How COVID-19 urgency can help investors tackle the climate crisis

Amidst the deluge of COVID-19 commentary, there is suggestion that climate change will fall off the agenda of governments, businesses and investors. However, this claim deeply underestimates the resolve of the global responsible investment community.

We stand determined to ensure that the transition to a net-zero economy does not falter in the face of the current crisis or the politics of recovery.

In response to the ongoing pandemic, investors, businesses, governments, and civil society alike are being forced to shift focus and priorities in the immediacy.

Of course, the most pressing health and economic issues must be addressed. At the same time, despite clear challenges, a global focus on bigger-picture social and economic outcomes, climate and sustainability must be maintained and incorporated into our response.

Climate change remains the most serious long-term threat we are facing, and we must ensure it is foremost in shaping the global recovery from this crisis. The current pandemic serves as a harsh reminder that ignoring risks and failing to plan and act decisively on mitigation can carry enormous human and economic costs.

The Transition Pathway Initiative’s (TPI) annual State of the Transition Report highlights this urgency. It shows that while the world is making progress in the shift to a low-carbon economy, in some areas there remains a real lack of action.

In sectors such as shipping, paper and electric utilities the transition is well underway, but others such as oil, gas and airlines are lagging significantly behind. From an investor, basic risk management and social licence perspective, it is no longer acceptable in 2020 that we find 40% of companies are unprepared for the transition and 80% are off-track for a 2-degree world, much less a 1.5-degree one.

It is no longer acceptable in 2020 that we find 40% of companies are unprepared for the transition and 80% are off-track for a 2-degree world, much less a 1.5-degree one

The report underscores not only the need for the transition to be undeterred by COVID-19, but for all stakeholders to push further, faster.

One of the early lessons from the pandemic is particularly salient to the climate crisis. From the response to COVID-19, we’ve seen what is possible on a global scale—the resources that can be deployed, the finances that can be found and the actions that investors, governments, businesses and civil society can take to fight an unseen but emerging threat.

Climate change is visible and it’s here, now. We need to deploy this same sense of urgency and collective action to tackle the climate emergency.

Climate change is visible and it’s here, now. We need to deploy this same sense of urgency and collective action to tackle the climate emergency.

There are recent encouraging signs that investors and some businesses will not be derailed from their efforts. Just a few days ago, following engagement with Climate Action 100+—the $40 trillion AUM-backed investor initiative of which PRI is a partner—Shell made a significant announcement. The global energy company committed to achieve net-zero emissions by 2050, accelerated ambition on its net carbon footprint to bring it in line with the goals of the Paris Agreement and announced a pivot towards serving businesses and sectors which are also striving for net-zero.

As one of the largest energy companies in the world, Shell’s commitment is noteworthy, not least because it comes as the sector is facing substantial challenges from the pandemic, including a slump in oil prices.

The Shell announcement is welcome. Investors, through long-term engagement stretching back to the ‘Aiming for A’ campaigns in 2014, have had a positive impact with Shell.

However, it’s clear there is significant action yet to be taken in the energy sector as well as in several others. With the clock ticking, investors must continue to accelerate direct engagement with recalcitrant boards and highly exposed companies.

This means leadership will be required in key areas, including lobbying, near-term targets and stewardship.

Lobbying 

For the first time this year, the TPI has included indicators around corporate climate lobbying and the results are truly worrying. It finds a mere 6% of companies ensure consistency between their climate policy and the positions taken by the trade associations of which they are members.

These indicators are an important step and will help facilitate further investor focus and civil society opprobrium on companies directly or indirectly engaging in activities running counter to their publicly stated positions. The space in which to fund and hide these corporate contradictions is narrowing.

Near-term targets

The vast majority of goals, commitments and targets are set for the future—for 2050 and beyond. But how do we get from here to there?

We need substantially more work on the pathways required and the interim steps and targets along the way. And these need to be genuine targets, not simply offsets.

To achieve this, we must see investment, research and development in requisite technology, starting now.

Creating the frameworks and incentives for significant capital reallocation and investment is a challenge for policymakers and regulators. Post-COVID recovery plans provide an opportunity for this.

Increased stewardship

To accelerate the transition to a low-carbon economy, investors must ramp up stewardship efforts, engaging companies to adopt a more deliberate approach to climate change.

Deeper engagements with companies around net-zero and lobbying are more important than ever, especially in light of the delay to COP26. This includes through joint initiatives such as Climate Action 100+ and the Net-Zero Asset Owner Alliance, which are proving highly effective in driving real change in company practices.

Collective action and escalation should see an increase in the number of resolutions being filed and, as importantly, publicly supported by major global investors and asset managers.

The composition of boards and replacement of board members who are not aligned to the transition or who are ignoring climate risks must move from investor discussions to the reality of new faces around board tables.

Ultimately, we need investors to dedicate more resources for their own stewardship as well as looking at their investment managers’ allocations. And importantly, we need to see stewardship focus on systemic issues, collaborations, and real-world outcomes.

Climate impacts and the degradation of the ecosphere will create the conditions for future pandemics, a new reality that has already been foreshadowed in various assessments. COVID-19 is an indicator of what’s to come.

In dealing with the current crisis, we will fail if we allow it to defer or delay our response to the overarching one.

In dealing with the current crisis, we will fail if we allow it to defer or delay our response to the overarching one

Harnessing the collaborative spirit, ambition, and urgency with which we’ve responded to this pandemic will help prepare us for the future health risks climate change poses. It also provides the basic model to realise the transition to a low-carbon economy.

In 2017 Fijian Prime Minister and COP23 President Frank Bainimarama addressing world leaders in New York said, ‘We are all in the same canoe.’ COVID-19 is a powerful reminder of this principle. When it comes to the transition to a net-zero future, the whole-economy response to the crisis and climate action, investors have a responsibility to paddle harder.

 

 

This article first appeared in Environmental Finance