Cop26 featured

Time to Shake the Green Money Tree

ESG Investor canvasses opinions from asset managers, NGOs and others on how to mobilise finance and combat climate change ahead of COP26.

One of the four pillars of the upcoming COP26 conference in Glasgow is mobilising finance. As explained by the United Nations, developed countries must deliver on their promise to raise at least US$100 billion in climate finance per year to support adaption in countries which have contributed least to the crisis but are most exposed to its physical impacts. International financial institutions, it adds, must play their part in “unleashing the trillions in private and public sector finance required to secure global net zero”.

ESG Investor posed three questions to a range of asset managers and NGOs on the key ways in which the summit can deliver on this pledge. Unsurprisingly, there are few simple answers. Opinions were varied, covering the need for more regulation around carbon pricing, more help to emerging markets to enable green finance transition and the need for stricter penalties for businesses failing to deliver on ESG targets. There was also a call for more commonality in standards, principles and taxonomies.

Our respondents praised the Science Based Targets Initiative (SBTi) and Climate Action 100+ but many felt more mandatory regulation may be needed for the finance sector to ‘move the dial’.

There is general optimism in the air ahead of COP26 with industry players looking for more plans around hydrogen development, reaching net zero and stronger leadership from both the US and China. But the breadth of responses below suggests there is no room for complacency.

Pricing carbon, pricing risk, setting expectations

What regulatory or policy-driven changes can be advanced at COP26 that will accelerate the mobilisation of finance to support climate change mitigation and adaption?

My-Linh Ngo, Head of ESG Investment, BlueBay Asset Management:

“Governments need to agree global mechanisms and rules notably on carbon pricing, the global trading of carbon credits, and non-market approaches for international climate cooperation. They must do this quickly to avoid a disruptive and disorderly transition, as this is in no one’s interest, least of all the investment community as it leaves it exposed to significant risks. Funding needs to be directed to emerging markets which are the most vulnerable, to help them mitigate impacts, and build resilience.”

Kelly Perry, Director, Head of ESG Client Solutions, Edison Group:

“With each mandatory regulation coming through there should be accountability for businesses not adhering to the new policies. If they are not delivering, there should be financial implications/fines to encourage Paris Agreement alignment.”

Alex Everett, Investment Manager, Cameron Hume:

“From an investment point of view, it is important that regulation and policies encourage markets to price climate risk appropriately. If asset prices reflect risks incurred – for example, then those who manage climate risk well should benefit from lower cost of debt, and vice versa.”

Randeep Somel, Equities Manager, M&G Climate Solutions Fund:

“The key for COP26 will be countries setting intermediate targets for the next 10-15 years. In recent months, US President Joe Biden has proposed targets to cut emissions in the US and the EU commission has put forward ‘Fit for 55’. Whilst China has signed up to the Paris climate pledge, it still has not publicly stated any medium-term targets.

“The US and EU proposals also include firm targets for renewable power generation as part of the electricity mix. This will provide utilities companies and investors with greater confidence, creating the urgency to push forward with investment.”

Simon Puleston Jones, Chief Executive, Climate Solutions:

“Learning the lessons from the 2008 financial crisis, governments should use COP26 to reach agreement on a common set of core principles for regulating sustainable finance markets. The Financial Stability Board and CPMI-IOSCO should be then tasked with creating a more detailed common framework, which in turn can be built upon by regional and national policymakers.

“In the absence of such a globally agreed framework, local policymakers are already rushing ahead with their own rules. There is no consistency of approach, which means ‘equivalence’ will become impossible if we continue down the current path. Such localised policymaking in the absence of global principles will result in the Balkanisation of capital markets and thereby significantly impede the global flow of capital to where it is needed.”

Sebastien Godinot, Economist, WWF European Policy Office:

“Multilateral development banks (MDBs) and national development finance institutions (DFIs) need to immediately implement their commitment to align their portfolios with the Paris Agreement and stop all support for fossil fuels immediately. Green monetary policies are needed from central banks: it is time they move from discussion to action.

“Harmonised taxonomies clarifying which economic activities are green or harmful should be advanced, as well as much more demanding prudential rules for banks and insurers to monitor and reduce climate-related financial risks.”

Adrian Whelan, Senior Vice President, Investor Services, Brown Brothers Harriman:

“The financial regulatory die has largely been cast. Globally, most regulators are already introducing some form of ESG requirements, however there is little consistency and a high degree of fragmentation. COP26 will be more about tangible financial and fiscal commitments from governments to help the race to zero. Funding of the carbon transition can’t occur without additional taxation. The EU’s Carbon Border Adjustment Mechanism is a regionalised example of managing carbon ‘imports’ however unless others make similar commitments it’s hard to see the needle moving globally. “

Justin Guay, Director of Global Climate Strategy, The Sunrise Project:

“COP26 serves as an important forcing function for climate action and with financial regulation growing in importance thanks to international forums like the Network for Greening the Financial System, we’re likely to see COP26 lead to new pledges and commitments.

“The Biden administration has a tremendous opportunity to repair the harm Trump did and deliver on finance thanks to a recent executive order instructing the US Department of the Treasury to produce an assessment of the tools the US could bring to bear to mitigate climate risk. That report is due right around Glasgow and should lay out all the policies the administration could undertake to mitigate climate risk to the financial system. They could, in theory, direct federal financial regulators to use direct regulation to halt fossil fuel finance and investment.”

Nazmeera Moola, Head of South Africa Investments, Ninety One:

“Through the current net zero framework, emerging economies risk being left behind. It is vital that policies are developed which help emerging markets go green, as a partial net zero is not net zero at all. In order to achieve the global ambition for decarbonisation, developed markets must ensure that the least developed countries are supported in mitigation strategies through financing solutions. Such strategies can then help to ‘crowd in’, both directly and indirectly, private sector financial flows to help accelerate investment.”

Voluntary versus mandatory change

What finance industry initiatives do you see as having most impact in driving capital toward climate-positive investments?

Everett, Cameron Hume: “Independent, international standards allow clients, policy owners and boards to better govern and compare the impacts of their investment allocations. The Science Based Targets initiative (SBTi) is especially useful for investors as it cuts through the spin surrounding transition plans and reduces the potential for greenwashing. The Task Force on Access to Climate Finance appears promising. The programme recognises that developing countries need more financial support to ensure decarbonisation of their economies. A pilot implementation of the proposed approach in five selected countries will be announced at COP26.”

Sarita Gosrani, Director, ESG & Responsible Investment at bfinance: “Collaborative initiatives such as Climate Action 100+ are integral. Further net zero initiatives such as Net Zero Asset Owners Alliance  and Net Zero Asset Managers initiative will play a large role as the growing list of participants commit to collectively understanding how to achieve net zero in their portfolios and putting this into action.”

Somel, M&G: “Science-based targets are going to be incredibly important in guiding companies on how much and how quickly they need to reduce their greenhouse gas emissions to prevent the worst impacts of climate change.”

Godinot, WWF: “Critical for WWF is that the initiatives hinge upon a commitment to a 1.5°C pathway; and to immediate action. Importantly, we need to move from voluntary to mandatory corporate science-based target setting: the pace of voluntary initiatives is way too slow.”

Guay, Sunrise: “Voluntary initiatives are all well and good, but they need to put their money where their mouth is. More often than not they fail to take the concrete steps necessary to drive transformational change – namely ending investment, underwriting, and lending to fossil fuels. That’s why regulation is necessary to really move the dial and shift the financial system. It’s hard to imagine any of these voluntary initiatives delivering the transformational change necessary, on the timelines required. Though we’re always happy to be wrong and see them all commit to halt all investment in fossil fuels at COP26!”

Jack Balsdon, Senior Associate, Climate Change, Principles for Responsible Investment (PRI): “The Glasgow Financial Alliance for Net Zero has immense potential in mobilising capital towards climate-positive investments. There is shifting focus from commitments to near term target setting and real economy impacts, which is a core focus of the UN-convened Net Zero Asset Owners Alliance, specifically the financing workstream focused on financing the transition to a net zero emissions economy.”

Moola, Ninety One: “In order to achieve a truly net zero portfolio, we believe encouraging companies to work with the SBTi and create plans to reduce their emissions with targets for 2025, 2030 and net zero by 2050 is a good way to begin.

“Increasing transparency and disclosure is also a key step. The Task Force on Climate-Related Financial Disclosure (TCFD) goes a way to doing this, but its adoption in emerging markets is limited. A more sustainable approach would be to develop better transition assessment models. Doing so will shift the focus from the current level of emissions to the pathway to emission reduction.”

New commitments, New ideas

What other developments around COP26 should asset owners expect to support their efforts to reallocate capital to climate-positive investments?

Everett, Cameron Hume: “In our view, bond markets don’t pay enough attention to climate change risk. This results in companies who do not manage climate change exposure well being able to borrow at largely the same cost as their contemporaries who do manage well. Real change will be seen more quickly if the financial incentives exist to drive it.”

Somel, M&G: “If we have any intention of hitting net zero emissions by 2050, we are going to need to tackle those that come from activities that are unlikely to be electrified in three decades’ time, e.g. steel and cement manufacturing, long haul road transportation and aviation. These hard-to-abate sectors are likely to come up at COP26 along with government plans to help encourage investment in clean hydrogen and support the infrastructure requirements for its wider adoption.“

Guay, Sunrise: “We expect to see COP26 drive a wave of new financial institution commitments to achieve net zero emissions from public and private financiers that include exclusions of coal, oil and gas from their portfolios.”

Balsdon, PRI: “Look out for the Net Zero Asset Managers initiative annual report which will outline managers’ initial emissions reduction targets and coal phase out positions. We will also announce the UN-convened Net Zero Asset Owners Alliance’s target setting protocol consultation on expanding to other asset classes, as well as its annual progress report. The new Inevitable Policy Response’s 1.5C forecast will also be released. This ‘scenario’ can help asset owners to assess transition risk and guide asset allocation decisions.”

Moola, Ninety One: “At COP26, we would hope to see moves for a far more collaborative working arrangement between the multilateral organisations, DFIs and the asset managers. Multilaterals and DFIs should be looking to catalyse investment in emerging markets by reducing the perceived risk of projects in these markets.

“This can be done by making available their project finance datasets to better demonstrate the reality of risks in these markets.  They can also help by making subordinated investments more widely available to allow innovative funds to attract investment from asset owners, and thus demonstrate the viability of the investment thesis. While they cannot provide such support indefinitely to every such fund, they can help prove the concept.”

Huw Davies, Senior Finance Adviser, Make My Money Matter:

“We want to see finance go further than just net zero. COP26 will offer a great opportunity for pension schemes to push for further measures by mobilising a diverse range of stakeholders to address the barriers that are holding us back. This should include discussions around targets for deforestation-free portfolios that put nature at the heart of our financial system and further transparency, such as the International Sustainability Standards Board initiative, and disclosure of fund investments so that individuals can see exactly where their money is going and ensure it is invested in line with their values.”

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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