Net zero: The new North Star

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Stephanie Maier, GAM Investments’ Global Head of Sustainable and Impact Investment, discusses the increased commitment to tackling climate change following COP26 as it becomes clear immediate action is imperative.

03 December 2021

It is now widely accepted that there is an urgent need to accelerate the transition towards global net zero emissions. October’s UN report highlighted that the world is set for a disastrous 2.7ºC global warming pathway based on current emissions pledges, making COP26, tasked with “keeping 1.5ºC alive”, the most important climate meeting to date. The conference saw some of the highest emitters, such as India, China and the US, update their national commitments. While the 2070 target date for India’s net zero commitment made headlines, the shorter-term commitments to generate 50% of India’s power from renewable sources by 2030 and commit to a 45% reduction in carbon intensity of the economy is a meaningful shift.

Meanwhile the joint declaration between China and the US to strengthen their cooperation on climate action and to accelerate emissions was important, given President Xi was not in Glasgow in person. There were also new declarations to address deforestation, methane emissions and the acceleration of clean technology deployment. Furthermore, there was explicit private sector support for tackling issues from deforestation to coal, as well as a number of public-private pledges. This more collaborative approach and increased recognition of the private sector’s role in tackling climate change marks a significant paradigm shift.

The question is no longer why we should act to combat climate change, but how. For many corporates, net zero is the new North Star. Businesses are articulating their 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.

Climate Action Tracker warming projections – global temperature increase by 2100

 
Source: Climate Action Tracker (2021). The CAT Thermometer. November 2021. Available at: https://climateactiontracker.org/global/cat-thermometer/ Copyright © 2021 by Climate Analytics and NewClimate Institute. All rights reserved.

The notion of private sector finance ‘at the ready’ was prevalent throughout COP26, emphasised by Mark Carney’s announcement that the Glasgow Financial Alliance for Net Zero (GFANZ) has committed USD 130 trillion to tackle climate change between now and 2050. Notably, GFANZ represents financial institutions who have committed to target setting – but delivery against these commitments will be critical. Nonetheless, the headline number is a significant increase from USD 5 trillion, the amount proffered when the UK and Italy assumed the COP26 presidency. This level of commitment is a signal of what lies ahead. A relatively stable policy environment is behind us and we are entering uncharted territory with increased policy action around the finance sector and real economy. Whether this rewiring is orderly, or more disorderly, will depend on the policies’ clarity and coherence.

What does this mean for investors?

Investors should expect an enhanced focus on disclosure and standards. While the expected harmonisation of sustainability disclosure standards by the IFRS Foundation’s new International Sustainability Standards Board are welcome, they will likely fall short of providing a complete forward-looking picture. The question is whether this will lead to better data or just more disclosure. Shortly before COP26 started, the UK announced it will become the first G20 country to make it mandatory for the largest businesses to disclose their climate-related risks and opportunities, in line with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations, with rules set to come into force from April 2022. On Finance Day at the conference the UK Chancellor Rishi Sunak outlined that 35 other countries have now set dates for introducing climate-related reporting. The key litmus test, as we look to align investment to deliver on net zero, will be whether these standards drive investment decisions or simply encourage further disclosure.

The period from now to 2030 will need to be more than just the decade of action. We believe 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. Business as usual is not 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 real-world emissions reduce and real action is taken that delivers outcomes against commitments.

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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator for the current or future development.

Stephanie Maier

Global Head of Sustainable and Impact Investment

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