Investors Must Brace for Policy “Tsunami”

Pace of national and global climate-related policies suggest radical change ahead for asset owners and investee companies.

Increased legislative and regulatory action so far this year has shown that policymakers are stepping up their commitment to net zero pathways, but investors need to continue putting pressure on corporates to ensure a 1.5-2°C scenario. This is according to panellists speaking at a webinar co-hosted by the Climate Bonds Initiative, the UN-convened Principles for Responsible Investment (PRI) and the Inevitable Policy Response (IPR) yesterday.

“If you’re an institutional investor or asset manager, one thing you can be 100% certain of is that there is a tsunami of policies coming if major economies are going to halve global emissions by 2030. The question is: Will they ride the tsunami or be swept up in it?” said Sean Kidney, CEO of the Climate Bonds Initiative.

IPR forecasts aim to provide institutional investors with an assessment of the acceleration of both national and global policies on climate-related issues, such as carbon pricing, the energy transition, land use and net zero commitments. The 2021 IPR published in March identified the 10 key climate-related policies policymakers will be focusing on between now and 2025.

A key focus will be carbon pricing and ensuring the use of carbon credits is transparent, managed and reduced over time. Industry calls for a global carbon pricing framework have increased discussions at the governmental level but remaining barriers are considered steep. Despite scepticism in some quarters, the use of voluntary carbon offsets looks set to increase in the medium term, particularly following the launch of the Voluntary Carbon Markets Integrity (VCMI) initiative.

Around the world

The EU continues to be a leader on climate, the panellists acknowledged, pointing to the European Commission’s proposal for a Carbon Border Adjustment Mechanism earlier this month, its expansion to its Emissions Trading Scheme, as well as continued work on its EU Taxonomy Regulation.

But a major change in the policy landscape this year has been the strength of US commitments to climate action, panellists observed, highlighted in April at the Earth Day Summit hosted by President Joe Biden. Under new Chair Gary Gensler, the US Securities and Exchange Commission (SEC) is pushing for the SEC to introduce a climate-related financial disclosure framework for publicly-listed companies by the end of this year.

During a separate PRI webinar on Wednesday, Gensler noted that US investors are “looking for consistent, comparable and decision-useful disclosures so they can put their money in companies that fit their needs”.

Key policies will need to come from China, said Mark Fulton, IPR Programme Director. “China needs to decarbonise a 1,300-gigawatt power system, which is a hell of a challenge,” he said, adding that it will likely start by banning new coal-fired production, which IPR predicts will be enforced from 2025.

Panellists noted that the Global Stocktake (2023) and the Paris Ratchet Mechanism (2025) alongside COP26 in November are all adding pressure on policymakers and investors to make sure that corporates are decarbonising in line with a minimum 2°C climate change scenario.

The Global Stocktake is the process of analysing the world’s progress with the implementation of Paris Agreement goals. It will take place between 2021 and 2023, repeating every five years thereafter.

The Paris Ratchet Mechanism ensures that signatories to the Paris Agreement are regularly tightening their climate-related policies every five years, to ensure that the path to net zero continues to accelerate.

Matching pace of change

Investors need to continue to work alongside policymakers to make sure they – and therefore investee corporates – are matching the pace of change, said PRI CEO Fiona Reynolds, as there’s “really no way to disentangle the climate crisis from our financial markets”.

Commissioned by the PRI, work on the IPR is led by Vivid Economics and Energy Transition Advisors, surveying 200 global policy experts across 21 countries representing more than 75% of global GDP.

A number of asset managers have recently become strategic partners of the IPR, ahead of the planned update to the Forecast Policy Scenario (FPS) report expected in October, which will focus on policy developments up to 2030. Asset managers that have partnered with IPR include BlackRock, BNP Paribas Asset Management, Nuveen and Robeco.

Later this year, IPR will also be releasing a 1.5°C Required Policy Scenario, said Fulton, which will build on the International Energy Agency’s (IEA) 2050 roadmap through further analysis of the global policies that will be required to enable this pathway.

The Intergovernmental Panel on Climate Change (IPCC) is further expected to publish its Sixth Assessment Report (AR6), which assesses the current level of scientific knowledge on climate change, in 2022.

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