By Sagarika Chatterjee, Director of Climate Change, the PRI, and COP26 Champions Finance Lead
Five years on from the Paris Agreement, there is good news and bad news. The good news is that the US will re-join the Paris Agreement in 2021 and that policy and regulation, along with actions taken at the country, corporate, investor and consumer level, have driven an unprecedented awareness of climate risks and the need to limit the rise in the average global temperature to “well below 2C.”
We’ve also seen increased use of renewable energy, as prices for less carbon intensive energy sources become more competitive, and which concurrently, has seen a downturn in the use of coal. The rise of new technologies such as carbon capture usage and storage (CCUS), a group of technologies that together, capture CO2 emissions before compressing and transporting them to be stored where they cannot contribute to climate change, is poised to play a critical role in emissions reductions.
However, at this weekend’s Climate Ambition Summit, the UN Secretary General António Guterres warned nations to declare a climate emergency as they face catastrophic heating of over 3C. The summit shows how much government action is still needed; 2021 presents an unprecedented opportunity for governments to build a sustainable green recovery.
COVID-19 and climate
The COVID-19 pandemic has highlighted the need to re-examine the links between climate change and human health, a sustainable economy and the environment. Dr Ian Hamilton, executive director of the Lancet Countdown, noted in the recent Lancet Countdown report: “The threats to human health are multiplying and intensifying due to climate change, and unless we change course our healthcare systems are at risk of being overwhelmed in the future. This year’s devastating US wildfires and tropical storms in the Caribbean and Pacific, coinciding with the pandemic, have tragically illustrated that the world doesn’t have the luxury of dealing with one crisis at a time.”
One of the most significant commitments towards climate action that we’ve seen in recent years is the march to net zero. In total, 127 countries, responsible for around 63 per cent of global emissions, are considering or have adopted net zero targets. Today the EU has the most ambitious plan incorporating finance, with the European Commission’s Platform on Sustainable Finance launched in 2020.
How has the global investor community stepped up?
At the Paris Agreement launch, a small number of leading investors committed to climate action. This included the Portfolio Decarbonization Coalition, the Montreal Carbon Pledge and the private equity initiative, ic20.
The Task Force on Climate-Related Financial Disclosures (TCFD), also launched in Paris in 2015, has completely transformed the landscape, influencing how the finance sector, supervisors and regulators respond to climate risk.
In 2020, climate change is a mainstream investor concern:
- In 2020, 2,097 investors with US$97 trillion in assets, have completed the PRI’s mandatory climate indicators in the PRI Reporting Framework.
- Through Climate Action100+ 545 investors with nearly US$52 trillion in assets under management are engaging with the highest emitting corporates in the world.
- Through The Investor Agenda seven investor groups, including the PRI, are collaborating to converge on clear policy asks of governments.
We have also seen the establishment of the UN-convened Net Zero Asset Owner Alliance, whereby 33 of some of the world’s largest pension funds have committed to net zero by 2050. The PRI expects the alliance to be recognised as the most serious and influential of recent climate commitments.
In October, the alliance released a draft Target Setting Protocol, which sets out how individual members will set a net zero target, achievable in the next five years, balancing scientific ambition, active ownership engagement, and divestment constraints. A final protocol will be published in 2021, available for all asset owners to draw on.
And last week, it released Sector Pathways to Net Zero Emissions, commissioned by the University of Technology Sydney (UTS), to inform alliance members about the critical transition of their investment portfolios to net‐zero by 2050. The study highlights the steep emissions and investments needed – a stark reminder of the challenge at hand in how we get to net zero.
We also support the global COP26 Race To Zero campaign. Around 1,000 businesses, over 450 cities, more than 500 universities and 24 regions have joined this initiative. The Net Zero Asset Owner Alliance has also signed up.
Finally, last week also saw the launch of the Net Zero Asset Managers Initiative, a group of 30 asset managers managing over US$9 trillion globally, endorsed by the PRI and The Investor Agenda.
Together, asset owners and managers send a clear signal of the strong investment case and unprecedented opportunities of a climate-resilient economy and sustainable recovery from COVID in 2021.
As momentum grows for net zero, investor understanding of how the transition could play out, including technology and policy drivers, becomes of critical importance. Investor views on the shape that the transition will take influences capital allocation to finance the transition, conversations between asset owners and managers, and investment analysis to inform portfolio construction.
Providing tangible information to inform decarbonisation strategies has been at the heart of the PRI’s work programme, The Inevitable Policy Response, (IPR), in conjunction with Vivid Economics and Energy Transition Advisers, which aims to prepare investors for the associated portfolio risks around climate change.
It has shown how investors can incorporate an IPR into investment processes and sector analysis to inform portfolio construction, including identification of potential winners and losers.
Investors seeking to position themselves to capitalise on this opportunity must act now
By cultivating and originating early nature-based solutions, opportunities that are already becoming mainstream, and by engaging policy makers on optimal enabling regulations, forward-looking investors can drive this market and its impact.
Doing so will also help investors get exposure to the upside opportunities associated with net-zero transitions. IPR assists investors in taking a step towards net zero by highlighting when, how and why a transition will take place.
Now for the bad news. Global C02 emissions have continued to rise, hitting record levels in 2018. Clearly, low-carbon development globally needs to increase if we have any chance of keeping to the agreed 1.5-degree Celsius target of the Paris Agreement.
There are also concerns that many of the world’s biggest polluters—China, the US—have not sufficiently strengthened their 2030 Paris Agreement targets in time for this year’s deadline set by the UN Framework Convention on Climate Change, including explicit targets for their nationally determined contributions (NDCs).
As countries prepare to submit their NDCs by 31 December, the PRI urges them to ramp up their ambition in response to the climate crisis. We further ask that Australia, a G20 nation, commit to net zero.
The world is transitioning to a net zero economy and nations that embrace the transition are more likely to prosper in this new world. The eyes of the world—youth and civil society—are not only on ambition levels and public commitment, but on interim targets, follow-through, implementation and real emissions reductions.
Looking ahead, global investors have the opportunity to play their role in two challenges; transitioning finance and financing transition.
Transitioning finance will involve normalising net zero in the finance sector, setting net zero targets and seeing more leadership among insurers, banks and investors – until net zero is truly the norm.
Financing transition will mean building convergence in the finance community on sector transition pathways, developing a common understanding of key technologies needed, as well as what can be financed today and what needs to happen so more can be financed.
We look forward to supporting global investors in helping meet these dual challenges and in delivery towards COP26 in 2021.
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