“Concrete and actionable carbon-reduction strategies” required from governments to drive capital reallocations, say investors, while reinforcing commitment to science-based targets.
Investors called on policymakers to provide greater certainty on the frameworks and pathways needed to transition to a global net-zero economy by 2050, in light of the Intergovernmental Panel on Climate Change’s (IPCC’s) latest report on climate change.
“The transition to a net-zero economy cannot be achieved without strong government leadership and robust action from the asset owners and managers alike,” said Fiona Reynolds, CEO of the UN-convened Principles for Responsible Investment (PRI). “Governments and regulators need to provide near-term accountability for net-zero targets with robust policy frameworks and credible emission reduction plans for 2030.”
This was echoed by the Net Zero Asset Owners Alliance (NZAOA), which noted that setting interim targets in line with science for 2025 is “needed but not sufficient”.
With over 40 members (managing US$6.6 trillion in assets) committed to transitioning their investment portfolios to net-zero emissions by 2050, the Alliance urged policymakers to “go beyond announcements and urgently adopt concrete and actionable carbon-reduction strategies to underpin the required investments”.
Greater certainty on causes of climate change
Released Monday, the first part of the IPCC’s sixth climate assessment said there is now greater certainty that human reliance on fossil fuels is driving climate change, increasing the severity and frequency of extreme weather events, such as heat waves, heavy rainfall and drought. It also said that prompt action could still limit global warming to just above 1.5 degrees Celsius above pre-industrial levels.
Although some impacts are irreversible, the IPCC said, a sharp reduction in greenhouse gas emissions over the next decade could see average temperatures dip back below the 1.5-degree level before the end of the century. Other key findings included a 1.1 degree increase in global surface temperatures in 2011-2020 over 1850-1900, with scientists predicting 1.5 degrees would be reached by 2040 under five different scenarios. The report also noted a recent rate of sea level rise three times that recorded for 1901-1971, adding that a two-metre rise in seal levels before the end of the century could not be ruled out.
The report, titled Climate Change 2021 – The Physical Science Basis, is part of the first full review by the IPCC since 2013. It is based on analysis of 14,000 scientific papers by more than 200 scientists and approved by 195 governments. A 40-page summary is designed to provide negotiators at COP26 with the scientific basis on which to frame their discussions in Glasgow. “Unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to 1.5 degrees will be beyond reach,” the report said.
COP26 President-Designate Alok Sharma, who will lead negotiations between governments, said all parts of society need to “follow the science and embrace your responsibility” to keep climate change to 1.5 degrees.
“We can do this together, by coming forward with ambitious 2030 emission reduction targets and long-term strategies with a pathway to net zero by the middle of the century, and taking action now to end coal power, accelerate the roll out of electric vehicles, tackle deforestation and reduce methane emissions,” he said.
Speaking later at a panel discussion on the IPCC report, Sharma called for more action from the Group of 20 leading economies, noting that only 13 so far have committed to reaching net-zero emissions, with only eight submitting new nationally determined contributions which are more ambitions than their existing ones. “This really must change before COP26 in November,” he said.
“Massive” reallocation of capital
A “massive” reallocation of capital is needed to get to net zero, which “will drastically alter the global financial landscape”, said Maria-Krystyna Duval, Director of Climate and Energy at environmental law charity ClientEarth. While the IPCC forecasts demonstrated the need to move away from fossils fuels “as quickly as possible” it was “astonishing” that EU institutions and national governments were considering more gas pipelines and plants, and “bewildering” that in some legal texts such facilities were considered low carbon, she said.
As climate attribution science improves, governments and businesses may increasingly be found liable for failure to act on preventable climate-related harm, added Duval. As this trend continues, courtrooms must keep pace with the work of attribution scientists, so their judgments are aligned with the latest scientific evidence.
Randeep Somel, manager of the M&G Climate Solutions Fund, said investors “need to continue pushing companies to adopt science-based targets for their own emissions”. Investors should encourage highly pollutive companies to transition their business models to more sustainable paths, and channel capital to those companies that are researching and providing the climate solution tools that must be adopted, he said.
The financial services industry must assume greater responsibility, said Robyn Grew, COO and Head of ESG at Man Group, acting as powerful drivers for “much-needed” climate action. Investors must evaluate climate risk, engage with companies, vote for climate action and continue to decarbonise portfolios. “The sum of these actions sends an unequivocal message that we recognise the importance of managing climate risk for our clients, employees, stakeholders and the environment,” he said, encouraging all asset managers to sign up to the Net Zero Asset Managers initiative as a “first step”.
Lombard Odier’s Senior Sustainability Analyst Dr Michael Urban said the report “solidifies the importance for investors to consider transition, physical and litigation risks into their investment decision-making”. Observing that the market cap of clean tech companies grew by US$1 trillion in 2021, the report should strengthen “an already buoyant” demand for investment solutions that tackle climate mitigation and adaptation, they added.
Pension funds’ climate responsibilities
In a blog published Tuesday, David Fairs, The Pensions Regulator’s Executive Director of Regulatory Policy, Analysis and Advice, said pension scheme trustees had a responsibility to ensure climate change is fully taken into consideration in the “selection, retention and realisation” of pension scheme investments.
“Even where trustees feel their advisers and asset managers are doing a satisfactory job considering climate-related risks and opportunities, the trustees have a duty to monitor whether their expectations are being met,” Fairs wrote.
“Ultimately, if a scheme’s advisers do not sufficiently consider the risk and opportunities from climate change trustees can vote with their feet by re-tendering with mandated climate-related criteria or by appointing specialists.”
The urgency of the climate crisis requires pension schemes to commit to robust net zero targets, including a 50% reduction in emissions by 2030, according to Huw Davies, Senior Finance Adviser at Make My Money Matter, a campaign group promoting responsible investment by pension funds.
“There is no point retiring into a world on fire. However, this report indicates that the flames are getting higher, and as the gravity of the crisis finally sets in, we now need the Government to take urgent action ahead of COP26 to ensure that all financial institutions work to tackle climate change.”