At the end of 2016, nations from across the globe met in Marrakech for the annual climate summit. Countries confirmed the commitment made a year earlier in Paris to limit global warming to 2°C and pursue efforts to go further to 1.5°C.

The European Union continues to play a key role in this shift.

Last December, it named a 20-strong committee from across the financial community charged with helping to hardwire sustainability into EU financial policy.

The committee’s work will have relevance to the EU’s capital markets union plan, an ambitious initiative that aims to more effectively link the capital of savers with sustainable infrastructure projects. The committee is expected to come up with an interim report by this summer.

December also saw a deadline for countries to put into legislation an EU directive requiring large companies to report environmental, social and governance (ESG) information or explain to investors why they have failed to do so. Companies will be required to produce the reports in 2018, covering the 2017 financial year. Ireland will transpose this directive into law this May. Irish-located companies that will fall under this new legislation include Kerry Group plc, Glanbia plc, Greencore Group plc and Origin Enterprises plc.

Bank deal

A recent example of ESG performance linked to a firm’s financing saw Philips agree a unique deal with a consortium of international banks that links their sustainability performance to the interest rate attached to a €1bn loan.

Philips have agreed to have their current sustainability efforts assessed by an independent provider of ESG ratings, which will be used as a benchmark for future improvements. This year-on-year approach will determine how much interest is to be paid on the revolving credit facility. Greater achievements will be met with a lower rate. Alternatively, interest on the loan will increase should Philips go backwards in its sustainability efforts.

In Ireland, capital market participants are also increasingly considering ESG factors in their investment decisions. They recognise that this not only affects a company’s reputation, operational risks and costs, but can enhance efficiency and productivity leading to growth in shareholder value.

Fossil fuel investment

In February, Ireland became the first country in the world to introduce legislation banning fossil fuel investment for state-sponsored investments. If enacted, the Ireland Strategic Investment Fund will fully divest from fossil fuels by 2020.

Another major development at the end of 2016 was the release of a long-awaited report by the Taskforce on Climate-related Financial Disclosures. It recommended that all companies disclose, as part of their financial reporting, the potential effects of climate change on their business.

The report has gravitas. The taskforce is chaired by billionaire Michael Bloomberg and involves big-hitters from across the global financial community. It was assembled by the Financial Stability Board, which was set up by the G20 in the wake of the financial crisis and is chaired by Bank of England governor Mark Carney.

Although the report is preliminary, its release was a landmark moment because it puts climate change firmly on the boardroom agenda for both investors and the companies they invest in.

Investors

By saying that climate risks should be disclosed in financial statements, the taskforce is telling investors that they should be thinking about whether a company’s business model is in line with limiting global warming to 2°C, because this could prove to be material to the company’s future. In other words, there are risks for emissions-intensive companies because governments may bring in legislation that penalises them as they push towards the 2°C target.

So, the capital stack is shifting. Not being sustainable is deemed risky. Institutional investors and banks are increasingly embracing the sustainability agenda.

Companies that bury their heads in the sand when it comes to these issues may find that the capital markets are closed to them, or their cost of borrowing rises, because they are more of a risk.

The 2017 Irish Farmers Journal/KPMG Agribusiness report entitled Agricultural Thinking: inside the minds of global agri leaders comes free with the current issue of the Irish Farmers Journal.

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The Irish Farmers Journal/KPMG Agribusiness Report 2017