With COP26 looming, the world’s investors are taking on governments

Investors running more than a third of global invested assets are calling for changes to government incentives, while Steve Waygood continues his mission to develop a Global Finance Transition Strategy

With less than 150 days left until the start of COP26, the milestone climate summit at which the world’s leaders will agree a new set of decarbonisation targets, investors are rolling up their sleeves. 

Today, a $41tn coalition – that’s a third of all global investor assets – wrote to all governments urging a “race-to-the-top on climate policy”, warning that laggards will miss out on trillions in investment if they “aim too low and move too slow”.

There are 457 signatories to the letter, including many of the biggest pension funds in Europe, Australia and North America, and a slew of specialist ESG houses such as WHEB Asset Management and NEI Investments. Major mainstream players like State Street Global Advisors have put their name to the statement, although BlackRock and Vanguard – the other two giants of the asset management industry – are notably absent. 

The letter, published as the G7 Summit gets underway in England, makes a number of requests to rulemakers, starting with strengthening national climate commitments at COP26, with ambitious interim targets to get to Net Zero by 2050 or sooner, and roadmaps outlining how carbon-heavy industries will be expected to decarbonise. 

‘No amount of engagement with individual companies is going to change the whole system’ – Steve Waygood

Covid-19 recovery plans should also support the transition to Net Zero, meaning minimal investment into new carbon-heavy projects and requirements for polluting companies to enact transition plans in order to receive public funds. 

Private investment into green projects and companies should be encouraged, in part by governments axing fossil fuel subsidies, creating a robust carbon price, phasing out thermal coal and avoiding new fossil-based projects. To manage the social fall out, the investors want ‘just transition’ plans to be developed to safeguard workers and communities that might be hit by these changes to industry and energy production. 

Finally, the group calls on governments to introduce mandatory climate disclosure requirements aligned with the Task Force on Climate-related Financial Disclosures. The letter stresses that these reporting rules must generate “consistent, comparable and decision-useful” information for investors. 

The demands have been coordinated by the Investor Agenda – a partnership between the Principles for Responsible Investment, the Institutional Investor Group on Climate Change (IIGCC), Ceres and other major sustainable investment networks around the world.

“The outcomes of COP26 will be incredibly significant in ensuring investors have the confidence and certainty they require to unlock the additional flows of investment required to deliver a net zero future," says Stephanie Pfeifer, IIGCC's CEO and a member of the Investor Agenda's Steering Committee. "We are seeing encouraging progress in the run up to the summit, but greater ambition needs to be reflected in the emission reduction pledges. Just as importantly, investors will need clarity on how countries will look to achieve net zero commitments.

 “Interim targets and clear decarbonisation roadmaps for carbon-intensive sectors are important in ensuring there is a common understanding on how commitments will be realised and the pace of change. This will certainty help speed up the deployment of additional capital required to achieve decarbonisation across economies and countries will see the benefit this brings in the race to a net zero future.”

The statement will remain open for further institutional investors to sign until COP26 and will be periodically updated with new signatories at key moments throughout 2021.

It is not the first time investors have joined forces to call for more long-term clarity on where they should allocate capital to help economies decarbonise. Last summer, Steve Waygood, the Global Head of Responsible Investment at Aviva, announced his intention to launch the International Platform on Climate Finance (IPCF). It would, he said at the time, act as a kind of “CFO for the Paris Agreement” – a capital markets version of the scientist-led Intergovernmental Panel on Climate Change, providing a framework to steer investment in the low-carbon economy. The hope is for it to get the okay at COP26 in November.

“The platform would be tasked with the specific aim of building and maintaining a Global Finance Transition Strategy that sets out how to finance the transition by transitioning finance. This plan will be monitored and maintained in a manner that is consistent with the UNFCCC planning process, but not coordinated by the UNFCCC itself,” he explained in a recent post, referring to the UN’s Framework Convention on Climate Change, the treaty at the centre of the Paris Agreement.

The Global Finance Transition Strategy could be executed via the OECD, Waygood suggests, and the focus should be on supporting developing countries and engaging the World Bank, the UN and its member states. 

There are now 38 institutions backing that project, including Affirmative Investment Management, Aviva Investors, Denham Capital, Earth Capital, the UK’s Green Finance Institute and the World Benchmarking Alliance.

Members are currently conducting outreach with countries and financial institutions. Waygood says “some institutions are scared by this kind of ambition”, but adds: “We are now at a point that we should be scared by a lack of it”.

Aviva’s own sovereign bond team has begun what Waygood describes as “macro stewardship activity” – asking countries whether they are signed up to the green central banking network NGFS, for example, or the APAC-focused Climate Finance Network. 

“We’re getting a lot of traction in talks with G20 nations like Italy – more so than we’ve experienced with the G7 and the UK,” he notes. “That said, we have also been given very considerable access to [the UK] Treasury, the COP26 team, and other such bodies, which has been welcomed.”

The upcoming G7 and G20 summits – which kick off in the UK tomorrow and in Italy in October, respectively – should be key events for investors in terms of collaborative engagement with politicians, policymakers and advisors, he adds. 

“No amount of engagement with individual companies is going to change the whole system – we need to make sure that we harness the profit motive and that no one can continue to make money from this problem,” he says. “Our industry must challenge heads of state, heads of finance, finance ministers and central bank governors to ensure we are collectively using these opportunities to harness the international financial architecture needed to deliver the ambition of the Paris Agreement. We're not going to get a better opportunity than this."