Commentary

ICYMI, The Race to Zero Just got Harder

Increasingly, responses to the climate crisis appear to be informed by science.

Last week, world leaders upped their game in terms of the credibility and timescale of their commitment to net-zero pathways, prompted by US President Joe Biden’s pledge to half US emissions by 2030. This week, it was the turn of the private sector.

The UN’s Race to Zero campaign, which coordinates decarbonisation efforts by businesses, cities and regions, has toughened its criteria. From June, members must provide more detailed evidence on 2030 emissions reduction plans, greater clarity across all three scopes and “enhanced specificity” on offsets and nature-based solutions to hard-to abate emissions.

The whole concept of net zero had come under attack from academics and a new finance sector initiative aligned with Race to Zero was treated with scepticism in some quarters. The tougher rules – which carry the threat of expulsion – were not a knee-jerk reaction, however, but a long-planned three-month review facilitated by the University of Oxford, with more than 200 participants joining eight online consultations. That’s pandemic-style rigour for you.

The embrace of science in transition pathways is reaching the high streets too. An investor engagement programme coordinated by the FAIRR Initiative and Ceres has led to five global fast-food brands committing to science-based targets to reduce their emissions, including an SBTi-approved plan by the owner of KFC and Pizza Hut to cut Scope 1, 2 and 3 emissions by 46% by 2030. Such firms have a long way to go, including on water usage, but their recognition of changing consumer appetites, in line with growing environmental concerns, is raising the prospect of reaching “peak meat” within five years.

Speaking of consumer demand, new data showed that US ESG funds now exceed US$1 trillion, while the sustainable bond market has grown to a cumulative total of US$1.7 trillion outstanding. Many of these investments are in need of scrutiny, in terms of their true ESG credentials. Yet asset owners in particular and financial institutions more broadly are still only gradually aligning their investments with the Paris Agreement, according to CDP data.

There is no shortage of guidance. UK pension funds were advised to take a more holistic approach to their ESG-led investment strategies by the Pensions Policy Institute, pointing to an imbalance between environmental and social factors. Meanwhile, Australia’s superannuation funds are being encouraged to take a tougher line, potentially voting against directors at investee companies that fall short on managing climate-related risks.

Positive signs can be seen in terms of the flow of decision-useful information to investors. Asset managers are becoming increasingly transparent on their voting policies, with some pre-publishing their intentions and rationale. Consolidation of ESG reporting standards continues apace, but while sustainability performance is explained as narrative rather than data, there will be a place for AI techniques such as natural language processing.

Asset owners might feel the need for robotic assistance as they wade through the current bout of lengthy engagement reports, but there are easier ways of keeping up with their managers’ ESG strategies.

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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