in the benchmark has an adequate approach to phasing out all fossil fuels. This highlights the complexity of the issue and the fact that ALL stakeholders must come together to make this happen.”

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