Net zero alliances and the way forward for our industry

For the investment industry, collective action is at the core of an effective response to the challenges of climate change.

Why we need net zero alliances

The business and financial risks posed by accelerating global warming are well-established, but as a sector, forming a cohesive response to these challenges is still ongoing. What is abundantly clear is that the individual actors cannot tackle this problem in isolation. We still need to establish best practice; fill knowledge gaps; examine the issues, the science and the modelling; and ultimately, understand which policies, industries and countries are progressing – and tailor investment approaches accordingly. 

Acting in isolation will only lead to a fragmented approach and poorer outcomes. This is why we need the Glasgow Financial Alliance for Net Zero (GFANZ)  and the many alliances associated with it, to bring the whole finance sector to the table to support real economy decarbonisation and provide feedback to policy makers on what’s needed to get finance flowing.

The PRI directly supports the following four net zero finance sector alliances, all united through GFANZ:

• Net Zero Asset Owner Alliance  (NZAOA)
• The Net Zero Asset Managers initiative  (NZAM)
• Net Zero Financial Service Providers Alliance  (NZFSPA)
• Net Zero Investment Consultants Initiative  (NZICI).

Creating space to work with policy makers

These alliances help investors and investment service providers create spaces for new investment solutions, identify the policy enablers and call for the changes needed, while still in keeping with their fiduciary responsibilities. Members of the alliances make their own decisions about factoring the risks and opportunities related to climate change, consistent with their responsibility to manage such risk in the long-term interests of their beneficiaries.

Alliance members are at the forefront of pushing the need for market responses to climate change. This is why the PRI supports signatories to collaborate in climate action alliances and views them as being at the very heart of the global responsible investment ecosystem. These alliances serve a vital role in creating test beds for policy makers and regulators to observe and build confidence in good practice - which is why governments and regulators around the world (should) welcome them.

Acting in isolation will only lead to a fragmented approach and poorer outcomes. This is why we need GFANZ and the many alliances associated with it, to bring the whole finance sector to the table.

Recognising different investor needs

Taking a clear-eyed view of the different roles of investors and those who are managing or advising on their money, and why they are different, is imperative. As is the need to address the shortcomings in our financial system so that savers and responsible agents can make the most appropriate decisions. Transition plans for economic sectors, companies and investors, environmental performance benchmarks, disclosure obligations, reporting standards and targets are the tools of transition for finance. It is incumbent on the finance sector to both call for and use these tools, and the alliance landscape is where this work is underway.

Our industry is nuanced, complex and multi-faceted, and each part of it has a distinct and complementary role to play based on its function. Being accurate in this way about our roles in the economy and our progress in sustainable investment need not undermine our ambition. Rather, it is a necessary consideration to translate this ambition to action.

For example, it is entirely sensible that investment managers respond to climate-related risks, with targets that can guide investment strategy and analysis and the products they sell to clients. This is a prudent response to changes in the economy, the climate and environmental risks arising and the critical need for clients to understand what they are investing in. On the other hand, asset owners use targets to align investment strategy with the interests of their individual clients and beneficiaries.

This distinction is important. Our aim should be to realise a market that grasps the reality of the changing world around it, and is transparent, efficient, and trustworthy across the spectrum of sustainability challenges.

Providing tools to guide investment strategies

This much-needed clarity on how different financial actors are using tools such as targets and transition plans will serve to advance the work of GFANZ and the net zero alliances at the forefront of the transition process. Simultaneously, such progression will help safeguard against the criticism levelled against collaborative alliances as they work to support prudent decision making.

The argument that the work of the net zero alliances is rooted in good and prudent execution of fiduciary responsibility is rock solid – our industry knows this. But serving to further clarify where the roles of various players begins and ends will serve to illustrate how our work takes shape in practice.

Supporting investors on the journey

Finance sector alliances and initiatives are necessary, and we should all be supporting them. As the members of these investment alliances know, they are where the work and the transparency start and not where it ends. The work of the net zero alliances is at the very start of a multi-decade process. Nobody should consider the job done yet. While we continue to take on this important work, we must maintain our ongoing commitment to evolving what we do, consistent with the demands of the users of the financial system and the changing world around us.

The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.