Enhancing sustainable finance – how investors can support the transition to net zero?

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Enhancing sustainable finance – how investors can support the transition to net zero?

As the sustainable finance industry continues expanding, asset managers are experiencing further pressure to utilise their financial skills and work towards a greener future.
Last year was a pivotal period where investors started to seriously look at how they could support the transition towards a net-zero economy. Membership of the UN managed Net Zero Asset Owner Alliance coalition increased significantly. A Net Zero Asset Managers program was introduced, and several of the most prominent asset managers shifted their focus on shareholder climate plans and fossil fuel-related asset risks. 2020 was also a pivotal year for environmental social and governance (ESG) stocks which outperformed other major markets during the economic downturn.
While the shift in plans is promising, the reshaping of the financial system will require more than ambition to implement a greener stance. A fragmented approach to regulations and a widening range of ratings and reporting frameworks with differing scoring and sustainability criteria has caused some to criticise the overall sustainable finance movement as disorderly and vulnerable to ‘greenwashing’. While there have been advancements in committing to net zero and climate action, there is still much to be done in terms of solidifying funds and pensions as genuine low carbon, standardising risk reporting and ensuring investors can access all the information regarding climate and transition risks.
Sagarika Chatterjee, director of climate change at the Principles for Responsible Investment (PRI) explains that investors must be a top priority in terms of delivering a more standardised ESG reporting framework. Chatterjee emphasises the needs for convergence, creating a more consistent approach and enabling a comprehensive review of all data provided by businesses. Chatterjee states that regulators are focusing more attention on this issue and will likely play a pivotal role in standardising the overall ESG rating market.
Climate-related risk is another important area, and more businesses are generating annual reports following the Taskforce for Climate-related Financial Disclosures (TCFDs), but there are still some that are ignoring this area. Hannah Simons, the head of sustainability strategy at Schroders, believes businesses shouldn’t let incomplete data be a barrier to delivering climate-related risk disclosures. Simons explains that every business should begin disclosing because as time progresses and you continue to make changes, reports and progress can be updated. Furthermore, Simons highlights that for those that are cautious to disclose climate-related risks may have little choice in the matter. The UK government has announced plans to make TCFD reporting mandatory and Simons highlights that new sustainable finance disclosure regulation due to be implemented in the EU this March will have an impact on the UK. New regulations should offer added support for clients looking to determine which approach to take in terms of ESG integration and impact investing.
Mark Campanale, the founder of financial think tank Carbon Tracker believes a lot more work is required in terms of restructuring the investment sector and reaching net-zero emissions. Campanale believes that solely focusing on improving the ESG market will not deliver the necessary impact on investor portfolios and the transition of capital towards net-zero emissions. Campanale explains that financial models need to be completely transformed, rebuilding the models to enable investors to future-proof their portfolios and ensure they are sustainable, secure and resilient.
Engagement and divestment strategies are other means of supporting businesses with little associated with climate action to embrace the transition to net-zero business models. The last year has seen a surge in activity in both of these areas. The largest asset manager in the world, BlackRock, has confirmed it will explore new approaches as part of a wider sustainability plan and recently voted against directors in preference of climate action at several high carbon intensity businesses. They also put an end to their active investments in major coal manufacturers.
Shipra Gupta, the head of investment stewardship at Scottish Widows explains that divestment will have some impact but emphasised that exclusion from one investor wouldn’t necessarily prevent a high carbon business from exploring an alternative area that has a destructive impact on the environment. The core objective goes beyond improve our portfolios. It is about having a real impact on our world, according to Gupta.
Campanale refers to Legal & General and their new initiative that enables individuals to have a say on how they vote with shares held in their personal pension and insurance schemes. Campanale believes individuals would be empowered, and the public has more of an active role in investment. Campanale also things that the government should look to implement a policy that ensures businesses make default pension schemes low carbon or no carbon.
Several challenges need addressing in the investment sector but it is promising to see that asset managers are aware of the role they need to play in supporting a transition towards a net-zero economy. The sharp decline in the prices of oil and gas indicates the trends that may emerge over the coming years, especially with the rise of carbon taxes and climate laws. Investors that fail to acknowledge the importance of their role in the net-zero transition will possibly lose out.

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