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

IA joins calls for UK government to provide granular detail on decarbonisation policy


Paul Scaping, public policy specialist, investment and capital markets, Investment Association

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

The Glasgow Climate Pact, the agreement which Sharma worked so hard to conclude at COP26, reaffirmed the international goal of pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels. However, it stated that countries would need to revisit and strengthen their emission reduction targets if the prospect was to remain attainable.

Ahead of COP27, the UN Environment Programme published its latest Emissions Gap Report which it said showed that any effort to strengthen these targets had made “a negligible difference”. New and updated targets since COP26, and the associated policies that countries have put in place, point to a 2.8°C temperature rise by 2100.

The 1.5°C target remains significant for signatories to the Net Zero Asset Managers commitment and members of the Net Zero Asset Owners Alliance. Each signatory has committed to supporting the goal of net zero greenhouse gas emissions by 2050, and to compare emissions from their portfolios against science-based pathways that limit warming to 1.5°C.

A high‑level expert group was convened by the UN Secretary General earlier this year to make recommendations on how to ensure that such pledges don’t encourage greenwashing. The group’s report was published 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 remain aligned with the 1.5°C limit.

But the UN report also warns that “while ambitious actions from this ecosystem of players is important, it is critical that governments make good on their own net zero commitments”. This echoes the clear statement from investment managers and asset owners that their ability to decarbonise investment portfolios, while maintaining their fiduciary duty to clients, is contingent on appropriate action from governments. The Net Zero Asset Managers commitment states that it is “made in the expectation that governments will follow through on their own commitments to ensure the objectives of the Paris Agreement are met”.

Plans and pledges

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 in place to achieve an orderly transition in the assets in which they invest. If governments are not doing what it takes to “keep 1.5 alive” then how can investors deliver what is needed?

This challenge explains another of the UN expert group’s recommendations, that non-state actors align their external policy and engagement efforts (and those of their trade bodies) to the goal of reducing global emissions to net zero by 2050. The Investment Association has published a Climate Change Position 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 can be new territory for industries like investment management whose advocacy priorities may traditionally have been a little narrower and sector specific. But by committing to a truly economy-wide transition to net zero which requires a transition within most, if not all, assets in which we currently invest, governments have made pursuit of orderly transition central to how the industry serves its clients.

The Investment Association is a member of the UK’s Transition Plan Taskforce 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 scrutinise the viability of these company transition plans, the government must provide granular detail on how policy will shift in pursuit of decarbonisation. It is essential that government departments dealing with all aspects of the “real economy” understand and provide the level of detail which companies and investors require.

Regular and active dialogue between private finance and the government is essential to ensure 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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