Regular communication between private finance and government essential to net-zero transition

As Alok Sharma’s nearly three-year tenure as COP26 president draws to a close and he leaves the cabinet, his longtime mantra of “keep 1.5 degrees alive” may be leaving the stage with him.

The Glasgow climate agreement, which Sharma worked hard for at COP26, reaffirmed the international goal to try to limit the rise in temperatures to 1.5°C above pre-industrial levels. However, it said countries would need to revisit and strengthen their emissions reduction targets if this outlook was to remain realistic.

Before COP27, the United Nations Environment Program released the latest Emissions Gap Report It said this suggested that any efforts to strengthen these targets had had a “negligible impact”. New and updated targets since COP26 and related policies developed by countries suggest a temperature increase of 2.8°C by 2100.

The 1.5°C target remains relevant for signatories of the Net Zero Asset Managers Commitment and members of the Net Zero Asset Owners Alliance. Each signatory has pledged to support the goal of net-zero greenhouse gas emissions by 2050, comparing the emissions of its portfolio against science-based pathways to limiting warming to 1.5°C.

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Earlier this year, the UN secretary-general convened a high-level panel of experts to make recommendations on how to ensure such commitments do not encourage greenwashing. The group’s report, which was published at COP27, recommends that comprehensive plans, such as financial institutions, to make commitments to net-zero emissions should have “no or limited overshooting” to remain consistent with the 1.5°C limit.

But the UN report also warns that “while ambitious action by this ecosystem of players is important, it is also critical that governments deliver on their own net-zero commitments”. This echoes clear statements from investment managers and asset owners that their ability to decarbonize investment portfolios while maintaining their fiduciary duty to clients depends on appropriate action by governments. The net-zero asset manager’s commitment states that it is “an expectation that governments will deliver on their commitments to ensure that the goals of the Paris Agreement are met”.

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plans and commitments

In the UK, investors are concerned about a possible gap between the government’s legally binding net-zero emissions target and the policy measures taken to achieve an orderly transition of invested assets. If the government doesn’t take steps to “keep 1.5 alive”, how are investors going to provide what is needed?

This challenge explains another UN expert group recommendation that non-state actors align their external policy and engagement efforts (and those of their trade bodies) with the goal of reducing global emissions to net zero by 2050 . The Investment Association publishes a climate change position and annual action plan in part to demonstrate to our members that our advocacy plan is consistent with and consistent with their own environmental commitments.

This could be new territory for an industry like investment management, where pitches may traditionally have a narrow and industry-specific focus. But by committing to a true net-zero transition across the economy (which would require a transition within most, if not all, of the assets we currently invest in), the government has made the pursuit of an orderly transition as how the industry can provide The core of customer service delivery.

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The Investment Association is part of the UK Transition Planning Task Force, which this year worked to develop an industry-neutral disclosure framework. This will help firms develop robust net-zero transition plans and enable investment managers to make more informed investment decisions.

In order for investment managers to properly scrutinize the viability of these companies’ transformation plans, governments must provide details of how policy will shift in pursuit of decarbonisation. Government departments that deal with all aspects of the “real economy” must understand and provide the level of detail that companies and investors require.

A regular and active dialogue between private finance and governments is essential to ensure investment to sustain economic growth and support an orderly transition consistent with global efforts to limit warming to 1.5°C.

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