A fragmented policy environment for the net zero transition requires investors to adopt a holistic approach to engagement, says BNY Mellon sustainability head.
If global temperatures rise above 1.5°C, company engagement on climate change will have minimal impact, prompting investors to collective engage policymakers to drive systemic change, according to Kristina Church, Global Head of Sustainable Solutions at BNY Mellon.
Speaking at the Climate Investment Summit hosted by the London Stock Exchange as part of London Climate Action Week, Church highlighted the Intergovernmental Panel on Climate Change report which warned the world is on track to reach exceed 1.5°C without immediate cuts in greenhouse gas emissions and an accelerated phase out of fossil fuels.
“With the latest nationally determined contributions, even the chances of a 2°C world is limited,” Church said. “Therefore, the real economy is currently more aligned closer to 3°C.”
Church cited recent MSCI data which found that only 19% of publicly listed companies had transition pathways aligned with 1.5°C, suggesting an investor on a pathway to net zero couldn’t invest in 80% of the publicly listed investable universe.
“If the real economy isn’t aligned, it is very hard to align our portfolios to deliver on those risk-adjusted returns,” added Church.
According to Church, engagement with companies remains “incredibly important” to drive change, but she noted that “as the world moves further and further away from a 1.5°C trajectory” collaborative engagement is going to become increasingly vital. “The way to drive impact might no longer be single company engagement but driving systems change and driving policy in the right direction.”
Church told onlookers at the event that the US Inflation Reduction Act (IRA), which has ignited significant investment opportunities in some of the hardest-to-abate sectors, represents a major step up in renewable energy and a step down in prices necessary to ramp up production in the electric vehicle supply chain.
However, she noted that the climate policy globally remains insufficient.
Other related policies are the EU’s Net Zero Industry Act, but observers say it doesn’t tackle the main barriers to cleantech investment such as scarcity of critical skills and high energy costs. This week, the UK’s Climate Change Committee recently described government efforts to scale up climate action as “worryingly slow”.
“We have different environments in different regions of the world, and in Europe within our SFDR portfolios there’s more focus on exclusionary investing,” she said, highlighting the need for investors to support the net-zero transition of firms, including those with high levels of emissions and particularly tough challenges in reducing emissions.
“We need ways to invest in some of the hard-to-abate sectors [on the path to net zero]. These sectors are vital for future economic growth such as the steel, automotive, buildings and chemicals sectors. But they need some really innovative solutions and many of those solutions are not commercially viable.”
Church said granular data is key to understanding the net zero pathways for sectors in different policy environments, and that investor engagement will need to shift to accelerate climate policy “to generate opportunities and not just sticks”.
Other investors in recent months have indicated that they are evolving their engagement efforts on climate change. The Church of England Pensions Board (CoEPB), which had led engagement efforts at Shell via Climate Action 100+, is no longer prioritising engagement with the oil and gas sector on climate change.
Instead, CoEPB will refocus its efforts on reshaping the demand side of the oil and gas industry in key sectors such as the automotive industry.
The CoEPB and the Church Commissioners last week exited oil and gas.
The Church Commissioners, which manages the CoE’s £10.3 billion (US$13.2 billion) endowment fund, had previously excluded 20 oil and gas majors from its investment portfolio, but will now be excluding BP, Ecopetrol, Eni, Equinor, ExxonMobil, Occidental Petroleum, Pemex, Repsol, Sasol, Shell and Total, having concluded that “none are aligned with the goals of the Paris Climate Agreement”. The CoEPB will be taking the same steps.
Valeria Piani, Head of Stewardship at Phoenix Group, said engagement with policymakers and regulators would be the future of stewardship by investors on climate change at ESG Investor’s inaugural Stewardship Summit in May.