Most current business models do not reflect scale of change required.
Investment consultants Willis Towers Watson (WTW) has launched an accreditation framework, Climate Transition Pathways (CTP), to help insurance companies and other institutional investors identify companies that have transition plans aligned to the Paris Agreement. A governance committee, comprising representatives from consultancy Volans and the Climate Bonds Initiative (CBI), will build an insurance standard to address the need for a consistent way of identifying and supporting organisations committed to low-carbon transition.
The framework will be based on the methodology developed by Assessing Low Carbon Transition, a joint voluntary initiative of the UNFCCC secretariat Global Climate Agenda initiated by ADEME, the French Agency for Ecological Transition, and the Carbon Disclosure Project, a not-for-profit global disclosure system. Organisations achieving accreditation will be able to access insurance capacity and capital to support their orderly transition and help them meet their low-carbon commitments. The committee will create industry-focused solutions during 2021 and beyond.
Rowan Douglas, Head of the Climate and Resilience Hub at Willis Towers Watson, said, “To ensure that organisations in high-carbon industries transition effectively, in line with what the science indicates is needed, they require robust transition plans and the ability to execute successfully against these.”
It is increasingly recognised that robust transition plans require the halving of carbon emissions over the coming decade to 2030, then again for each of the next two decades. WTW’s Thinking Ahead Institute 1.5°C working group’s report, ‘The investment industry and climate change – framing the problem’, says the transition will require “the fastest economic transition in history”.
Luba Nikulina, global head of research at WTW, said it was the fiduciary duty of pensions funds and other asset owners to think about the risks associated with the transition to net zero economies. “Governments around the world are creating targets for net zero energy transition – it will happen and will affect economies and business models,” she said.
While most current business models do not reflect the scale of change that is required, Nikulina believes there is an opportunity for pension funds to think about how they make investment decisions.
“Funds need to be much more active asset owners, identifying which businesses are carbon intensive, which have transition plans and which will lose value or be wound down. The stewardship and engagement for this requires more time from owners and their asset managers.”
The investment industry must channel much more primary investment into transition, she added. The International Renewable Energy Agency (IRENA) estimated that the cumulative investment required between 2016 and 2050 to transform the global energy system to meet the objective of the Paris Agreement was US$110 trillion. Investment could be in scaling up the mature technologies of renewable electricity generation, or investments in more speculative technologies such as negative emissions technologies (NETs).
Nikula sees parallels between NETs and renewable energy, noting solar and wind are now cost competitive and commercially generate “very good returns” via stable, long-term and inflation linked cash flows, following a long period of development. “Scale is a big problem, with only 5% of growth assets invested. That has to become much greater and it is on the agenda of the majority of our clients.”