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

As Alok Sharma’s nearly three-year term 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” is leaving the stage with him.

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

Ahead of COP27, the United Nations Environment Program has released its latest Emissions gap report what he said showed that any efforts to strengthen these targets made “negligible difference”. The new and updated targets since COP26, and the associated policies that countries have put in place, point to a temperature increase of 2.8°C by 2100.

The 1.5°C target remains meaningful to the signatories of the Net Zero Asset Managers Pledge and 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 benchmark emissions from their portfolios against science-based pathways that limit warming to 1.5°C.

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The UN secretary-general convened a high-level panel of experts earlier this year to make recommendations on how to ensure that such commitments do not encourage greenwashing. The group’s report was released at COP27, and the recommendations note that financial institutions, among others, making net zero commitments should have “no overshoot or capping” 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 actors are important, it is critical that governments deliver on their own net zero commitments.” This echoes the 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 action by governments. Net Zero Asset Managers’ commitment states that it is “made with the expectation that governments will fulfill their own commitments to ensure that 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 for a shortfall between the government’s legally binding net zero target and the policy measures put in place to achieve an orderly transition in the assets in which they invest. If governments are not doing what is needed to “keep 1.5 alive”, then how can investors provide 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 efforts (and those of their trade bodies) with the goal of reducing global emissions to net zero by 2050. The Association of Investments has published an annual Climate Change Position and Action Plan, in part, to demonstrate to our members that our advocacy plans are compatible and consistent with their own environmental commitments.

This may be new territory for industries like investment management, whose advocacy priorities may traditionally be a little more narrow and sector-specific. But by committing to a truly economic transition to net zero that requires a transition in 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 your customers

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The Investment Association is a member of the UK transition plan working group which has spent this year developing an industry-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 scrutinize the viability of these company transition plans, the government needs to provide granular details on 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 businesses 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 in line with global efforts to limit warming to 1.5°C.

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