Deep Dive: Net-zero urgency is understood

The urgent need to accelerate the transition towards global net zero emissions is now widely understood. October’s UN report highlighted that the world was set for a disastrous 2.7°C global warming pathway based on current emissions pledges, making COP26 the most important climate meeting to date, tasked with “keeping 1.5°C alive”.

The conference saw updated national commitments, including from the highest emitters such as India, China, and the US. Meanwhile there was explicit private sector support for tackling issues from deforestation to coal, and a plethora of public-private pledges too. This more collaborative approach and increased recognition of the private sector’s role in tackling climate change marks a significant paradigm shift. 

Today, the question is no longer why act to combat climate change, but how. For many corporates, net zero is the new North Star. Businesses are articulating net zero plans in response to shifting stakeholder and consumer demands, rather than just policy and regulation, and recognising the opportunities the transition presents, rather than just the risks.

The notion of private sector finance ‘at the ready’ was prevalent throughout the conference, emphasised by Mark Carney’s announcement that the Glasgow Financial Alliance for Net Zero (GFANZ) has committed $130trn to tackle climate change between now and 2050. Notably, GFANZ represents financial institutions who have committed to target-setting – but it is delivery against these commitments which will be critical. Nonetheless, the headline number is a massive increase from $5trn, proffered when the UK and Italy assumed the COP26 presidency.

Commitment across the breadth of the finance sector, including investment consultants and service providers, will be critical if we are to ‘rewire’ the financial system and deploy the estimated $125trn investment required to transform our economy and avoid the worst physical impacts of climate change.

This level of investment is a signal of what lies ahead. A relatively stable policy environment is behind us and we are entering into uncharted territory with increased policy action around the finance sector and real economy. Whether this rewiring is orderly or disorderly will depend on the policies’ clarity and coherence.

SOURCE: Climate Action Tracker

So what does this mean for investors? We should expect an enhanced focus on disclosure and standards, and while the expected harmonisation of sustainability disclosure standards by the IFRS Foundation’s new International Sustainability Standards Board are welcome, they will fall short of providing a complete forward-looking picture.

Likewise, the updated Task Force on Climate-related Financial Disclosure (TCFD) metrics and intended new ‘gold standard’ for transition plans to be developed by the UK’s Transition Plan Taskforce will provide valuable improvements to today’s patchy data and disclosure landscape. As we look to align investment to deliver on net zero, the key litmus test will be whether these standards drive investment decisions or simply encourage further disclosure.

In sum, the period from now to 2030 will need to be more than the decade of action. It must be the decade of detail too. Metrics and methodologies to measure progress and sectoral pathways towards net zero must evolve and we need to collaborate and collectively embrace this period of transformation, since business as usual is no longer an option. 

The theory of living beyond our planetary boundaries has been around for decades, but the fact is we are now living at the equivalent of 1.6 Earths, which is already having profound impacts on the climate, biodiversity, water and other natural resources. In many ways, the argument that ‘the road from Glasgow is more important than the road to Glasgow’ rings true. 

Sharm El-Sheikh is the next stop for the COP, and will be even more important, as will every COP until we reduce real-world emissions and implement real action that delivers outcomes against commitments.

Stephanie Maier is global head of sustainable and impact investment at GAM Investments

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