Six months on from the marquee COP26, and with six months to go until the next summit, this is an opportune time to assess the progress made against the ambitious goals and objectives set out in Glasgow.
Yet, the recent comments by HSBC Asset Management’s head of responsible investment illustrate how much further we have to go. The comments were ill-judged and wrong-headed, but they highlight the need for honest conversations about the extent to which climate finance – and sustainable finance in general – is genuinely helping to combat climate change and other sustainable development goals.
While almost everyone has dissociated themselves from his comments about not caring about climate change and whether Miami is underwater, there has been some support for his questioning about the sector’s ability to contribute to real change. Are we actually making any difference? How do we need to act to drive real progress?
These questions are central to considering how the investment profession should support the transition to net zero. At a recent City of London summit on net-zero delivery, Mark Carney conceded there may need to be further investment in fossil fuels to support the transition, particularly in light of the need to find alternatives to Russian gas.
Sarah Breeden, his past colleague at the Bank of England, also noted it might be better for investment firms to continue to provide capital to fossil fuel firms and to steward them towards a transition rather than to divest.
As she observed: “Paper decarbonisation does not reduce emissions and worse risks making us think that we are making progress when we are not…we cannot push emissions into the shadows.”
Investing in what’s already green holds its own challenges, but investing in what is now brown to help it become greener is just as important and more complex.
When might a step back be allowable to enable a borrower to then take two steps forward? How should investors assess the relative merit of different plans?
The recent consultation paper from the UK’s Transition Plan Taskforce provides some clues.
In her introduction, Amanda Blanc, Aviva CEO and co-chair of the taskforce, points out “the tangible changes we urgently need will only come about when the private sector has robust, detailed plans that set out precisely how they will achieve their ambition. And for these transition plans to be an effective roadmap to a low carbon future, they must be consistent, credible and ambitious…No-one has ever decarbonised an entire economic system before. The scale of the challenge is enormous, but so are the opportunities.”
So, those seeking capital are going to have to figure out how to communicate with capital providers and capital providers are going to have to figure out how to understand what they are being told.
And, while there is important work going on around how this information can be shared (despite the apparent weakening of the government’s support for the Sustainability Disclosures Requirements) the investment profession is being challenged to get started before we even really have a common language in place.
The UK government’s definition of a transition plan is one that sets out how an organisation will adapt as the world transitions towards a low carbon economy.
It should set out a) high-level targets the organisation is using to mitigate climate risk, including greenhouse gas reduction targets (e.g. a net-zero commitment), b) interim milestones, and c) actionable steps the organisation plans to take to hit those targets.
That doesn’t sound too tricky, but when you think about it for more than a moment various questions arise. How should you read a plan? How can you test it? What does good stewardship around a plan look like? How should plan analysis inform securities’ valuation?
The good news is that different workstreams of the Transition Plan Taskforce are on the case. For instance, workstream three is going to make recommendations on how to simplify the assessment, comparison, and interpretation of transition plans by users, how to enhance the capacity of users to effectively use transition plans, and how to enhance the capacity of preparers to produce accurate, robust, and accountable transition plans.
In the same vein, the IIGCC recently published a Net Zero Stewardship Toolkit designed to provide a ‘standardised foundation for climate-related engagement’.
There’s a lot of work ahead of us. We’re designing the playing field at the same time as selecting our teams and building their skills.
In time, we will learn more about the financial materiality of each of these components, about how to differentiate good plans from bad and how to convert that analysis into stewardship and valuation, but we have little time.
We need to learn as we go and to share what we learn so that good practice becomes common as fast as possible.
We can get there and, when we do, the rewards for our clients will be profound both in terms of driving real portfolio performance and driving real change.