Finance sector commitments strongly in evidence, but NGOs and asset owners call for increased fossil fuel focus.
Banks, asset managers and insurers all made renewed commitments to tackling climate change to coincide with Finance Day at COP26, while host country the United Kingdom announced plans to mandate net-zero transition strategies from listed corporates and financial institutions.
Although the direction of travel indicated by the statements was largely welcomed, some claims on the scale and pace of change in the finance sector were challenged.
Wednesday’s dedicated stream of finance-focused events at COP26 was the catalyst for a cascade of announcements from the industry, headed by the sector-wide Glasgow Financial Alliance for Net Zero (GFANZ), which announced that over US$130 trillion of private capital is now committed to supporting transition to a global net-zero economy by more than 450 institutions.
On Tuesday evening, the UK government outlined legislative plans to require independently verified net zero transition reports, as part of a broader initiative to establish the UK as a net-zero financial centre.
Fans of GFANZ?
The new GFANZ total represents a 25-fold increase in committed capital by members under the UK and Italian COP Presidency, according to a new progress report. The US$130 trillion figure reflects the total assets of GFANZ members. Formed in April, GFANZ is an umbrella body for finance-sector initiatives supporting decarbonisation of the global economy.
GFANZ constituents include banks, insurers, asset managers, asset owners, investment consultants and other financial service providers. It is a member of the UN’s Race to Zero campaign, which monitors and regulates the commitments and actions of all non-state actors to achieve net zero emissions by 2050.
Members of GFANZ must set regularly renewed science-based targets to map their path to net zero emissions by 2050 at the latest, deliver their “fair share” of the UN-endorsed effort to cut global emissions by 50% by 2030, and report on progress annually.
GFANZ said that more than 90 founding institutions have set short-term targets, a number which incorporates commitments initiated prior to its foundation. The total includes 29 asset owners which have committed to reducing portfolio emissions by 25-30% by 2025 under a protocol announced in January, and 43 members of the Net Zero Asset Managers initiative, which have published targets for cutting emissions by 2030 or sooner.
In a statement, GFANZ noted that the first targets have also been published by Net Zero Banking Alliance members. On Tuesday, the alliance said membership included 92 banks representing US$66 trillion – over 43% of banking assets worldwide – encompassing the top 10 largest banks by assets in both Europe and North America.
But recent reports suggest banks continue to be slow on fleshing out net zero commitments. Research from responsible investment charity ShareAction found that none of the top 25 banks in Europe had published a comprehensive net zero plan, despite 20 out of 25 having committed to net zero by 2050.
Tim Mohin, Chief Sustainability Officer at climate management and accounting platform Persefoni, said finance sector firms now need to follow up on the principles and commitments they signed up to in the run-up to COP26.
“Principles only work when people have principles,” he said. “Many of the goals that have been put forward are somewhat aspirational and they don’t come with the management systems and rigour and accountability needed to really show progress. Unless and until you have rigorous KPIs, reported at a regular cadence, publicly and transparently, then really all you have is an aspiration.”
Revd Dr Andrew Harper, Head of Ethics at Epworth Investment Management, urged asset owners to be more urgent in their demands for immediate actions from banks to support the low-carbon transition, including an accelerated exit from fossil fuel relationships.
“We want banking relationships we can be proud of. It’s too late for targets; it’s time for action,” he said, noting the continuing challenges involved in interrogating the climate policies of financial institutions.
Wholly owned by the Central Finance Board of the Methodist Church, Epworth manages assets of around £1.3 billion on behalf of churches and charities.
A report released by NGO Reclaim Finance claimed that GFANZ and its underlying alliances are insufficiently focused on reducing the finance sector’s support for fossil fuel firms, despite scientific evidence for an end to new exploration to meet climate goals. Reclaim Finance also says GFANZ should adopt tougher policies on the use of carbon offsets and the need for absolute emissions reductions, including Scope 3.
In response to recent consultations with NGOs, GFANZ has set out increased detail on its policies and processes, including taking a science-based approach to phasing-out of fossil fuel finance and sanctions for members which do not meet membership criteria.
Speaking at COP26’s Finance Day, Founding Chair Mark Carney said “GFANZ is the gold standard for net zero”, emphasising the role of independent peer review to ensure membership criteria and governance implications are observed.
To make the most use of the US$130 trillion in financing commitments, Carney said progress was also being made on 24 infrastructure reforms and initiatives identified as private finance priorities for COP26. Speaking later, Larry Fink, CEO of BlackRock, the world’s largest asset manager, prioritised the need for “safe and reliable” channels for rapid deployment of capital in developing markets.
Fink also stressed the role of private markets firms, saying “you can’t cherry-pick and greenwash” by only expecting listed firms to address climate change. According to a recent report by Boston Consulting Group, private markets investors will need to contribute around US$470 billion annually by 2030 – eight times the amount invested in 2021 – for net-zero goals to be achieved.
Earlier, Chancellor Rishi Sunak appeared to respond to demand for greater transparency when he unveiled the UK’s plans to require firms to publish “clear, deliverable” transition plans in the opening speech of COP26’s Finance Day, in which he referenced the need to “rewire” the global financial system.
Under the new UK scheme, asset managers, regulated asset owners and listed companies will need to publish transition plans that consider the government’s net zero commitment on a ‘comply-or-explain’ basis. Over time, standards for transition plans will be incorporated into the UK’s recently announced Sustainability Disclosure Requirements.
The reports’ requirements will be established and scrutinised by a Transition Plan Taskforce, drawn from industry, academia, regulators and the third sector. The taskforce will report by the end of 2022, but a government statement has already asserted that transition plans should include high-level targets, interim milestones and actionable steps to achieve goals.
“This measure is core in delivering the transparency needed to ensure firms meet their net zero targets in time to keep warming below the 1.5°C threshold. A robust regulatory framework is a clear requirement for success here – firms must have the ability to report on targets and progress towards them through a strong regulatory system which delivers both visibility and accountability,” said Fiona Reynolds, CEO at the Principles for Responsible Investment.
Bethan Livesey, Director of Policy at ShareAction, said the UK government should make transition plans fully mandatory. “The comply-or-explain approach opens the possibility that we will see UK financial institutions, many of which are important fossil fuel financiers, offering an explanation instead of a plan at a time when we urgently need action,” she said.
Managers’ efforts constrained
Ahead of COP26’s Finance Day, the Net Zero Asset Management initiative (NZAM) published an update which details the interim targets of 43 members, revealing that 35% of their AUM, totalling US$4.2 trillion, is already being managed in line with achieving net zero by 2050. The firms include early signatories Legal and General Investment Management, Wellington, AXA Investment Managers and DWS.
“While the headline percent figure looks low, a closer read of the individual reports shows that asset managers have already pledged a significant portion of their ‘in scope’ AUM – namely listed equities, corporate debt and real estate investments – where there are well established decarbonisation methodologies,” noted a report by Credit Suisse. Several of the methodologies being used by managers are currently working to include a wider range of asset classes.
A recent report from Morningstar, titled ‘Asset Managers and Net Zero Investing: The Road Ahead’, said asset managers are somewhat hamstrung in their ability to set and meet targets at present, largely due to lack of reliable data.
“Asset managers feel less equipped to commit to portfolio targets because corporate disclosure and company-level emissions data remains weak or inconsistent, and because portfolio-level commitments are conditional on clients’ ambitions,” it said, also noting survey evidence that showed managers are grasping new guidance and tools as they develop net zero investment strategies.
ShareAction noted that the 35% average figure published by NZAM masks significant variations in the proportion of AUM targeting net zero by 2050 across individual managers, with eleven members committing 100% of assets, while others have committed considerably less.
The charity also noted that members are not yet required to adopt a fossil fuel policy and recommended that managers publish fossil fuel phase-out plans for all assets being managed in line with net zero.
Hortense Bioy, Global Director of Sustainability Research at Morningstar, said the NZAM update reflects the different stages of asset managers on their net zero journeys.
“Some managers have been divesting over the past two years from the largest emitters, often having engaged with them but concluding that they’re not moving fast enough and thus do not justify the financial risk of remaining invested at this point in time,” she says, adding that certain managers are also motivated by pressure from clients, especially serving institutional investors in the Netherlands and the Nordics.
Bioy said the commitments of alliance members to decarbonise their portfolios is likely to lead to greater engagement activity in next year’s AGM season. “Most managers don’t expect to decarbonise their portfolios by divesting from the biggest emitters,” she said, pointing out that the NZAM encourages members to focus their efforts on driving real-world decarbonisation.
“We expect most asset managers to intensify their active ownership programmes. That means more engagement, having a robust escalation strategy, filing and co-filing shareholder resolutions related to climate, and being willing to consider divesting if the engagement fails.”
Joining up, slowing down?
“There is a definite effort to talk up the numbers to show they’re taking this seriously,” said Peter Bosshard, Global Coordinator of Insure Our Future, reflecting on the range and volume of announcements both by coalitions and individual firms.
But membership of a net zero alliance does not immediately translate into a fulsome commitment to decarbonise, he asserted, noting that the Net Zero Insurance Alliance is “welcoming new members that have not yet disassociated themselves from coal”.
Days ahead of COP26, Lloyds of London joined the alliance, but under a new approach it gives insurers in its marketplace freedom to continue to insure new coal, tar sands and arctic energy projects, while aligning itself with UK government policy on achieving net zero emissions by 2050.
Bosshard further says that there is a risk that allowing half-hearted members into such net zero initiatives can water down their efforts. “Once they are in the tent, they have a voice on the future path. They have potential to slow it all down,” he said.
This article has been updated to since initial publication to include additional input from sources.