SUSTAINABLE INVESTING

The Next Chapter in Sustainable Investing: The Private Sector Tightens Its Focus on Climate Change

01.03.2022 - Jeff Finkelman, Managing Director, Sustainable Investing

Optimism ran high when the 2015 Paris Climate Agreement was signed. National climate action plans were not yet sufficient to limit global warming to 1.5 degrees Celsius, but the parties agreed to ratchet up their ambition by the 26th United Nations Climate Change Conference (“COP26”). Surely the world would get itself on track by then.

Well, COP26 came and went with decidedly mixed results. Policymakers again failed to deliver on the 1.5-degree promise, however, the private sector came forward with bold announcements. Investors with $130 trillion of assets under management committed to achieving the goal of net zero emissions by 2050. (1) With climate at the top of the agenda as we move into 2022, the challenge for sustainable investors will be to match those words with action.

Pursuing Net Zero Is Front and Center

Private investors have already unleashed a surge of capital into climate technology and renewable energy infrastructure, directing an expected record $750 billion towards clean energy and efficiency technologies in 2021. (2) But more is needed. Achieving net zero may require $3 to $5 trillion a year of investment, deployed across a wide range of technologies from hydrogen power to direct air capture technology.(3)

Yet, the real potential of the net zero commitments announced at COP26 may be found in that portion of the $130 trillion in assets not invested directly in climate solutions. Net zero signatories now stand in the spotlight. If they fulfill their pledges with “creative carbon” accounting and fail to push for real emission reductions across their portfolios, critics will pounce.

Investor engagement is no substitute for the behavior-shaping power of public policy, but rarely has there been so much capital unified behind a single message. C-suites around the world should expect to face increasing pressure, from a broader range of their debt and equity holders, to pursue corporate climate targets in line with these signatories’ net zero ambitions.

Standardized Reporting Is Key for Progress

Holding investors and their portfolio companies to account as they pursue these goals will depend on access to timely, accurate, and consistent environmental, social and governance (ESG) data. Fortunately, progress towards standardized ESG reporting looms on the horizon.

Coincident with COP26, the International Financial Reporting Standards (“IFRS”) Foundation, the steward of the most widely used accounting standards worldwide, announced the creation of an International Sustainability Standard Board. By July 2022, the new board will absorb two other major standards providers: the Climate Disclosure Standards Board, an initiative of CDP (formerly the Climate Disclosure Project), and the Value Reporting Foundation, which houses the Sustainability Accounting Standards Board (SASB) and the International Reporting Framework.

Consolidating the alphabet soup of ESG standards providers could be a real boon to the industry, reducing compliance headaches for companies and giving investors a single standard to point to when asking companies to improve their climate and ESG disclosures.

 

 

1. Net Zero Asset Managers Initiative, www.netzeroassetmanagers.org.
2. Executive summary – World Energy Investment 2021 – Analysis - IEA; 2021.
3. Net Zero by 2050 – Analysis - IEA; 2021.







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SUSTAINABLE INVESTING

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