Regular communication between private finance and government is essential to the transition to net zero usage

As Alok Sharma’s nearly three-year tenure as COP26 President draws to a close and he leaves cabinet, his long-standing mantra of “keep 1.5 degrees alive” risks retiring from the stage with him.

That Glasgow The climate pact, the deal Sharma worked so hard to conclude at COP26, reiterated the international goal of pursuing efforts to limit temperature rises to 1.5C above pre-industrial levels. However, it noted that if the prospects were to remain achievable, countries would need to reconsider and strengthen their emission reduction targets.

before COP27the The UN Environment Program has released its latest Emission Gap Report showing that any effort to strengthen these goals has made “a negligible difference.” New and updated targets since COP26 and the associated policies that countries have put in place point to a temperature increase of 2.8°C by 2100.

The 1.5°C target remains for the signatories of the Net Zero Wealth Manager Commitment and members of the Net Zero Asset Owners Alliance. Each signatory has committed to support the goal of net-zero greenhouse gas emissions by 2050 and to benchmark emissions from their portfolios against science-based pathways that limit warming to 1.5°C.

A high-level group of experts was convened by the UN Secretary-General earlier this year to make recommendations on how to ensure that such pledges do not encourage greenwashing. The group’s report was released at COP27 and the recommendations say financial institutions are doing, among other things 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 action by this ecosystem of actors is important, it is crucial that governments deliver on their own net-zero commitments.” This reflects a clear statement by asset managers and asset owners that their ability to decarbonize investment portfolios while maintaining their fiduciary duty to clients depends on appropriate government action. Net Zero Asset Managers’ commitment states that it is “made with the expectation that governments will honor their own commitments to achieve the objectives of the Paris agreement to be made”.

plans and commitments

In the UK, investors are concerned about the possibility of a gap between the government’s legally binding net-zero target and existing policies to achieve an orderly transition of the assets in which they invest. If governments aren’t doing what it takes to “keep 1.5 alive,” how can investors deliver what’s needed?

This challenge explains another recommendation by the UN Expert Group that non-state actors direct their foreign policy and engagement efforts (and those of their trade organizations) towards the goal of reducing global emissions to net-zero by 2050. The Investment Association has a Position on Climate Change and Annual Action Plan to demonstrate to our members that our advocacy plans are compatible and consistent with their own environmental promises.

This may be new territory for industries such as wealth management, whose advocacy has traditionally been somewhat narrower and sector specific. But through the commitment to a really macroeconomic reconciliation to net zero, requiring a transition in most, if not all, of the assets we currently invest in, governments have placed the pursuit of an orderly transition at the heart of how the industry is serving its customers.

The Investment Association is a member of the UK Task Force on Transition Plans which has spent this year developing an industry-neutral disclosure framework. This will help companies develop robust net-zero transition plans and enable investment managers to make more informed investment decisions.

In order for investment managers to properly assess the feasibility of these business transition plans, the government needs to detail how decarbonization policies will change. It is critical that government agencies dealing with all aspects of the “real economy” understand and provide the level of detail that businesses and investors require.

Regular and active dialogue between private financial institutions and government is essential to ensure that investments underpin economic growth and support an orderly transition, in line with global efforts to limit warming to 1.5°C.

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