Regular communication between private finance and government is key to the transition to net zero – ESG Clarity

As Alok Sharma’s nearly three-year term as COP26 President draws to a close and he leaves the cabinet, there is a risk that his long-term mantra of “maintaining 1.5 degrees alive” retires from the scene with him.

The Glasgow Climate Pact, the agreement Sharma worked so hard to reach at COP26, reaffirmed the international goal of continuing efforts to limit temperature rise to 1.5°C above preindustrial. However, he said countries would need to review and strengthen their emissions reduction targets if the prospect was to remain achievable.

Ahead of COP27, the United Nations Environment Program released its latest Emissions Variance Report which she said showed that any effort to reinforce those goals had made “negligible difference.” New and updated targets since COP26, and associated policies that countries have put in place, point to a temperature increase of 2.8°C by 2100.

The 1.5°C target remains significant for signatories of the Net Zero Asset Managers Pledge 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 and to benchmark emissions in their portfolios against science-based trajectories that limit warming to 1.5°C.

A high-level panel of experts was convened by the UN Secretary-General earlier this year to make recommendations on how to ensure these pledges do not encourage greenwashing. The group’s report was released at COP27, and the recommendations say that financial institutions and others that commit to net zero should have “no or limited overshoot” in comprehensive plans to stay aligned with the limit. 1.5°C.

But the UN report also warns that “while the ambitious actions of this ecosystem of actors are important, it is essential that governments meet their own net zero commitments”. This echoes the clear statement from investment managers and asset owners that their ability to decarbonize investment portfolios, while meeting their fiduciary duty to clients, depends on appropriate action by governments. Net Zero Asset Managers’ pledge states that it is “taken in the expectation that governments will follow through on their own commitments to ensure that the goals of the Paris Agreement are met.”

Plans and promises

In the UK, investors are concerned about the possibility of a gap between the government’s legally binding net zero target and the policy measures in place to ensure an orderly transition of the assets in which they invest. If governments are not doing what is needed to “keep the 1.5 alive”, how can investors provide what is needed?

This challenge explains another of the recommendations of the UN Panel of Experts, that non-state actors align their foreign policies and engagement efforts (and those of their trade bodies) with the goal of reducing global emissions. to net zero by 2050. The Investment Association has published an annual Climate Change Position and Action Plan in part to demonstrate to our members that our advocacy plans are compatible and consistent with their own environmental commitments.

This may be new territory for industries like investment management whose advocacy priorities may traditionally have been a bit narrower and sector-specific. But by committing to a truly economy-wide transition to net zero that requires a transition in most, if not all, of the assets we currently invest in, governments have placed the pursuit of a orderly transition at the heart of how the industry serves its customers.

The Investment Association is a member of the UK’s Transition Plan Taskforce, which has spent this year developing a neutral disclosure framework for the sector. This will help companies develop robust net zero transition plans and enable investment managers to make more informed investment decisions.

For investment managers to properly consider the viability of these corporate transition plans, the government needs to provide specific details on how policy will evolve in pursuit of decarbonisation. It is essential that government departments dealing with all aspects of the “real economy” understand and provide the level of detail that businesses and investors need.

Regular and active dialogue between private finance and government is essential to ensure that investments support economic growth and support an orderly transition in line with global efforts to limit warming to 1.5°C.