As demand for net zero rises, what are the opportunities & challenges for investors in the low carbon transition?

As the world faces an uphill struggle to meet ambitious low carbon emission targets, CAMRADATA’s latest whitepaper, Low Carbon Transition considers what are the most effective ways to drive change through investment.

The whitepaper includes insight from firms including AXA Investment Managers, Jupiter Asset Management, Wellington Management, London CIV, Nest, Redington, Lane Clark & Peacock, ShareAction and Principles for Responsible Investment, who attended a virtual roundtable hosted by CAMRADATA in June.

The report highlights with the advent of the European Union’s Sustainable Finance Disclosure Regulations (SFDR) in March, and further major policy announcements expected during COP-26 in November, economic decarbonisation gathers apace.

Meanwhile, ESG demand continues to rise, as the importance of investing in a sustainable future has become clearer than ever since the onset of Covid-19.

Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “Many industry players have pledged to integrate ESG criteria across their businesses, while companies and governments alike have made commitments to achieving net zero emissions by 2050 or sooner. But scientists have warned that emissions need to be cut by 45% during this decade for global warming to be kept to a maximum of 1.5C, beyond which the risk of droughts, floods, and extreme heat significantly increases. Despite the challenges, plenty of opportunities lie ahead for investors. Our latest whitepaper explores the most effective ways to drive change, and suggests that capital allocation will play a crucial role in the low carbon transition.”

Every asset manager and owner represented at the CAMRADATA roundtable has a Net-Zero target in place. But there is still plenty of detailed work to do translating that target into everyday practice and monitoring progress. The discussion began with the asset managers explaining their position, before turning to how asset managers can help long-term asset owners in the energy transition.

Other discussions focused on what one policy would most assist the transition to a low carbon world, and how asset managers engage with issuers of stocks and bonds in order to aid the energy transition. The panel closed with a return to the opening theme of establishing net-zero carbon targets and milestones based on as-accurate-as-possible data.

 

Key points were:

 

  • UK and European managers tended to account for carbon in their portfolios using the Picard methodology. US-based managers, on the other hand, preferred Weighted-Average Carbon Intensity.

 

  • One panellist said their clients expect them to help them reach their sustainability objectives via reasonable pathways. There is a need for ongoing communication between manager and clients, and they were positive on the future of such collaborations.

 

  • For all the efforts made thus far to improve sustainability, humanity is still failing to meet internationally recognised scientific targets for curbing greenhouse gas emissions and preserving natural capital.

 

  • When asked what one policy would most assist the transition to a low carbon world, one panellist suggested a form of global carbon pricing based on countries’ GDP. This would see richer countries support developing countries to grow economically with less reliance on fossil fuels.

 

  • Another said that there was no ‘silver bullet’ but making education on climate change mandatory for the members of boards of public companies would be an effective policy. This would help to counter some of the short termism still prevalent in corporate culture and financial centres.

 

  • Carbon pricing needed to be holistic to aid the costs of a just transition. A panellist said they feared that, even if implemented, a carbon tax could be gamed by unscrupulous operators, adding that the G7’s recent measure to establish a minimum corporate tax globally was a more realistic first measure than minimum carbon pricing.

 

  • Some UK pension schemes are in “pushback” mode and want answers to how climate change represents a strategic risk to them; and how the transition manifests itself in terms of new opportunities.

 

  • Discussing how asset managers engage with issuers of stocks and bonds in order to aid the energy transition, one said that engagement was an enormously powerful tool.

 

  • One asset manager agreed and said they had approximately 15,000 meetings every year with C-suite executives of corporations around the world. They said companies listen to and engage with them in a constructive way.

 

  • A final point made was that no one should be waiting for perfect standardisation. Companies select various ways to present their earnings, for example, and everyone is used to evaluating the differently-presented data, but the industry can get hung up on the false reassurance of data.

 

  • Another agreed that complexity was no excuse for inaction. They said back in 2014 companies would use the lack of standardisation on emissions reporting as an excuse to do very little. But climate change is now an emergency.

 

  • The discussion concluded on a positive note, that the reliability of corporate figures detailing sustainability now has the ear of the most powerful people on the planet.

 

Additional insight is offered in the whitepaper with three articles from the sponsors:

  • AXA Investment Managers: How climate metrics can guide institutional investors towards their net zero goals’
  • Jupiter Asset Management: ‘How to value the low carbon transition’
  • Wellington Management: ‘A framework for net zero in low turnover credit’

 

To download the ‘Low Carbon Transition’ whitepaper click here.

 

For more information on CAMRADATA visit www.camradata.com