Investors have a golden opportunity to accelerate transition to a resilient net zero emissions economy
Capital has not shifted at anywhere near the speed and scale needed, but there is still time if investors act now, says Christiana Figueres
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Five years ago, leaders signed both the Sustainable Development Goals – an aspirational blueprint for a secure future for all – and the Paris Agreement on Climate Change, a binding global commitment to tackle climate change by meeting the science-backed goal for net zero emissions by 2050. The private sector, including investors with tens of trillions in assets under management, played a crucial role in securing both agreements.
Science is very clear that decarbonising the global economy to meet net zero global greenhouse gas emissions by 2050 is necessary to stay below 1.5°C of warming, and that the only feasible pathway requires a reduction in emissions by 50% by 2030. Next year, the 195 signatories to the Paris Agreement will come together at COP26 for the first global stocktake on progress made since its historic signing, and the private sector will again be called upon to help enlarge the tent and provide the reassurance that collectively, we can achieve unprecedented progress.
For this great human achievement to be possible, investor actions and resources must be directed at the complex tasks needed to actualise significant progress in achieving both the SDGs and the Paris Agreement within this decade; it’s an opportunity we must not squander.
Private sector investors carry outsized influence when it comes to ensuring the economic turnaround is clean and green, and that the pace is consistent with science.
Thus far capital flows have not shifted at anywhere near the speed and scale needed to achieve these aims. The reality has not yet sunk in that staying on track with decarbonisation has health, economic and social benefits that can not only aid economic recovery from the pandemic and consequent economic crisis, but also realise significant advantages in pricing parities that enable the doubling of clean energy capacity required to fully transition the energy sector and invest in the technological developments at hand to do the same for the transport and infrastructure sectors. The financial levers for exponential growth in proven technologies and those that are emerging, such as hydrogen in the transportation sector, have never been better.
This need for both recovery and transition should precipitate a flood of private capital toward actions that can protect the global economy from the risks now laid bare by the convergence of multiple crises: the threats of climate change, biodiversity degradation, species extinction and economic inequality have reached breaking point all at the same time and are clearly at the root of the COVID pandemic too, according to the epidemiologists. Put simply, we have built the global economy on the completely unsustainable destruction and abuse of nature and now that there is no doubt, the only pragmatic pathway is to repair, regenerate and innovate.
Investors have been slow to realise the long-term benefits of decarbonisation, but it’s not too late. The most significant consideration for private sector finance flows now is how they can be directed to ensure the remaining nine years of this decisive decade are dedicated to rebuilding a thriving economy, with clear benefits to people and ecosystems, on which all life and economic activity relies. Private sector investors carry outsized influence when it comes to ensuring the economic turnaround is clean and green, and that the pace is consistent with science.
Amongst the exceptional challenges of this moment, there is ample cause for investors to be optimistic about the future growth trajectory they can influence through aligning their portfolios with the Paris Agreement. The policy frames that already exist pave the way to an unprecedented suite of opportunities. Firstly, more than 120 countries have enshrined the goal for net zero into national law, aligned with the Paris Agreement. This includes four of the world’s six largest economies by nominal GDP – China, Japan, California and the EU – which are now setting the pace all other countries will have to follow.
Asset owners sit at the pinnacle of the finance sector food chain, and many have now joined the pioneering Net-Zero Asset Owner Alliance, with a collective $5trn AUM. By committing to align their portfolios with net zero emissions by 2050 and working together to tackle shared challenges, these investors are poised to drive changes in the real economy toward clean energy, transport and other investments that will facilitate human health and wellbeing.
The role of assets owners and asset managers in aligning capital flows with net zero emissions could not be more important – and the timing for making and acting upon such commitments could not be better. What may have seemed like an abstract debate about leaving oil, gas and coal in the ground to fight climate change has suddenly become real. The crippling economic crisis and reduced energy prices mean that drillers and miners are coming to grips with projects that are no longer viable. Some companies are writing off assets worth many billions of dollars. A Financial Times study in February concluded that limiting temperature rise to 1.5°C would render worthless more than 80% of hydrocarbon assets, evaporating $900bn from balance sheets of fossil fuel companies.
This year’s pandemic-induced demand shocks, coupled with dramatically stepped-up climate commitments by some companies, have already resulted in tens of billions of dollars in write-downs – a major step on the path to net zero and 1.5°C. Just as investors must shift away from high-carbon investments, opportunities abound for investing in natural capital and other climate solutions.
Science instructs that nature-based solutions can provide 30% of the emissions reductions needed in this decade. Some investors are beginning to seize the opportunity to invest in protecting and restoring nature, changing the shape of value chains, as evidenced by the recent announcement that HSBC Global Asset Management, AXA Group and Allianz France are among 26 financial institutions, representing more than $3trn in assets, set to measure, set targets and publicly report on their biodiversity impacts by 2024.
A net zero commitment embraced by both asset owners and asset managers can have profound effects on the value chains of the companies in which they invest, with huge global ripple effects – including in emerging markets where resources will be sorely needed. I am not alone in encouraging the necessity for portfolio alignment with the goal for net zero, the achievement of which requires that both asset owners and asset managers come together around this unifying goal for transformation. Mark Carney, the UN Special Envoy on Climate Action and Finance, has been vocal on this point, as have leading economists from Joseph Stiglitz to Nicholas Stern.
Investors at the leading edge of finance-sector net zero commitments are now taking the concept from theory to action. They are demonstrating how investors’ formidable toolkits – from corporate engagement to policy interventions and shifting asset allocations – can be deployed to accelerate net zero transition in the real economy. To deliver on the potential of this decisive decade, the rest of the financial sector needs to follow suit. Let’s not leave 2015 in the history books as the last time the private sector played a prominent role in unprecedented global cooperation. We need to recover that spirit urgently through actions that investors can unleash now.
Christiana Figueres was the Executive Secretary of the UN Convention on Climate Change 2010-2016. She is the co-founder of Global Optimism, co author of The Future We Choose: Surviving the Climate Crisis, and co-host of the podcast Outrage + Optimism.