Last year was astonishing in many ways, with conventional wisdom turned on its head as we were forced to recognise our vulnerability as a species, and yet our resilience and ingenuity has helped us adapt to the challenges we’re facing.
It was also a year of rhetoric and commitments, most notably on climate change, as businesses, investors and governments marked the fifth anniversary of the Paris Agreement with ever-more ambitious goals.
From rhetoric to action
As we head into 2021, we can expect more of the same as organisations scramble to announce suitably impressive targets and burnish their climate credentials.
Indeed, we can probably expect an acceleration as the UK prepares to host the delayed COP26 climate talks and seeks to establish itself as a world leader in sustainable finance.
See also: – Pension schemes and members: Finding the common ground on ESG
However, 2021 needs to be the year when ambitious rhetoric is matched by equally ambitious action. This will be the make or break year for the climate.
In its latest emissions gap report, the UN Environment Programme said: “Global GHG emissions are only projected to be significantly reduced by 2030 if Covid-19 economic recovery is used as an opening to pursue strong decarbonisation.”
Not only must we ensure emissions do not rebound to their pre-Covid levels as life starts to return to “normal”, we must also ensure that post-recovery spending does not lock-in high-carbon infrastructure and business models that will make it even harder to stay within our carbon budgets.
The recent launch of the Net Zero Asset Managers Initiative marks a new level of ambition for the industry that is to be welcomed. However, setting a net-zero target is the easy part; following through with policies and actions to achieve it will be much harder. Investment professionals will need to work together to deepen our understanding of what net zero actually means in practice and how it can be implemented across each asset class.
We will also need to ensure that we are pulling in the same direction, particularly when we form part of a long, complicated and intermediated investment chain.
See also: – Special Interview with the UN’s Pierre Bardoux: Economies will collapse if more action is not taken
Stewardship
Nowhere is this more important than in the area of stewardship. As we get to grips with the scale of the climate crisis, it’s clear that it’s not enough for investors just to sell their holdings in a few carbon-belching laggards and invest in a few flagship green initiatives.
Instead, we need systemic change. That calls for investors to speak with one voice, both to encourage all companies to adopt a sustainable, climate-resilient strategy and to advocate for clear, ambitious climate policies from policymakers around the world.
Fortunately, there are signs that this is already happening. Climate Action 100+ has reported strong progress by its target companies, with 43% now having some form of net-zero goal by 2050 or sooner, although clearly there is a long way to go.
The UK’s new Stewardship Code will drive improvements in transparency, with much greater reporting on activities and outcomes. There will be a flurry of stewardship reports over the next three months as asset managers, asset owners and service providers (including LCP) seek to demonstrate they have met the high standards required to be a signatory to the Code.
When it was published 15 months ago, the Stewardship Code 2020 marked a step-change in expectations and yet the Asset Management Taskforce has already highlighted how we can – and must – go further. Its recent proposals seek to strengthen how stewardship works in practice across the full range of investments, to deliver on the purpose of the industry to generate sustainable value, and to ensure the collective responsibility of market participants and stakeholders.
See also: – Outlook: ‘2020 was an educational year – 2021 will be about the nitty gritty’
Real-world outcomes
There is increasing awareness that it is not enough to address climate change through a narrow financial lens. That it’s not enough to simply manage the risks and opportunities that climate change poses for our investments. We also need to ensure that we have a sustainable and socially just world – not only since that’s a pre-requisite for strong long-term investment performance, but more importantly since it’s the environment in which our colleagues, clients and communities will live.
We’re seeing this shift already, as interest grows in real world investment outcomes. We’re starting to rethink the role of business in society through the focus on stakeholder capitalism. We also need to rethink the role of investors in society.
Here, we might encounter challenges as moral imperatives push up against legislative and regulatory constraints. We see a hint of this in the Net Zero Asset Managers Initiative acknowledgement that managers’ ability to reach net zero “…depends on the mandates agreed with clients and clients’ and managers’ regulatory environments”.
For years, I’ve been telling my pension scheme clients that taking account of ESG factors is entirely compatible with their fiduciary duty. And yet, as these clients seek to go further and invest in a truly sustainable way, they may soon find themselves constrained by current interpretations of fiduciary duty.
We need to explore whether current interpretations remain fit for purpose or whether a new definition of fiduciary duty is needed (as the PRI has proposed). Millennials – and others – are rightly concerned about their future and do not want to eventually retire into a climate-ravaged world. They are looking to their pension providers, and others who manage money on their behalf, to step up to the plate. We must not let them down. We must ensure that 2021 is the year when climate rhetoric becomes climate action.
