A Consistent Message

Institutional Investors Group on Climate Change CEO Stephanie Pfeifer says policymakers at COP28 must provide an enabling environment for responsible investors.

With COP28 underway, it’s time for policymakers, business and investors to all take stock of where the world stands on climate action, identify gaps and work together to chart a better course forward in 2024.  

Speaking with ESG Investor, Stephanie Pfeifer, CEO at the Institutional Investors Group on Climate Change (IIGCC), explains how the past 12 months have marked a “shift from theory to action” among investors. 

The IIGCC, which works primarily with European asset owners and managers (representing around US$65 trillion AUM), has no doubt played a vital part in driving this shift by helping investors to set net zero ambitions and providing frameworks and guidance to help them implement and manage those commitments.  

One of the investor network’s most significant achievements this year, says Pfeifer, was the expansion of the IIGCC’s Net Zero Investment Framework (NZIF) to encompass additional asset classes, such as infrastructure and private equity. The second iteration of the NZIF is slated for mid-2024.  

Another major milestone for the IIGCC this year was its role in the launch of Nature Action 100 (NA100), a collaborative engagement initiative tasked with tackling nature and biodiversity loss, which entered its engagement phase in September and announced its focus list of companies systematically important to reversing humanity’s negative impact on the natural world.  

Over 200 investors, including AXA Investment Managers, Columbia Threadneedle Investments, BNP Paribas Asset Management, Church Commissioners for England and Storebrand Asset Management, have joined the initiative within a short timeframe.  

On the subject of corporate engagement, the IIGCC is also one of five investor networks, including Asia Investor Group on Climate Change (AIGCC), Ceres, Investor Group on Climate Change (IGCC) and the UN-convened Principles for Responsible Investment (PRI), that delivered the investor-led engagement initiative Climate Action 100+ (CA100+).  

This year, the initiative, which aims to ensure the world’s largest corporate greenhouse gas (GHG) emitters take necessary action on climate change, progressed into Phase Two, shifting its focus from corporate climate-related disclosure to ensuring companies produce credible and robust transition plans to support their commitments.  

To support investors in their decision-making processes, the IIGCC has developed standards and expectations for transition plans across crucial sectors like banking, oil and gas, diversified mining, and chemicals.  

“These guidelines will support investors in understanding, assessing, engaging and making decisions based on their findings,” says Pfeifer.   

On the policy front, the IIGCC has maintained an active stance at national, regional (especially within the EU), and global climate arenas.  

“We’ve advocated for supportive policies, calling out instances like the UK government’s net zero policy roll back and pressing for more ambitious sustainable finance policies at the EU level,” she says.  

The four Cs 

In October, Pfeifer penned a letter to COP28 President-designate Sultan Al Jaber calling for ambitious outcomes focusing on the three priorities: the phasing out of fossil fuels, building resilience and reducing vulnerability, and the scaling up and aligning of finance for climate action. 

“Investors seek certainty, consistency, clarity, and continuity in the signals conveyed by governments and policies,” says Pfeifer when asked how large the ‘Overton Window’ for climate action is at COP28 and what success as the landmark event looks like within that context.  

The importance of this theme is evident in the co-signed letter addressing changes to UK government net zero policies, emphasising the need for clarity and the avoidance of unexpected shifts in policy direction, following UK Prime Minister Rishi Sunak’s apparent willingness to forego the creation of an enabling policy environment for long-term investment. 

“Many governments have made net zero commitments, but what’s crucial is backing these ambitions with concrete sector-by-sector policies to support long-term asset allocation, rather than undermining the confidence of their decision making,” says Pfeifer, adding that sectors like the automotive industry have shown positive strides due to clear policy maps, highlighting the impact of robust government plans. 

In November, climate think tank World Resources Institute (WRI) highlighted that “immediate, transformational changes” across every sector are needed by 2030. The ‘State of Climate Action 2023’ report offers a roadmap to accelerate necessary changes across all sectors and inform governments’ policy response to the Global Stocktake at COP28 in Dubai. Across the 42 indicators assessed in the WRI report, only one – the share of electric vehicles in passenger car sales – is on track to reach its 2030 target.    

“A robust sustainable finance regulatory framework is vital,” says Pfeifer, noting that the IIGCC focuses a significant proportion of its efforts on advocating for this framework at global, regional, and national levels.  

“At COP28, emphasis must also be placed on resilience, adaptation, and nature, especially given the significance of emerging and developing economies in achieving global net zero and climate resilience goals.”  

Fulfilling obligations 

Fundamentally, investors require a supportive policy environment to confidently pursue long-term investments and asset allocations across various sectors, says Pfeifer, as moving beyond such policies exceeds their fiduciary duties, restraining their ability to progress in their net zero ambitions and commitments. 

For instance, portfolio decarbonisation commitments made by signatories to initiatives like the UN-convened Net-Zero Asset Owner Alliance (NZAOA) or the Paris Aligned Asset Owners hinge upon governments and policymakers fulfilling their obligations within the Paris Agreement, she says.  

“The extent of an investor’s actions, however, is influenced by their mandates, client demands, and significantly by the prevailing policy environment,” she says.  

Another crucial factor impacting investors is the availability of high-quality data, models, and scenario analysis essential for informed decision-making.  

The Universities Superannuation Scheme (USS), one of the largest pension funds in the UK, said it feels a “false sense of security” with current climate scenario analysis and has co-released a new report calling for a “radical and urgent shift” in the way they are conducted.   

The ‘No Time To Lose’ report outlines four new climate scenarios, developed by USS and University of Exeter, that “better reflect the real-world risks and opportunities that frame investment decision-making over the short and medium term”, such as extreme weather, geopolitics, financial markets, and technology.    

For its part, the IIGCC has supported portfolio decarbonisation by ensuring breadth of guidance across asset classes.  

“Initially, when considering asset classes for alignment, methodologies were more accessible for certain classes, while others lacked the necessary net zero methodologies, such as infrastructure and private equity,” explains Pfeifer. Despite ongoing evolution, certain asset classes still lack these methodologies, prompting ongoing efforts to address this gap. 

Discussions surrounding the NZIF 2.0 have extended to derivatives and sovereign bonds, which are slated for inclusion in the framework next year, she says, adding that this ongoing expansion illustrates the step-by-step development of the NZIF to encompass diverse asset classes. 

As previously reported by ESG Investor, Mahesh Roy, Investor Strategies Programme Director at IIGCC, acknowledged that this expansion is “complex”, but that the review of consultation responses is well underway.   

The IIGCC has made significant strides in addressing key challenges by developing valuable resources, establishing guidance, and forming various working groups. For instance, the IIGCC created a data vendor catalogue with more developments in progress. 

Further, efforts are underway by the IIGCC to enhance the principles governing the next generation of net zero benchmarks, reflecting a commitment to continual improvement in this area, according to Pfeifer.  

However, the transition from commitment to implementation poses significant challenges for investors which have pledged to achieve net zero goals, she says, noting that this shift demands substantial operational changes, and overcoming technical barriers requires both time and resources.  

“Despite these hurdles, numerous investors are actively engaged in this process, and the IIGCC will continue to provide support in their endeavours.” 

Climate-nature nexus 

Reflecting on the broader topic of nature and its relationship to climate change, Pfieffer tells ESG Investor that it’s becoming increasingly evident that a more holistic approach to environmental risks and impacts is necessary for investors.  

“This shift requires moving beyond the longstanding focus solely on [climate] mitigation towards acknowledging the significance of adaptation, resilience, and now, the critical aspect of nature and biodiversity loss – recognising the interconnectedness of these elements is key,” she says. 

According to Pfeifer, the launch of NA100 was “immensely satisfying”, especially in the wake of witnessing the substantial investor interest during the COP15, which saw the adoption Kunming-Montreal Global Biodiversity Framework (GBF). 

“It’s gratifying that the IIGCC has taken a leading role in establishing this initiative and will continue to provide support, both through the Secretariat and in corporate engagement with specific companies in the future,” she says.  

Looking ahead, the goal is to further integrate nature into ongoing conversations between asset owners and investee firms, says Pfeifer, especially in the context of investors’ actions regarding climate change and the associated challenges of nature and biodiversity.  

“The NZIF, already widely used for setting net zero commitments, presents an opportunity to include nature within its scope over time – a step many investors are inquiring about,” she says.  

Pfeifer also says that there’s potential to weave nature engagement into existing alignment targets, possibly by identifying climate and carbon-related metrics that can accommodate nature-centric aspects.  

If so, this could significantly enhance the comprehensiveness of these targets, she says, although a more detailed update on this will be provided when ready, most likely Summer 2024, ensuring a thorough understanding of these integrations. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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