By Mathew Carr
Feb. 9-13, 2021 – LONDON: The European Union’s carbon price is seen needing to triple to force changes in corporate behavior because climate disclosure and governance measures haven’t worked quickly enough.
The CO2 allowance price “needs to be three times where it is today, even though it’s at record levels,” said Steve Waygood, chief responsible investment officer at Aviva, the funds manager. Disclosing climate risks and requiring board members to focus on other stakeholders such as society have not protected the climate and nature adequately and they probably won’t do alone, he said.
That’s why politicians need to put in place stronger climate protections such as higher carbon prices.
Waygood was speaking at seminar about how to improve corporate governance to spur companies to broaden their objectives beyond money and short-term profit toward sustainability objectives such as cutting emissions.
The EU’s Non-Financial Reporting Directive needs strengthening because behavior changes are not happening quickly enough, said EU commissioner for justice Didier Reynders.
“We’ve seen that reporting obligations have not made the breakthrough,” he said. Short-termism is still dominating corporate decision making.
“We are facing a sustainability crisis of unprecedented scale.”
EU carbon prices have more than doubled since the beginning of the pandemic, closing the week above 40 euros a ton. Economists have said levels above 100 euros imposed soon might give the world a fighting chance of meeting emission cuts implied in the Paris climate deal.
Science-based emission-reduction targets are seen as an effective way for companies and countries to align their plans with the objective of the Paris agreement, which is to keep temperatures from rising more than 1.5C. Temperatures have already risen about 1C above pre-industrial levels.
To make the economy work more sustainably, governments need to deliver tax reform to ensure living wages for workers while narrowing the gap between senior executives and workface employees to ensure social cohesion, said Caroline Avan, advocacy officer at charity Oxfam in France. Measures to ensure compliance with human rights guidelines should also be implemented.
Countries can use money generated from selling carbon allowances to help compensate poorer people for higher costs in the economy created by stronger climate policy.
“Many corporate directors have told me that already now they are expected to be responsible and sustainable, but in the future these expectations will become legal obligations,” said Heidi Hautala, EU Parliament vice president and chair of its responsible business conduct working group. “The board and its audit committees can show if the companies’ ESG actions are effective, or mere greenwashing,” she said at the event.
The EU is considering widespread legislation that will require better corporate behavior and curb damaging executive greed.
“I believe that the EU non-financial reporting standards could become the globally recognized best practice – the lingua franca, the common language, of sustainability,” Hautala said
Yet wider pressures need to be brought to bear across the economy, warned Aviva’s Waygood. I added some emphasis.
“I don’t think we can rely on corporate governance alone to create sustainable markets. The case may have been slightly overstated … It isn’t the job of the board to correct market failures. It isn’t the job of the board to (in the economic jargon) internalize externalities. That is the role of government and regulators and policymakers.
I’m missing the systemic vision of how the financial disclosure requirements all fit together.”
In the real economy, companies need to pay the cost of cleaning up the damage they cause; “therefore the full cost of capital reflects the full cost of carbon on society — the full cost of emissions. That cannot be done through corporate governance,” Waygood said.
The financial supply chain is crucial, those who advise families how to manage their investments and pension pot need to be better joined up with funds managers advocating for better board stewardship. Chemical companies, oil companies and automakers all need to be accountable via the prices they pay and that are paid for their goods and services.
“It’s time for a new vision; of how the emissions trading scheme, the common agricultural policy, the common fishing policy; the extended producer responsibility” and other measures all “come together in the real economy to shape prices so that the cash flows of the businesses that are being valued properly reflect their full cost to society and the environment,” Waygood said.
See this earlier opinion: The Era of Climate Brinkmanship is Ending as Carbon-Free Cashflow Rises: https://carrzee.org/2021/02/09/the-era-of-climate-brinkmanship-is-ending-as-carbon-free-cashflow-rises/
- Recording of the webinar: https://youtu.be/BNZTfEyDuxs?t=28
- Slides can be downloaded here
- Relevant resources:
- Alliance for Corporate Transparency website (including 2019 and 2020 research reports and public databases)
- Climate Disclosure Standards Board analysis of environmental disclosure under the EU Non-Financial Reporting Directive
- Professor Andrew Johnston statement on ‘Corporate Governance for Sustainability’ signed by over 60 company law scholars
(Updates with science-based targets, Hautala; updates Wednesday, Thursday with links, more complete quotes; closes weekly carbon price Saturday)