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Working towards a greener financial future

Investors must focus on real-world impact to enable the transition to net zero

By Eva Cairns

Climate change is one of the largest threats of our time and impacts not only future generations, but also many countries and companies around the globe today.

Tackling it requires trillions of dollars of investment every year to transform our world into one that emits net-zero greenhouse gases. It also requires public and private sector collaboration and the right incentives and infrastructure to accelerate the transition at the rate needed.

As we look ahead post-Cop26, it is clear that promises need to be translated into binding actions, not just to decarbonise, but also to build resilience and adapt to the physical impacts of climate change. The recent Intergovernmental Panel on Climate Change report on climate impacts, adaptation and vulnerability emphasises that impacts will be severe and, in some cases, irreversible – even if warming is limited to 1.5°C. Investment in adaptation is therefore just as important as mitigation.

In November 2021, during Cop26, the UK government announced it would become the world’s first net-zero-aligned financial centre. Under the proposals, there will be a requirement for all UK-based financial institutions to produce credible transition plans setting out their decarbonisation strategies in order to meet net-zero 2050 targets.

We welcome and support this initiative and transparency as we strongly believe that unified, clear standards are an integral component to success. However, it is also important to recognise the complexity of being a global UK-based company working across continents with different commitments and policies and the challenges that can bring.

Achieving net zero – the importance of real-world decarbonisation

To reach the global ambition of net zero, we believe that the asset management industry has a significant role to play in allocating capital that can support the transition and invest in the new climate solutions the world needs. To do this, the industry must seek real-world decarbonisation – that means supporting the transition of carbon-intensive sectors through active ownership.

We believe that this is a more effective strategy than simply decarbonising portfolios by moving away from these sectors. We aim to meet our own target to reduce the carbon intensity of our portfolios by 50 per cent by 2030 by delivering on our Net Zero Directed Investing strategy. It is underpinned by research and data to ensure that we are truly integrating climate change factors into our investments.

We also have a range of investment solutions that enable clients with climate goals to meet them. Our membership of the Net Zero Asset Managers initiative demonstrates that we are committed to supporting the path to net zero and will collaborate with clients to increase our assets under management (AUM) aligned with net-zero goals.

Another critical factor in reaching net zero is active ownership via engagement and voting. We engage with our investee companies to understand how they consider climate risks and opportunities in their business plans and the credibility of their transition strategies. We engage with companies across our equity and credit holdings seeking transparency on progress against clear transition milestones assessed against relevant standards such as the Climate Action 100+ net-zero benchmark. We will divest from these companies where, after two years, we consider insufficient progress has been made against the transition milestones set.

Accelerating the transition

In order to accelerate the transition, the promises made at Cop26 need to be put into practice. Bolder, collective action is desperately needed both to achieve the overall climate goal and for corporates and asset managers to achieve their own net-zero ambitions. Importantly, developed nations should move faster and support developing nations in their transition. The side agreements made at Cop26 are usually not legally binding and we are concerned they will not be transposed into concrete national legislative changes at the pace required.

Bolder, collective action is desperately needed to achieve global climate goals Critically, countries’ aggregate nationally determined contributions (NDCs) would still take us to a 2.4°C world according to the latest Climate Action Tracker analysis. This is broadly in line with our own climate scenario analysis where our mean climate scenario results in temperature rises of 2.2°C. Effective incentives in the form of appropriate carbon pricing are absolutely critical to enable capital allocation in line with net zero and create an investment environment that rewards companies and investors that take climate action.

Together, the private and public sectors can collaborate to accelerate the pace of change and we are looking to Cop27 in November 2022 in the hope that updated NDCs will take us closer to the 1.5°C goal. This is the decade in which global emissions need to be halved and we’re rapidly running out of time.

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