It has been more than five years since the Paris Agreement on climate change was signed by 191 member states, whose official aim is to limit global warming to well below 2ºC compared to pre-industrial levels and make every effort to limit this to 1.5ºC.
Since that historic day in 2016, much has been done in pursuit of this goal. Governments and companies across the world made zero carbon pledges, tactics were discussed, and national guidelines were introduced.
The past two years have seen a particular acceleration in the fight against climate change, as the number of commitments to net zero from governments and businesses doubled and billions poured into ESG investment strategies.
Recent commitments by China, Japan, South Korea and the US mean that today around three fifths of global greenhouse gas emissions are covered by net zero targets.
But are the pledges in place really enough to stop the world from spiralling into a disaster scenario? What proof do we have that companies and governments will honour their commitments? And what more can be done in the fight against global warming?
Jonathan Bailey, head of ESG investing at Neuberger Berman, says that while we are now seeing companies and governments take tangible steps to limit emissions, such as the plan by some national and local governments to ban the sale of internal combustion engine vehicles in the coming decades, “if our objective is to limit warming to 1.5ºC then the aggregate targets that we have in place at the moment are not enough”.
Harry Granqvist, senior ESG analyst at Nordea Asset Management, even goes as far as to say that “the policy pledges that the world’s countries have so far made are critically insufficient for delivering the constraints on global warming set out in the Paris Agreement”.
Rebecca Craddock-Taylor, director of sustainable investment at Gresham House, is also sceptical about the likelihood of meeting the emissions reductions targets required by 2030 to meet the Paris Agreement, pointing to “the way net zero targets are being set but not always audited”.
“Many net zero targets have been publicised with huge marketing campaigns, but fail to highlight the small print – such as only covering scope 1 or 2 emissions, or planning to store carbon using technology that is not available or not viable, while some rely too heavily on carbon offsetting,” she says.
“There needs to be an agreement on how net zero targets can be set, how much reliance can be placed on carbon capture technology and who will audit them to ensure they align with the Paris Agreement objectives.”
Granqvist agrees that an increasing number of companies are making “unsubstantiated claims” about net-zero emissions which are going “largely unchecked”.
“Problems include incomplete emissions coverage, short-sighted decarbonisation horizons, a lack of concrete strategies to deliver on stated ambitions, and an excessive reliance on so-called ‘avoided emissions’ or carbon offsets,” he says.
“We see that institutes such as the Science-Based Targets Initiative and the Transition Pathway Initiative play a critical role in providing checks and balances to corporate emissions targets, and it is positive that more and more companies are being assessed by [them], but we are still far away from the type of transparency and credibility that we need to see.”
Part of the issue, according to Esmé van Herwijnen, senior responsible investment analyst at EdenTree Investment Management, is that current net zero targets are long term, but companies and governments fail to describe how exactly they will get there.
“Net zero targets need to be followed by short-term, medium-term and long-term targets to reduce emissions,” she says.
To combat this issue, she wants to see “an increase in the number of companies that are setting Science Based Targets”, which she believes will incrementally lead to the Paris Agreement goals being achieved.
Ben McEwen, climate change investment analyst at Sarasin and Partners, also expects that the prospect of a carbon border tax, which is part of the European Commission’s European Green Deal, could incentivise heavy polluters, such as Australia, to improve commitments to maintain their trade relationship with the EU.
But he adds that “despite the ratcheting up of corporate and national level targets, we need to see a sustained pace of emissions cuts if we are to achieve the Paris Agreement goals”.
Positives of Covid-19
The coronavirus pandemic, though devastating for global economies, has brought some positives for the fight against climate change, drawing further attention to the importance of lowering global emissions.
As transport and industries were brought to a standstill, global carbon emissions fell, albeit by just 6.4%, according to academic research.
However, Gresham House’s Craddock-Taylor warns this drop could “lull us into a false sense of security”, and as restrictions lift, “emissions could rise significantly, with people booking more foreign holidays and continuing to avoid public transport” – something that we are already beginning to see.
Granqvist says: “During the height of the lockdown, we could see that global emissions fell at about the same rate that they will need to fall every year until 2050 if we are going to meet the 1.5°C target.
“What the pandemic taught us about emissions is that the type of reductions that are needed going forward can only be delivered by large-scale systemic change, and a return to normal will not cut it.”
Craddock-Taylor also notes there is a risk of greenwashing if emissions reduction targets are set in relation to 2020 emissions levels, since “reducing emissions from a lower base is far easier, but will not help us limit global temperatures to the extent we need to”.
However, McEwen believes that Covid has inspired “a collective awakening that a different way is possible and that the climate crisis can no longer be ignored”, as well as an “increased political ambition to address the climate crisis”.
“The Covid crisis has placed economies and societies at a critical juncture, as fiscal recovery packages could entrench or partly displace the current fossil fuel-intensive economic system,” he says.
“This critical topic has been the subject of extensive analysis and it has been shown that there are abundant policies with high potential on both economic multiplier and climate impact metrics. Building back better is possible.”
For corporates, a crucial aspect of measuring the progress towards net zero targets is disclosure against established frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB), according to Neuberger Berman’s Bailey.
“In the next few years, we believe there will be more data as reporting requirements increase, but the key for investors will be to find signal among the noise,” he says.
He believes investors will be increasingly “judged on whether they helped move companies in the right direction, or were just passive onlookers”, adding that he expects “more clients to explicitly ask us to set net zero investment objectives for their portfolios in the coming years”.
For asset managers, the pressure is also increasing on the regulatory side, with the recent introduction of the Sustainable Finance Disclosure Regulation (SFDR) in the European Union aiming to stamp out greenwashing and hold investment firms accountable on ESG issues, including climate targets.
Similar national frameworks are expected to be implemented outside the EU in the not-too-distant future.
Granqvist’s concern, however, is that while “net-zero is a full value chain endeavour”, at this stage “we do not yet have adequate full value chain methods to measure it”.
He believes there is a need for concrete implementation strategies and robust climate governance frameworks for net zero commitments to truly be effective, but while this issue is “increasingly well understood by the financial industry, we just do not have all the solutions yet”.
Asking the questions
However, this does not mean asset managers do not have the tools at hand to push for positive change. The key question to ask, Granqvist says, is: “When emissions leave our portfolios, where do they go?”
“This means we actively seek out investments in companies that are reducing their own emissions, rather than simply tilting our portfolios towards lower-emitting sectors and countries that might in fact not be delivering any emissions reductions at all,” he says.
As climate metrics improve, Granqvist expects to see “increasing maturity and uptake of so-called corporate ‘temperature scores'” by investment firms, as well as “more scalable and sophisticated approaches to investments in climate solutions providers”.
Naturally, this comes with its own challenges, such as methodologies that do not take into account the positive effects of some products and therefore unfairly penalise climate solutions providers, such as wind turbine manufacturers.
However, the momentum is there to bring about meaningful carbon reduction, and that is encouraging.
After all, there is a reason the ten years leading up to 2030 has been labelled the ‘decade of action’ for the environment – we simply do not have any more time to waste.