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The pace and scale of decarbonisation required for net zero will only be possible with the right policy measures and incentives to support growth in investment opportunities
Stephanie Pfeifer is Chief Executive at the Institutional Investors Group on Climate Change (IIGCC).
In a statement published today, investors representing US$41 trillion of assets – over a third of global assets under management – have sent a powerful message to the G7 leaders meeting in Cornwall this weekend. Investors and policy makers must work together to radically raise climate ambition if we are to unlock the trillions of dollars in investment needed for the net zero transition.
We have seen some encouraging progress on climate ambition this year, with increasing numbers of governments and investors committing to net zero targets. Most recently, investors applauded the announcement by G7 finance ministers to introduce mandatory reporting of climate risks for businesses. However, this progress is not enough to deliver on the goals of the Paris Agreement.
As they collectively stand, current Nationally Determined Contributions (NDCs) - each country’s 2030 pledge to reduce emissions in line with the Paris Agreement - indicate a global warming trajectory in excess of 3°C this century. Indeed, as last month’s high-profile report from the International Energy Agency confirmed, despite many pledges and efforts by governments, CO2 emissions from energy and industry have increased 60% since the UN Framework Convention on Climate Change was signed in 1992.
To avoid the worst impacts of climate change, further ambition is needed to align 2030 pledges with limiting warming to 1.5 °C. Similarly, net-zero emission reduction targets from governments are a welcome start, but just as important are sectoral roadmaps setting out how these net-zero targets will be achieved.
Investors have shown leadership by committing to net-zero emissions alignment through global initiatives such as the Paris Aligned Investment Initiative and Net Zero Asset Managers. Investors have also developed a practical tool to set net-zero targets, measure alignment and determine an effective investment strategy using the Net Zero Investment Framework, which is tested using real-world investor portfolios, and with metrics and methodologies that stretch across a range of asset classes from equities to sovereign bonds and real estate.
While it is clear that investors can take significant steps in this context to align portfolios to the decarbonisation and investment pathways needed to achieve net zero, this is only possible in the short term. The pace and scale of decarbonisation necessary for net zero in the longer term will only be possible if the right policy measures and incentives are put in place to support the growth in investment opportunities that meet investors’ diversification, risk and return requirements. And this requires regulation, pricing, and public investment to create the enabling environment for this growth.
For market commitments to translate into the required change in the real economy, we need a policy environment that closes the gaps between climate ambition and policy action.
Agreed expectations from investors
Today’s investor statement shows that there is broad consensus among investors on how governments can close this gap. A first step is that governments must strengthen their NDCs for 2030 before the COP26 climate talks in November, to align with limiting warming to 1.5°C.
Second, governments should commit to a domestic mid-century, net-zero emissions target and outline a pathway with ambitious interim targets that include clear decarbonisation roadmaps for each carbon-intensive sector. This means setting clear timetables and deadlines for the phase-out of fossil fuels and phase-in of net-zero technologies in line with a global carbon neutral economy.
Additionally, governments need to strengthen domestic policies to deliver these targets. This includes near-term action such as removing fossil fuel subsidies, phasing out thermal coal-based power generation and robust carbon pricing. COVID-19 economic recovery plans should facilitate investment in zero-emissions energy and transport infrastructure, and avoid further public investment in new carbon-intensive infrastructure.
We stand at the beginning of a pivotal decade. Investors and governments each have a shared responsibility to act swiftly together and to be bold in their ambition to tackle climate change.