Is Net Zero momentum increasing for investors?

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Net Zero. A term that will echo across the world of finance with even greater strength after today’s US climate summit, and as we approach COP26 in November.

It’s a term that investors have grasped with increasing momentum since the turn of the year. Just one example came last month when we saw membership of the Net Zero Asset Managers Initiative triple – it now stands at $37tn, which is more than a third of total AUM worldwide. Among those to sign up were such heavyweight signatories as BlackRock and Vanguard. To ensure progress, this commitment includes a requirement for the asset managers to set interim targets for 2030, consistent with a fair share of the 50% global reduction in CO2, identified as a requirement in the IPCC special report on global warming of 1.5°C. 

Last month’s news followed the March launch of the Net Zero Investment Framework (NZIF), which for the first time provided investors with a practical blueprint to implement Net Zero. The framework means we now have a shared understanding that investors must both decarbonise their investment portfolios and increase investment in climate solutions, if they are to call themselves ‘net zero’ investors. This forms a part of the Paris Aligned Investment Initiative which also continues to gather steam, with its 10-point commitment for asset owners to align their portfolios and activities to the goals of the Paris Agreement.

In sum, there is a growing understanding among investors of what ‘genuine’ corporate Net Zero targets should look like.

Asset owners [must] continue to use our position to engage with companies to change irresponsible and unsustainable behaviours and ditch polluting activities. We need to hold ourselves accountable too, laying out a clear climate strategy for companies of what we expect – and when – in our voting and engagement policies.

The annual data on the ‘State of Transition’, provided by the Transition Pathway Initiative (TPI), shows growing momentum behind credible Net Zero targets – that is, companies whose targets include the most material emissions of their company (e.g. pledges from oil and gas would include emissions from the use of companies’ products and auto firms would include emissions from petrol used in cars), and which have intermediate targets for significant decarbonisation – so do not kick climate action into the long grass of 2050. TPI found that the number of companies committing to credible Net Zero targets more than doubled this year (from 14 to 35). That said, just 17% of companies offering credible Net Zero commitments is far from enough and the task ahead remains mammoth. 

Policy needed

Moreover, investors and companies cannot do this alone. We need policy frameworks that both incentivise (e.g. carbon pricing, taxes) and mandate action, thereby helping to scale up private capital investment in the low carbon transition. 

This is why it is encouraging to read this week that President Biden may issue an executive order instructing some federal agencies to act on climate-related financial risk.

Biden chose Earth Day, 22 April, to launch his first climate summit – timing which highlights his intention to make it a defining moment for US climate policy. His administration has been keen to send a clear message that climate is a top priority and, in the first few months of his presidency, we’ve already seen the US rejoin the Paris Agreement; launch a plan to hit net zero by 2050; and commit to enforce stringent new conservation policies across at least 30% of US lands and oceans by 2030.

Exactly how Biden integrates climate finance policy long-term still remains unclear, however. Whilst he has trumpeted a new, greener era, the US still lags far behind Europe on sustainable finance reforms and legislation. There is still a heavy dependence on fossil fuels, whilst European countries are investing far more per capita into renewables, carbon-capture technology, battery storage and other decarbonisation efforts. 

In December last year, a report by PwC found that 70% of global ESG mutual fund assets were represented by European organisations, whereas North America accounted for a meagre 21%. 

Differing cultural and political attitudes around sustainability are key contributors to this disparity. Whilst the US is emerging from a Trump administration that repeatedly fought policy proposals around sustainability, there has been a wave of green finance initiatives in Europe such as the EU Taxonomy.

Investors must remain vigilant on climate issues

However, while it’s fantastic to see so many investors taking ownership of climate issues, there remains a long road ahead. Action must follow the words and commitments. A pathway towards sustainable finance is one that still requires a major global push to bring emissions down and hit Net Zero targets.

Asset owners have an integral role to play in leading companies down the right path when it comes to climate action. We need to continue to use our position to engage with companies to change irresponsible and unsustainable behaviours and ditch polluting activities. We need to hold ourselves accountable too, laying out a clear climate strategy for companies of what we expect – and when – in our voting and engagement policies.

Investors will be watching closely this week to see what’s next for the Biden administration – will the US embrace bold, progressive climate-finance policy? Or will institutional structures choose a more gradual approach to ESG policy, as we’ve seen historically from US governments? Whatever the outcome, a great deal of the onus for climate progress this year sits on the shoulders of the financial sector. Let’s ensure we deliver on those commitments.

 Faith Ward is Chief Responsible Investment Officer at the UK’s Brunel Pension Partnership