Regular communication between private finance and government essential to net-zero transition

As Alok Sharma’s nearly three-year spell as COP26 president comes to an end and he leaves the cabinet, there is a risk that his long-term mantra of “keeping 1.5 degrees alive” may be retired from the stage with him.

The Glasgow Climate Pact, the agreement that Sharma worked so hard to conclude at COP26, reaffirmed the international goal of efforts to limit temperature increases to 1.5°C above pre-industrial levels. However, it said countries will need to review and strengthen their emission reduction targets if the outlook remains achievable.

Ahead of COP27, the UN Environment Program has released the latest Emissions Deficiency Report which he said showed that any effort to strengthen these targets made “negligible difference”. New and updated targets since COP26, and the associated policies countries have put in place, point to a temperature increase of 2.8°C by 2100.

The 1.5°C target remains significant for the signatories of the Net Zero Asset Managers Commitment and the members of the Net Zero Asset Owners Alliance. Each signatory has pledged to support the goal of net zero greenhouse gas emissions by 2050 and to compare emissions from its portfolio with science-based pathways that limit warming to 1.5°C.

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The UN Secretary-General convened a high-level expert group earlier this year to make recommendations on how to ensure that such pledges do not encourage greenwashing. The group’s report was released at COP27, and the recommendations state that financial institutions, among others, making net-zero commitments should have “no or limited overshoot” in comprehensive plans to stay in line with the 1.5°C limit .

But the UN report also warns that “while ambitious actions by this ecosystem of players are important, it is critical that governments meet their net zero commitments.” This reflects a clear statement by investment managers and asset owners that their ability to decarbonise investment portfolios, while maintaining their fiduciary duty to clients, depends on appropriate government action. Net Zero Asset Manager’s commitment states that it is “made in anticipation of governments fulfilling their commitments to ensure the goals of the Paris Agreement are met.”

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Plans and promises

In the UK, there is concern among investors about the potential gap between the government’s legally binding net-zero target and the policy measures in place to achieve an orderly transition in the assets they invest in. If governments are not doing what is needed to “keep 1.5 alive”, then how can investors deliver what is needed?

This challenge explains another of the recommendations of the UN expert group, that non-state actors align their foreign policy and engagement (and the efforts of their trade bodies) with the goal of reducing global emissions to net zero by 2050. The Investment Association has released a Climate Change Position Statement and Annual Action Plan in part to demonstrate to our members that our advocacy plans are compatible and consistent with their own environmental pledges.

This may be new territory for industries such as investment management whose advocacy priorities have traditionally been a little more narrow and sector-specific. But by committing to a truly economy-wide transition to net zero, which requires a transition across most, if not all, of the assets we currently invest in, governments have made the pursuit of an orderly transition central to how the industry serves its to clients.

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The Investment Association is a member of the UK Transition Plan Working Group which has spent this year developing a sector-neutral disclosure framework. This will help companies develop robust net-zero transition plans and enable investment managers to make better-informed investment decisions.

For investment managers to properly examine the viability of these corporate transition plans, the government must provide detailed details of how policy will change in the pursuit of decarbonisation. It is essential that government departments dealing with all aspects of the ‘real economy’ understand and provide the level of detail required by companies and investors.

Regular and active dialogue between private finance and government is essential to ensure that investment sustains economic growth and supports an orderly transition to global efforts to limit warming to 1.5°C.

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