OECD says lack of clarity on fiduciary duty an obstacle to low carbon investment

The OECD has highlighted a lack of clarity on fiduciary duty and stewardship pertaining to environmental, social and governance (ESG) issues as being among the policy “misalignments” undermining low-carbon investment.
And it added another hindrance is corporate reporting “that does not reflect the climate risk (e.g. stranded assets)”.
The Paris-based Organisation for Economic Cooperation and Development said that its 28 country members, where institutional investors manage around $93trn in assets, need to create policies, like establishing green investment banks, to shift this capital to low-carbon energy.

It makes the recommendation in a wide-ranging report on policy for a low-carbon economy requested by OECD member countries and the European Union.

The 234-page report, Aligning Policies for a Low-carbon Economy, says addressing human-induced climate change is one of the “most significant challenges to be undertaken by the international community” and that many countries are implementing policies to tackle it.

However, it finds that a number of policies are not well aligned with climate policy objectives and in some cases in direct conflict.

For example, the report says there is “an urgent need to significantly scale-up investment to low-carbon energy and shift away from fossil fuel use”.

However, some financial regulations hinder the allocation of long-term finance to low-carbon infrastructure investment.For example, the report warns that rules such as the Basel III capital adequacy regime can inadvertently limit the ability of institutions such as banks to finance long-term infrastructure.

The report makes a number of recommendations to unlock institutional capital.

The OECD wants more green investment banks, stronger requirements for institutional investors to provide information on green investments, more risk mitigation financial tools and liquid markets for green infrastructure financing instruments.

More broadly, to channel more finance to low-carbon infrastructure, the report says governments should review financial regulation such as Basel III and Solvency II; properly account for climate risks and liabilities in financial markets and step up standards for ESG disclosure. Along with reforming policy around finance, the report makes recommendations around climate-friendly taxation practices, encouraging innovation and skills for a low-carbon transition, removing international trade barriers, low-carbon urban mobility and sustainable land use.

Launching the report today, OECD Secretary General Angel Gurría said it had to be a priority to encouraging long-term investment finance for a low-carbon transition and lowering the cost of capital. He said: “We need to move from a world where green bonds are a novelty to one in which the entire $100trn bond market reflects a transition towards a low-carbon transformation. It’s all about policies.” OECD Home Page.