Net zero goal needs more alignment

More ambitious and aligned policies are needed to achieve the Paris agreement targets – and to enable investors to make a bigger impact, according to Aberdeen Standard Investments (ASI).

Jeremy Lawson, Aberdeen Standard Investments

The economic costs of inaction in trying to achieve a net zero future by 2050 tip the balance towards much greater policy efforts now.

Without more effective and credible policies to significantly reduce global emissions, the investment community will also start to feel the impact, according to Jeremy Lawson, ASI’s chief economist and head of the ASI Research Institute.

This is based on the key objective of the Paris Agreement to ensure financial flows are compatible with the temperature reduction objectives. It led to a subsequent rush to encourage the financial industry, and the companies in which they invest or lend to, to align capital allocation decisions to the Paris goals.

“If global policy is not aligned with those objectives, capital flows directed by the financial sector will not be either,” explained Lawson.

This is a key reason why most investor and corporate net-zero commitments carry the caveat that they are conditional on government policies becoming aligned with the Paris Agreement’s goals, he added.

New commitments needed

These dynamics shine a spotlight on the COP 26 meetings due to be held in Glasgow in November.

According to Lawson, without more ambitious targets and credible actions, global temperatures will not be held at 2°C above pre-industrial levels – let alone 1.5°C.

As a result, ASI has proposed several recommendations for restoring the credibility of the Paris Agreement.

First, the firm is urging countries to upgrade their emissions-reduction targets, so that the total envelope of global emissions is compatible with keeping temperatures at least 2°C below pre-industrial levels.

Further, it wants as many advanced economies as possible to commit to net zero 2040 targets. “This will ease the burden on emerging economies and increase the possibility of the Paris objectives being met,” said Lawson.

Governments should also back up their targets through binding legislation – which must include more onerous carbon pricing, joined-up policy across all levels of government, and greater spending on “zero carbon” research and development, he added.

At the same time, Lawson believes the regressive effects of higher carbon prices should be offset by funnelling revenue into progressive policy initiatives. These include reforming tax-transfer systems.

Meanwhile, signatories to the agreement should treble the size of the Green Climate Fund and accelerate the Sustainable Development Mechanism to aid the just transition. Plus, ASI is calling on signatories to implement clear climate-disclosure frameworks and standards, in line with the Task-force on Climate-related Financial Disclosures.

“Our recommendations are ambitious, but achievable, and the benefits are incalculable,” Lawson said. “The IEA (International Energy Agency) demonstrated that a net-zero transition by 2050 could lift, not lower, economic activity.”

Managing climate risks

In line with the need for such change, ASI has developed a climate policy Index for the major advanced economies.

“Most developed countries have made progress towards decarbonisation, but there are still no countries with fully credible net zero 2050 strategies,” said Lawson.

ASI has also developed a bespoke approach to climate scenario analysis, which it considers an essential tool for managing the risks and identifying the opportunities associated with physical and transition climate risk.

The approach integrates the macro and micro drivers of climate impacts on asset prices within a probabilistic framework.

“It is vital that investors understand how physical climate change and the energy transition affect the investment returns of the companies and markets they invest in,” explained Lawson. “We believe that doing so will enable us to build more resilient portfolios and generate better long-term returns for clients. It is also increasingly demanded by asset owners and regulators.”