Week of 12 October 2020
Carbon emissions declined during COVID… but it’s still not enough. Institutional investors are responding with specific 2025 emissions reduction targets
COVID-19 lockdowns resulted in an 8.8% decrease in global carbon dioxide (CO2) emissions in the first half of 2020 compared to the same period in 2019—a greater magnitude than during previous financial crises or World War II—according to a new study published in Nature Communications. But the study’s authors cautioned that this incidental decline is unlikely to make a major dent in the pace of global warming, signaling that curbing climate change will not happen by accident. Economic actors are taking note; most recently, the UN-convened Net-Zero Asset Owner Alliance, comprising 30 institutional investors representing US$5 trillion in assets under management, launched its draft 2025 emissions reduction targets for public consultation.
- While companies were some of the first entities to set net-zero greenhouse gas emissions targets, financial actors are quickly jumping onboard (though not without some controversy).
- With the rise in regulatory proposals on climate disclosure and growing recognition that climate change could undermine the stability of our financial system, it is clear that investor action is a fundamental force behind reducing emissions globally.
- Roger Baneman of non-profit environmental advocacy organisation the Natural Resources Defense Council aptly sums up what this might look like: “[T]he reshaping of our economy to address the consequences of climate change will require huge changes in investment. But this can happen only if the power of the financial markets is harnessed in this effort. Investment through government spending will not nearly be enough. However, to cause this massive change in investment, there must be market signals to motivate the relevant financial players, such as operating companies, investors, lenders, and insurers. By including climate change in the risks they regulate, financial regulators will help create these market signals.”
- What’s more, by opening up its draft 2025 protocol to public review and feedback (find the consultation form here), the Net-Zero Asset Owner Alliance illustrates the point that financial actors and companies should not set such goals unilaterally. As a matter in which all of society has a stake, everyone should be empowered to shape the transition to a net-zero economy.
What is the Net-Zero Asset Owner Alliance and what is it committing to?
- The Net-Zero Asset Owner Alliance is made up of 30 institutional investors across the globe, with US$5 trillion in assets under management. The Alliance is committed to reaching net-zero greenhouse gas emissions in their investment portfolios by 2050. Members include Allianz, AXA, Aviva, CalPERS, Swiss Re, Nordea Life and Pension and the Church of England, among others.
- With the launch of its Draft 2025 Target Setting Protocol, the Alliance is pledging a 16% to 29% reduction in CO2 emissions by 2025, towards its ultimate goal of net-zero emissions by 2050
- Investors set targets in four areas:
- (1) Sub-portfolio targets—“asset classes where credible methodologies and sufficient data coverage exist today”; this will later be termed “Portfolio targets” as data evolves to cover all types of assets;
- (2) Sector targets—based on intensity of emissions and prioritising the highest emitting sectors: Oil & Gas, Utilities, Transport (civil aviation, shipping and road transport), and Steel;
- (3) Engagement targets—focused on the “top 20 emitters or those responsible for 65% of their portfolio emissions which do not already have Paris-Aligned business transition commitments”; and
- (4) Financing transition targets—” broad, long-term targets which contribute to the net-zero economy.”
- Alliance members are also committing to push public policy on climate change, including “embedding net-zero by 2050 in the post-COVID19 economic recovery framework,” sector-specific policies, and mandatory climate reporting.