IPCC’s Working Group III report makes for sober reading.
It seems unlikely that anyone involved in ESG investing would have missed the Intergovernmental Panel on Climate Change (IPCC) Working Group III report published at the beginning of the week. Focused on mitigation, the report noted that progress on the alignment of financial flows towards the goals of the Paris Agreement remained slow, with tracked climate finance flows distributed unevenly across regions and sectors.
As a set, the IPCC reports make for sober reading, but are also a clarion call for action. The investment industry, for the most part, recognises it has a role to play and reaction from the industry indicates many investors are willing to step up to the plate.
Nick Parsons, Head of Research and ESG at impact investor ThomasLloyd, said when it comes to mitigating the impacts of man-made climate change “doing nothing is not a realistic policy choice”. Western Europe must offer some practical assistance to organisations across the rest of the world, while also acknowledging the very different starting points of their future economic development.
He said Western countries should not close down “dirty manufacturing” industries at home, simply to rebuild them elsewhere while taking credit for reducing CO2 emissions. “We need to step back and look at these issues from a global perspective,” he insisted.
Parsons noted Western organisations must offer partnership, share technologies and invest “real money”. He said carbon capture and storage, sustainable infrastructure and renewable energy must form the core of future economic growth.
Will Jenkins, Director at Carbon Intelligence sees sense in such an approach. “There is potential for cash rich companies in the developed world to fund on-site renewable generation, or lower carbon manufacturing methods within their developing world supply chain. This decarbonises the value chain more rapidly while placing the cost of mitigation with those who can best afford it to secure a more just transition,” he said.
Dr Stephen Cornelius, the World Wide Fund for Nature (WWF) Global Lead for IPCC and head of the WWF delegation observing the IPCC negotiations, noted that meeting the 1.5 degrees Celsius target means “investing at scale in powering our societies more efficiently, using clean renewable energy, conserving and restoring nature, moving away from unsustainable business practices and leaving no one behind in this transition”.
Eoin Murray, Head of Investment at US$669 billion AUM active investment manager Federated Hermes said the report provides a “relatively” definitive guide to what actions can limit global warning. “What further wake-up call is required by our industry of the necessity of shifting to renewables?” he asked.
The Asia Investor Group on Climate Change (AIGCC) whose asset owners and managers have a combined AUM of over US$35.8 trillion, warned that “only a very small window remains to meet the goals of the Paris Agreement”. It noted that the IPCC report points to renewables as the key to energy security, with countries that have adopted low-carbon policies experiencing a drop in emissions.
AIGCC CEO Rebecca Mikula-Wright said net zero commitments must focus on deep emissions reductions first and be supported by detailed and transparent action plans. “Governments will also need to follow up on these pledges with the implementation of strong policy support measures to ensure that companies are able to take timely action to reduce dependence on fossil fuels.”
Governments in Asia, by working with investors to put in place robust policies, strong targets and a clear roadmap to reach net zero emissions, “can unlock these enormous investment opportunities and the jobs, economic growth and competitive advantage they will bring”, she added.
“Institutional investors can help their countries mitigate and adapt to the effects of global heating by adopting and accelerating Investor Climate Action Plans through four pillars: investment practices, corporate engagement, policy advocacy, and investor disclosure.”
The IGCC, which comprises Australasian investors with around A$33 trillion in AUM, said the Working Group III report “provides the clearest statement yet on the accelerated changes necessary from investors, business and policymakers”.
However, “poor and unstable energy policy” is discouraging IGCC’s members from investing in renewables in the Australian market.
“Australian investors who are investing in local renewable energy infrastructure are investing 200-300% more in overseas clean energy projects where policy settings are more stable and favourable,” it noted.
Portfolio allocation strategies that help directly mitigate warming will need to be complemented, reinforced and enabled by action from policymakers and corporate decision-makers, it added.
Amir Sokolowski, Global Director for Climate Change at non-profit global disclosure system CDP, said the report demonstrates there is “an absolute necessity to move away from support for and financing of fossil fuels. This is not new. The G20 must now honour its commitments to end coal financing and make good on parties’ agreement at COP26 to phase down unabated coal and end inefficient fossil fuel subsidies. These will be critical steps, alongside those to be required by the latest science from the IPCC, if we are to have any chance of achieving our global climate goals and preventing further escalation of the crises we face. There is no space for backtracking.”
It’s the third warning bell rung by the IPCC within the past year; it remains to be seen if the world will listen.