Amid mixed policy signals, investors are developing their own protocols and initiatives to translate net-zero commitments into action, reports Mike Scott

Any move by the European Union to wean itself off gas imports from Russia in response to the invasion of Ukraine will be welcomed by environmental, social and governance investors, who will be keen for Russian gas to be replaced with cleaner alternatives, from renewable energy sources to improving the efficiency of buildings and machinery.

Russian exports account for 40% of Europe's gas supplies, and yet the country refused to join more than 100 countries in signing a pledge to reduce methane emissions by 30% by the end of the decade. 

As the IEA's latest Global Methane Tracker reveals, Russia's gas is one of the world's worst for methane emissions. And its poor environmental profile is one reason for the outcry that greeted the European Commission’s decision last month to include gas in its draft rules for what constitutes green investment, known as the Sustainable Finance Taxonomy.

Its own expert advisers have urged EU authorities to rewrite the draft rules, which they said would allow a green label to be put on investments in gas plants with relatively high CO2 emissions, as well as new nuclear plants that wouldn't come online in time to help meet Europe's 2050 climate target. Read more.

One of the architects of the Paris Agreement, Laurence Tubiana, now chief executive of the European Climate Foundation, said: “Europe is undermining its climate leadership and lowering standards in the EU and beyond. When a gold standard does emerge elsewhere, this taxonomy will be left behind.”

The value of the tool is to drive the deep change we need. It is not about stabilising the energy mix like it is now

The financial sector needs direction, Tubiana argued. “The value of the (taxonomy) tool is to drive the deep change we need, to reach net zero emissions by 2050. It is not about stabilising the energy mix like it is now.”

But investors can't afford to wait for clarity, as they are coming under pressure to translate their own net-zero commitments into action. For example, the 69 members of the United Nations convened Net-Zero Asset Owner Alliance have committed to a new protocol that requires them to halve the emissions of their portfolios by 2030, not just in equities, bonds and real estate, but also in infrastructure. The protocol provides guidelines for engagement and investment opportunities to support the real-world transition and to benchmark progress.

Caroline Clarke, commercial director of financial services at business advisors Carbon Intelligence, says the commitment will require asset owners to significantly increase the pace of their decarbonisation efforts.

A gas pipeline at an import terminal of Norway's company Gassco in Emden, Germany. (Credit: Fabian Bimmer/Reuters)

It sets “much clearer expectations for asset owners and asset managers, as well as (giving) greater clarity and guidance on how these will be implemented over the next few years”.

There is also the Transition Pathway Initiative’s new sectoral decarbonisation pathways, which the asset owner-led initiative says “provide the definitive framework for assessing corporate climate targets in 10 key high-emitting sectors within energy, transport and industrials” to see if they align with the Paris Agreement.

The pathways cover electricity, oil and gas, aluminium, cement, diversified mining, paper, steel, autos, aviation and shipping.

Adam Matthews, chair of the Transition Pathway Initiative (TPI), says investors are faced with multiple interpretations of what the low-carbon transition should look like, “often with the intention of slowing rather than accelerating the rate of change”. To take decisions, investors need credible, rigorous analysis that reflects the economic, technical and societal realities of the low-carbon transition. “The TPI sectoral decarbonisation strategies provide that analysis,” said Matthews.

There is no pathway to net zero that involves funding an expansion in production of fossil fuels

The need for rigorous analysis is illustrated by a damning new report from the Corporate Climate Responsibility Monitor, a collaboration between the New Climate Institute and Carbon Market Watch. The report assesses the transparency and integrity of 25 major global companies that have made ambitious net-zero commitments and finds that “the rapid acceleration of corporate climate pledges … means that it is more difficult than ever to distinguish between real climate leadership and unsubstantiated greenwashing”.

The report says that the term “net zero” is misleading, with the companies committing to emissions reductions of only 40% on average, “not 100% as suggested by the term ‘net zero’”.

Standard-setting initiatives such as CDP and Science Based Targets initiative (SBTi) are lending credibility to low-quality and misleading targets, the report says, because many companies fail to include their Scope 3 emissions, or rely on offsetting to meet their targets.

Aluminium is included in the TPI’s new sectoral decarbonisation pathways. (Credit: Alexandros Avramidis/Reuters)

Among the 25 companies, 18 have set targets approved by the Science Based Targets initiative as compatible with either limiting global warming to 1.5 degrees Celsius or 2C. But in the majority of cases, the report said, “we would consider that rating either contentious or inaccurate, due to various subtle details and loopholes that significantly undermine the companies' plans.”

At the same time, you can see why companies might be confused by the signals coming from the financial community. According to non-government organisation ShareAction, 25 European banks with net-zero commitments lent $55 billion last year to companies looking to increase oil and gas production, despite the International Energy Association’s Net Zero by 2050 roadmap showing that there is no room for investment in new oil and gas fields if the world is to limit warming to 1.5C.

“There is no pathway to net zero that involves funding an expansion in production of fossil fuels. For the world to avoid 1.5C of heating, then no investment is needed anywhere in any new coal, oil or gas production,” Mark Campanale, founder and executive chair of financial think-tank Carbon Tracker, said. “Now is the time for banks to get real with the science and announce a science-based moratorium on funding new fossil fuel projects.”

ShareAction is urging asset managers to support resolutions filed by the Interfaith Centre for Corporate Responsibility at banks including JP MorganChase, Bank of America, Wells Fargo, Citigroup, Morgan Stanley and Goldman Sachs, calling on them to urgently scale back their fossil fuel financing.

Main picture credit: Benoit Tessier/Reuters

This article is part of the March 2022 issue of Sustainable Business Review. See also:

Policy Watch: Courts question whether oil and gas expansion is compatible with climate goals

Brand Watch: How brands are scrambling to bring clean-tech startups inhouse

From philanthropy to radical new business models in Latin America

What will SEC’s climate disclosure rules mean for U.S. companies?

Paris Agreement  EU green taxonomy  Net-Zero Asset Owner Alliance  Transition Pathway Initiative  CDP  Science Based Targets Initiative  ShareAction 

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