The World Wide Fund for Nature (WWF) has launched a tool to help financial supervisors, asset managers and financial institutions evaluate the net-zero transition plans of the companies they invest in.
Backed by artificial intelligence (AI) technology, the new tool will help investors assess whether companies’ transition plans have science-based targets and a credible pathway to achieve net zero by 2050.
The tool, which is currently under development and will be publicly available shortly, will also be able to identify whether companies are ‘greenwashing’ investors.
The WWF commissioned project, co-produced with the University of Zürich and the University of Oxford, highlights the need to carefully assess the ambition, feasibility and credibility of a company’s net zero climate transition plan, from a financial supervisory risk and vulnerability perspective.
The AI tool will automate and scale up the analysis of transition plans based on a proposed methodology, and will follow the structure of the ChatReport tool.
Currently, regulatory action by financial regulators to counter greenwashing and transition plan inconsistencies has been to ask for comparable and transparent disclosures, such as product transparency in half yearly reporting, and a requirement the sustainability of a financial product is discussed at the point of sale so customers are aware of what they buy.
According to the WWF this new tool addresses gaps in this current system, as a first screening tool to “red flag” companies whose transition plans lack ambition, feasibility and credibility.
For central banks, investors, policy makers and regulators it offers a data-driven tool to carefully assess the companies’ environmental and climate-related claims and select those companies suspected of greenwashing for more in-depth assessments, analyses, and direct engagement.
For market conduct authorities, red flag indicators are a useful screening tool to automate the process of identifying potential misleading claims and statements, the WWF said.
Corporate greenwashing “poses a serious threat” to financial stability and the transition resilience of companies, investors, and the financial system in the transition to a net zero, nature positive economy, according to the WWF.
This is because greenwashing leads to capital misallocation, and financially “riskier and costlier” decarbonisation pathways, which undermines the ability of markets to price risks correctly and reward resilience to deal with uncertainties.
This in turn, can negatively affect the global economy and private households, and even lead to increasing unemployment risks, such as the recently published climate stress test from the Bank of England (BoE) highlights.
For financial regulation, the WWF warned the credibility of climate transition plans is of particular concern because it directly affects consumer protection, as consumers are misguided by false claims.
It also has direct implications on micro- and macro-financial stability as greenwashing could undermine the effectiveness of prudential policies.
Maud Abdelli, lead on the WWF’s Greening Financial Regulation Initiative (GFRI) said: “Finance for transition must take a dynamic and forward-looking view, taking into account all sectors, in particular the most climate and environmentally harmful industries.
“It is therefore of crucial importance to properly assess the credibility and ambition of corporate climate transition plans.”
The AI tool can also be used to assess risk exposure at the micro-prudential level and demand more ambitious transition plans.
Financial supervisors are recommended to require financial institutions to publish strategies that indicate how it deals with the risk of inconsistency and greenwashing in its portfolio, or towards specific companies.
The WWF will support the University of Zurich and Oxford in pilot testing the AI tool’s red flag indicators framework with a number of companies between September and December 2023. The results will be published in December 2023 to help financial regulators and financial institutions get a better understanding and overview of the grade of ambition of companies.