As responsible investors, we believe engagement offers a greater chance for a just and inclusive transition to a sustainable economic model. This is how we have framed our approach to net zero. We will be joining the Net Zero Asset Managers Initiative with three key actions on our agenda:
Action 1: Commitment to real-world carbon reduction
Reducing carbon from the real economy is challenging and must go beyond off-sets. Our concern is that the dominance of Scope 1 and 2 emissions data, which is more readily available, may lead to pressure on investors’ shift away from carbon intensive industries in order to reach ‘portfolio net-zero’ milestones.
Although this may give the impression of decarbonisation, it has likely only shifted the problem. For example, if we take a global equity index and double the weight in big tech stocks you can achieve a 7% reduction in the carbon intensity of your portfolio.
However, if you double your weight in the utilities who are the biggest owners of renewable energy, you will in fact increase the carbon intensity of your portfolio by 5% because of the emphasis on scope 1 and 2. Thus we must be transparent on attribution around how we achieve decarbonisation in portfolios versus the real economy.
Our action is to seek and contribute to better measures of transition. To go beyond simply excluding the ‘worst’ culprits, which could result in a worse outcome and to question if greater impact in the real economy can be achieved by investing in (and engaging with) high emitters with ambitious transition plans.
Action 2: Support for emerging markets
The world needs an inclusive transition plan that works for all its 7.9 billion people. Reduction of carbon in the real economy must include emerging markets, which will account for more than 90% of future emissions. A drive to net zero that excludes, intentionally or otherwise, any place or enterprise could result in no net zero at all.
Emerging market economies need time, support and financial resources to transition. These economies, after all, are not responsible for the bulk of emissions to date and will have one generation to turn their socio-economic systems around. This is unprecedented.
Our action is to make the case not merely for a transition, but for a fair transition that includes emerging markets.
Action 3: Learning from our presence in Africa
Our presence in Africa reinforces the challenge for an inclusive transition. The energy grid in South Africa is four times as emissions-intensive as the UK, which impacts our own scope 1 and 2 emissions. Socio-economic challenges are intrinsically connected with the transition.
The Emerging Africa Infrastructure Fund mobilises both public and private capital in sub-Saharan Africa to help address the steep challenges these countries face attaining the Sustainable Development Goals. For example, the Kigali Bulk Water Supply Project will provide the capital city of Rwanda with 40 million litres of water every day. This substantially boosts Rwanda’s drive to have water reach 100% of the population with 500,000 people gaining access to clean fresh water.
In northern Mozambique, the Emerging Africa Infrastructure Fund has invested in a solar power plant that will bring affordable clean energy to 175,000 households in the region. It is the largest solar farm and the first utility-scale plant built in sub-Saharan Africa (outside South Africa).
When we look at sustainability through this lens, it reminds us that the most effective way to address sustainability is to invest proactively. Removing capital from sectors as an incentive for change will not be effective in the timeframes we are working with. The regions in need of the most funding continue to be the most underfunded.
Our action is through developing a centre of expertise in supporting transition plans for high-emitting sectors and companies, we can use these case studies to engage more broadly with heavy emitters in other emerging markets. We have a vested interest in South Africa getting on the right path and will contribute and engage in a purposeful way.
As a recent paper from Imperial College noted: “Not all firms can go green, but they can all get engaged in transition.” Instead of risking a disorderly exit from carbon-intensive economies, sectors or companies with a high carbon footprint, we will – where we can exert influence – actively allocate to companies and countries that can be encouraged to deliver on transition plans and have the will to do so. We want to do all we can to bring places and enterprises on the journey to net zero.
This is the approach that has the strongest probability of ensuring a transition that is fair, widespread and permanent.