With new reports out ahead of COP26 highlighting the need to pick up speed and ambition on driving down emissions, Mike Scott rounds up the latest developments by investors to rise to the challenge
With COP26 just days away, the crush to climb on the ESG bandwagon is almost overwhelming. The sector received a seal of approval from another British royal, as Harry and Meghan announced they were joining fintech company Ethic, one of the world’s largest pension funds said it will sell all its fossil fuel holdings, and a major steel group announced plans to be net zero by 2040, even though the technology to do so does not yet exist.
The speed at which all this is happening means that it can sometimes be a messy business, and it is becoming clear that investors are not always practising what they preach.
One recurring theme, though, is that it is no longer possible to hide behind the opacity of the data. The picture is becoming clearer every day – on how far we still have to go – as a planet, as companies and as investors. And with that come growing demands for these bodies to act.
PwC’s latest Net Zero Economy Index finds that despite a rise in climate action ambition, the emissions gap continues to widen; to hit the 1.5C target, we need to decarbonise at a rate of 12.9% a year, more than five times the rate achieved in 2020, despite the shrinking of emissions in that year as a result of Covid.
If implemented effectively, net-zero emissions pledges could limit warming to 2.2C, closer to the well-below 2C goal of the Paris Agreement
The same point was made by the United Nations Environment Programme, whose Emissions Gap report says we are on course for warming of 2.7C by the end of the century. National commitments are set to cut emissions by 7.5% in 2030, instead of the 55% that is needed.
“If implemented effectively, net-zero emissions pledges could limit warming to 2.2C, closer to the well-below 2C goal of the Paris Agreement. However, many national climate plans delay action until after 2030,” UNEP says.
The reduction of methane emissions from the fossil fuel, waste and agriculture sectors could help close the emissions gap and reduce warming in the short term, the report finds. Carbon markets could also help slash emissions. But that would only happen if rules were clearly defined and target actual reductions in emissions, while being supported by arrangements to track progress and provide transparency.
A new report from the International Emissions Trading Association and the University of Maryland says that a robust international emissions market could stimulate up to $1tn a year in new investment by 2050. However, negotiators have failed to agree on the required market mechanisms, set out in Article 6 of the Paris Agreement, for the past five COPs, so optimism should be tempered that anything will emerge in Glasgow.
This message was backed up by the International Energy Agency, which said in its World Energy Outlook 2021 that if countries meet their climate pledges, demand for fossil fuels will peak by 2025, but that there are gaps between the policies governments have put in place, the ambitions they have set out in their climate plans and the significant additional efforts needed to keep global warming below 1.5C.
Climate Action 100+, a $60tn coalition, is addressing this by calling for electric utilities to bring forward their net zero plans by up to 15 years. It says generators in developed countries should be net zero by 2035 and in developing countries by 2040. This is crucial for a number of reasons: the sector represents 40% of global emissions and many companies in other sectors are dependent on the decarbonisation of the electricity sector to enable them to meet their own targets. At the same time, the economy is going to become increasingly electrified and demand is predicted to grow more 166% by 2050.
Disclosure group CDP has seen record numbers of companies, cities, states and regions disclose their environmental performance, including more than 13,000 companies representing 64% of market capitalisation, and more than 1,000 cities. This is an increase of more than a third from 12 months ago, “demonstrating that more companies and cities are waking up to the climate and ecological emergency,” CDP said. The group reported increases in corporate disclosures across all three categories it currently covers: climate change, deforestation and water security.
We part with our investments in fossil fuel producers because we see insufficient opportunity to push for the acceleration of the energy transition
“This should provide further incentive for governments around the world to make environmental disclosure mandatory, as supported by the G7 in June. This will be essential for better tracking of companies’ and countries’ progress towards net-zero commitments,” it added.
In a major development, the Dutch pension fund ABP, one of the world’s largest, announced that it would sell its €15bn of fossil fuel holdings in 80 companies, which comprise 3% of its total assets, within 18 months.
The fund was sued by climate activist group Fossil Free in September on the grounds that its continued investment in fossil fuel companies was inconsistent with its pledge to align with the Paris Agreement. ABP chair Corien Wortmann-Kool said: “We part with our investments in fossil fuel producers because we see insufficient opportunity for us as a shareholder to push for the necessary, significant acceleration of the energy transition at these companies.”
Companies and investors continue to work through the implications of net-zero targets, with varying degrees of effectiveness. The UK campaigning group Make My Money Matter has revealed that the UK pensions industry, if it was a country, would be in the top 20 global carbon emitters. The group says that pension schemes invest £112bn into fossil fuels and it is calling on the government to make it mandatory for schemes to be net-zero aligned, with 71 of the top 100 UK pension schemes yet to make robust net-zero emissions commitments.
That is exactly what is going to happen in the UK, after Chancellor Rishi Sunak announced that not just pension schemes but asset managers and some large companies will need to start disclosing their environmental impact. A similar move has been announced in New Zealand.
The urgent need for such disclosure was highlighted by another piece of CDP research, which analysed 16,500 investment funds and found that less than 0.5% of their assets are currently Paris-aligned. Current investments are likely to lead to warming of more than 2.75C, CDP said, with just 158 funds assessed to be in line with “well below 2C” and more than 8,000 on a trajectory of more than 2.75C.
Net-zero standard launched by SBTi
Some powerful new tools to help investors keep companies to their net-carbon commitments have also emerged, however. The Science Based Targets initiative launched its Net-Zero Standard, which Alberto Carrillo Pineda, SBTi’s managing director, said would for the first time offer companies “robust certification to demonstrate to consumers, investors and regulators that their net-zero targets are reducing emissions at the pace and scale required”.
Large companies will need to convince the SBTi that they have a credible plan to halve their emissions before 2030 and eliminate 90-95% of emissions before 2050 compared with a base year after 2015. They will also only be able to use offsets to cover up to 10% of their emissions.
Seven companies, renewables group Ørsted and US drugstore chain CVS Health, real estate group JLL, PR company Dentsu International, Swiss building material company Holcim and Indian digital service provider Wilpro, became the first to have their net-zero plans verified under the new SBTi standard.
Meanwhile, the Transition Pathway Initiative announced plans to open a Global Climate Transition Centre, which will provide free, in-depth data on how 10,000 companies are performing on their efforts to align with net zero, up from 400 available today, and will also assess sovereign and corporate bonds.
TPI said the centre, due to open in early 2022, intends to be a critical part of the COP26 financial infrastructure. It will help investors to align their portfolios with net-zero targets covering three major asset classes; support global investor engagement initiatives such as Climate Action 100+; and allow investors to carry out much more detailed analysis of the most carbon-intensive companies and sectors.
BlackRock also announced it would be joining TPI as a supporter, taking TPI’s supporters to over 110 funds with $40tn in assets under management and advisement.
In other developments, HSBC CEO Noel Quinn announced (at an environmental summit in Saudi Arabia – another sign of the times) that 2021 is set to be the year that the green bond market reaches $1tn.
We urgently need to seriously rethink how capital is allocated in order to deliver real progress toward the net-zero commitments we have made
Back in the UK, NatWest announced plans to invest £100bn in climate and sustainable funding by the end of 2025, much of aimed at SMEs, which it said could contribute 50% of the UK’s net zero target.
And in Australia steel company Fortescue announced it would make carbon free steel by 2040, through the use of green hydrogen.
“Fortescue’s bold target overshadows the lack of ambition by BHP and Rio Tinto, whose absence of firm targets for steelmaking is looking increasingly lacklustre,” said Dan Gocher, Director of Climate & Environment at the Australasian Centre for Corporate Responsibility (ACCR.
In the U.S., former U.S. vice president Al Gore’s Generation Investment Management launched a new company, Just Climate, focused on investing in projects that are too capital-intensive, unproven at scale or in challenging geographies to attract mainstream investors.
“As a sector, we urgently need to seriously rethink how capital is allocated in order to deliver real progress toward the net-zero commitments we have made,” Gore said. “Just Climate aims to prioritise impact, to challenge conventional thinking and to inspire the sort of innovations that are now required for us to overcome the climate challenges ahead of us.”
This article is part of our pre-COP26 Sustainable Business Review. See also:
Policy Watch: On eve of COP26, all eyes are on whether G20 will step up on climate ambition
Brand Watch: Corporates hope fight against deforestation in supply chains will get boost from COP
Investors want to back net-zero, but COP26 needs to come up with a plan, says Günther Thallinger
Alexsandro Broedel: ‘Sustainabililty is part of the business model, not something that stands alone’