The finance sector has a central role to play in the global shift to net zero. Its scale and influence means that it’s ideally placed to affect the systemic change needed for net zero to become a reality. However, despite recognition of the fact that climate change presents a very real long-term risk to portfolios, there are still huge challenges in implementing the changes we need to see in order to finally realise the transition.
In the early days of ESG, it quickly became clear that coordinated action on responsible investment issues was essential. Moving to net zero inherently requires action on a vast scale. Investors taking action to engage with asset managers or portfolio companies on climate-related issues, for example, are more likely to see results if other institutional shareholders act in concert with them. In doing so, they can increase pressure on portfolio companies to adjust their behaviour and so realise these long-term goals.
It’s against this backdrop that a number of net zero initiatives have been launched, covering the breadth of the investment landscape. Established with the support and coordination of non-profits (such as the UN’s Environmental Programme – Financial Initiative (UNEP-FI) and ourselves at the PRI), but intrinsically led by the industry, these initiatives are designed to further the net zero agenda at scale and across the sector.
Net zero initiatives for Asset Owners and Asset Managers, launched in 2019 and 2020 respectively, have already delivered effective engagement on the issue, seeing extensive uptake from signatories of all sizes within their relevant sectors, in turn representing trillions in assets under management. The UN-Convened Net Zero Asset Owner Alliance, for example, regularly produces guidance, tools and thought leadership designed to set the standard of best practice and encourage change across the asset owner community. In addition, the initiatives serve as channels to allow signatories to conduct outreach as a collective. This has included issuing public calls for action on issues such as carbon pricing and scaling up investment in active removal of carbon from the atmosphere while prioritising deep GHG emissions cuts.
The breadth of these net zero initiatives has increased recently, with newly-launched initiatives in September 2021 now covering investment consultants and financial service providers, complementing alliances for the banking and insurance sectors launched earlier this year. This essentially means that firms at every stage of the investment journey have access to a platform to facilitate collective engagement to work towards net zero goals, to present a united front to the rest of the sector and the public, and to encourage other firms to join the cause.
It is important to understand that not only different firms, but different sectors, are at varying stages in the transition to net zero. The challenge now is to encourage businesses to shift from commitment to action, and to encourage high levels of ambition both within and across initiatives. Work on getting from commitments to implementation is underway by some and must now begin by others.
It is in this regard that net zero initiatives have the opportunity to demonstrate their value. Firstly, the schemes are able to facilitate the cohesive and consistent setting of near-term net zero targets. This is key and one we at the PRI are advocating strongly for – namely, creating more immediacy around a shift to net zero and bringing the deadline for demonstrable action on this issue forward from 2050.
The current executive leadership of firms across the financial services landscape are unlikely to still be incumbent in 2050 – the “hard deadline” for a net-zero world – but nevertheless, bold decisions must be taken now to realise that goal. By implementing deadlines for activity by 2025 (ideally) or 2030 (at the latest), the industry will be best placed to ensure that incremental changes are realised and will therefore be better equipped to hold executives to account on hitting these targets.
The UN-convened Net Zero Asset Owner Alliance already has a defined process in place for this: its Target Setting Protocol has been upheld as the ‘gold standard’ for net zero target setting in a recent communique by UN Secretary General Antonio Guterres, with the protocol referenced (among others) by net zero initiatives for asset managers and investment consultants. In addition, all initiatives mentioned here are part of the Race to Zero scheme, requiring initiative signatories to conduct annual reporting and submit to public scrutiny. This transparency is critical in the pathway to net zero.
Additionally, stewardship, policy engagement, and financing of the transition to net zero form the foundation to achieving change in the real economy, which is key in a cohesive net zero strategy and any credible investor climate action plan. Investors have a key role to play in engaging policymakers on implementing effective policies to enable the transition to a net zero carbon economy.
Similarly, stewardship is a key tool that must form an integral part of any net zero strategy. The Climate Action 100+ initiative, for example, provides a platform for investors to engage with the highest emitting companies on net zero targets and has so far resulted in 83 (52%) of the initiative’s focus companies announcing an ambition to achieve net-zero emissions by 2050 or sooner.
Importantly, net zero targets should not be considered in isolation. They require a holistic view of climate that recognises the link between issues such deforestation, the loss of biodiversity, the use of non-renewables and the ability to realise a just and equitable transition for even the most marginalised communities around the world – many of which are most at risk of the physical effects of climate change.
As innovation and good practice evolves, we can expect the bar to be raised further each year. Today’s ‘gold standard’ is not necessarily the gold standard of tomorrow. Leaders aspiring to credibility and high ambition cannot stand still and pat themselves on the back. Rather, they need to keep challenging themselves and keep an eye on the horizon for emerging topics relating to net zero implementation and stay closely tuned to civil society. Firms must not only consider these complex factors when developing and implementing their net zero strategy but should also act as a collective in implementing them, with a common approach and shared message being key to achieving meaningful change across the financial sector as a whole.
Expectations for action on climate change are higher than ever in the run up to COP26. Commitment, action and accountability are needed from stakeholders, including governments, regulators, banks, investors and indeed civil society. The financial sector has a vital role to play in facilitating the change the planet needs in helping realise a global shift to net zero and coordination is the best way to help the industry move from commitment to action.
With a full network of net zero initiatives now covering every stage of the institutional investment process, firms now have unprecedented access to a committed network of their peers, as well as a suite of resources designed to help educate and inform on how best to meaningfully engage with portfolio companies to realise this change. It is time for them to roll up their sleeves and act.
Sagarika Chatterjee is Director of Climate Change for the Principles for Responsible Investment