In the lead up to the COP26 summit, G7 Finance Ministers and Central Bank Governors issued a communiqué that endorsed the creation of beneficial ownership registers as a priority action in the “transformative effort to tackle climate change and biodiversity loss.” The policy paper notes the important role that beneficial ownership information plays in tackling illicit finance linked to environmental crimes (e.g. wildlife trafficking), and called on countries to fully implement and strengthen the Financial Action Task Force (FATF) standards.
Tackling environmental crime is one way in which beneficial ownership transparency (BOT) can contribute to environmental policy aims. However, BOT can also play a broader role in ensuring a successful and just transition to net zero through effective private investment, business accountability, and resource governance.
Ensuring effective private investment
Mobilising finance is among the four goals set out for the Glasgow COP26 summit that started yesterday, 1 November 2021. It is expected that trillions of dollars will be spent in public and private investment to achieve net zero emissions targets. For instance, the International Energy Agency (IEA) estimates annual investment in the energy sector must reach USD 5 trillion by 2030.
New reporting standards around sustainability are being developed for the private sector alongside these commitments. These aim to ensure that private finance will reinforce government policies, and that investors have reliable information on climate risks.
Within this field, the Task Force on Climate-related Financial Disclosures (TCFD) has made recommendations on risk management and reporting “to improve the quantity, quality and comparability of climate related disclosures,” which the COP26 Private Finance Hub aims to expand. This includes harmonising the numerous voluntary standards, and environmental, social and governance (ESG) metrics that have emerged.
A forthcoming Open Ownership report on the use of beneficial ownership data by the private sector shows this growing trend in voluntary standards around companies’ ESG performance is creating strong incentives to disclose and use beneficial ownership data. It can be used to gain better insights into suppliers, partners, and investees. When BOT is implemented well and the data made public, it can allow any investor or company to determine the true owners of companies and enable them to visualise complex transnational ownership structures. This helps manage operational and reputational risks, and could be incorporated into reporting frameworks like the one being proposed by TCFD.
Holding businesses to account
There are growing public expectations and legal requirements for companies to be held accountable for their emissions and to play their part in achieving a just transition to net zero. Countries around the world, as well as civil society, seek to monitor the private sector’s progress towards reducing emissions, and comprehensive, public information about who owns and benefits from business activities can foster greater accountability and trust.
Under the Greenhouse Gas Protocol, companies are responsible for reporting three types of emissions: direct emissions from sources owned or controlled by the company; indirect emissions from energy that is purchased; and all other emissions associated with a company’s activities. BOT could help streamline company reporting and enable governments and civil society groups to identify those culpable of taking evasive actions in the face of such protocols, such as hiding emissions by using subsidiary entities and outsourcing and obscuring high-emission activities along their supply chains.
These emissions accountability standards are echoed in the United Nations Guiding Principles on Business and Human Rights, which addresses how companies can advance climate action from a human rights perspective. Equipping companies with information about the real people with whom they are doing business can help them uphold their responsibility to conduct human rights due diligence, and to leverage their relationships to influence other actors to respect human rights.
Ensuring effective and fair resource governance
The energy transition is also fuelling growth in the demand for critical minerals for the innovations required – from electricity networks to electric vehicles – as highlighted by this IEA report. BOT can help improve the governance and management of critical minerals by helping prevent corruption in the extractives sector and increasing accountability of both governments and companies. The Extractives Industries Transparency Initiative (EITI) and Open Ownership’s joint Opening Extractives project is working to implement BOT in the extractives sectors in a number of jurisdictions around the world.
Finally, the fiscal resources that will be devoted to tackling the climate crisis and energy transition – like those being proposed by the Biden Administration – are likely to be vast. Beyond domestic spending, high-income countries are also aiming to deliver on the goal initially set out in COP15 to contribute USD 100 billion per annum in climate finance to developing economies between 2020 and 2025.
Beneficial ownership information can make extensive spending like this more effective and fair. BOT ensures that any government spending delivers value for money for taxpayers by fostering competition and preventing corruption and fraud. It also serves as a means of verification for preferential procurement, a policy instrument that can support a more just transition. These are key starting points for building toward a resilient and transparent energy future.
• If you would like to discuss these topics, please contact the authors Alanna Markle and Tymon Kiepe. You can also follow Open Ownership on Twitter.