By David Atkin, CEO, Principles for Responsible Investment
This article originally appeared in Capital Monitor.
For the financial sector to play a meaningful role transitioning to net zero, investors must commit to goals aligned with the best available science.
In March the Intergovernmental Panel on Climate Change (IPCC) launched its latest Synthesis Report, issuing a final warning for the planet. A ‘liveable sustainable future for all’ is still within our grasp, but the window of opportunity is closing. Our actions – or inactions – until the end of this decade will matter the most. Every fraction of a degree, every year matters as risks increase with every increment of warming.
“This report is a clarion call to massively fast-track climate efforts by every country and every sector and on every timeframe,’ remarked Secretary-General Guterres. “Our world needs climate action on all fronts – everything, everywhere, all at once.”
As a collective, we have not faced a challenge so great as climate change before, and its twin goals of reaching net zero and limiting warming to 1.5c. The level of commitment and pace of change required from policymakers and the private sector alike are unprecedented in recent economic history. The role of investors now has never been more important in enabling the transition and facilitating systemic change to low-emission solutions.
The good news is many of the tools, resources and solutions investors need to tackle this challenge already exist and there are clear levers we can pull in the immediate future to build the momentum we so greatly need.
This is the year of transition planning. For the financial sector to play a meaningful role in delivering the collective objective of transitioning to net zero economies, businesses and investors must commit to goals aligned with the best available science and set out clear plans on how they are contributing toward them.
Develop and engage on credible transition plans
Net-zero goals and transition plans are becoming the new norm in private sector ambition, though quality, decision-usefulness, comparability and credibility must be improved; accountability and transparency are key cornerstones of any effective transition plan.
The development of consistent guidance and standards for transition plans is already in train from international bodies like the International Sustainability Standards Board, the Glasgow Financial Alliance for Net Zero and regional bodies like the UK Transition Plans Taskforce. They will create multiple benefits, including enhancing transparency and accountability around net-zero targets, communicating the internal and external policy changes required to deliver on climate ambitions and enabling more informed decision-making.
Effective stewardship, with the explicit focus of delivering sustainability outcomes and impacts, is one of the key levers at the disposal of responsible investors. By pursuing sustainability outcomes and impacts through stewardship, investors can mitigate system-level risks – including climate change, biodiversity loss and social inequity. This can improve the long-term performance of economies, investment portfolios, and social and environmental outcomes. Such outcomes are aligned with their beneficiaries’ objectives and with public policy goals.
The PRI, alongside the World Bank Group and Chronos Sustainability, have produced tool kits on the sustainable financial system reforms that are needed, including a recent edition on stewardship.
Prioritise active ownership and effective stewardship
Making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development requires foundational changes to public policy. Financial policies and regulations have played an important role in supporting the emergence and growth of sustainable investment practices. Yet, despite this progress, current financial flows, and the business models they support, are still not consistent with net zero, climate resilient development pathways that work for people and the planet.
For responsible investors to play their part, the industry must be supported with complementary policy action, from governments around the world. We need to enable sustainable systems and remove the barriers stymying the flow of public and private capital to climate solutions.
Step up policy advocacy
Clear long-term policy goals designed to enable and incentivise long-term thinking, can provide certainty for investors and companies to implement their net-zero strategies and transition plans. This will in turn support investors’ confidence to allocate capital toward net zero.
The IPCC’s report was clear – we need swift action which sets the stage for an equitable transition to net zero. As the window for remedial action is closing, decisions taken today must be aligned with the long-term goal of a low-carbon future.
Take a unified approach
A resilient and sustainable world can only be achieved when governments, civil society and the private sector work together. With time running out, we all need to be pushing in the same direction. We simply can’t afford any more delays and efforts to slow progress such as we continue to see from parts of the fossil fuels industry, amidst recent anti-ESG backlash in the US.
The UN Secretary-General called on leaders of oil and gas companies to be part of the solution. Indeed, they have a critical part to play in conjunction with investors. Responsible investment is inherently apolitical, and we must bring all industries, including fossil fuels, along on this journey – helping them recognise the incentives to work with rather than against us.
Although climate change has topped the investor agenda for a number of years, the UN Secretary-General’s message serves as a call for all of us to move even further and faster. The solutions already exist and now is the time for bold, collective action.
And the case for investor action is clear. Not only is it permitted by law but is in many cases required to ensure the ability to generate returns in the long-term as a core fiduciary duty and benefit from the opportunities associated with the shift to a net-zero emissions economy. Ultimately, the future of market stability and the prospects for people and nature in every corner of the world depend on it.
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.
