IW Long Reads: No wasting time – Are we doing enough to meet the goals of the Paris Agreement?

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.”

Short-term targets

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.”

Disclosures

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.

A bitter aftertaste? The failed Deliveroo IPO could prevent growth shares from listing in London

The UK’s IPO market had a very buoyant second half of the year in 2020 as investor sentiment recovered from historic lows, with 13 companies floating onto the AIM market compared to ten IPOs that launched over the same time frame in 2019.

The AIM All-Share index also significantly outperformed the FTSE 100 over 2020, returning 21.8% compared to its flailing blue-chip counterpart’s loss of 11.6%.

Deliveroo IPO falls nearly a third as investors succumb to ‘anxiety’

The picture seems more muted this year, however, with the FTSE 100 outperforming the AIM All Share by 1.3 percentage points with a total return of 5%, according to data from FE fundinfo.

Deliveroo has been the latest IPO to hit the headlines, with the highly anticipated flotation snubbed by asset management giants including Aviva, Aberdeen Standard and M&G in the run-up due to concerns regarding its workers’ rights and its dual-class share structure.

Upon floating onto the AIM last Wednesday (31 March), the company saw more than £2bn wiped off of its £7.6bn valuation after its share price tumbled by more than 26% during its first day of trading.

Ketan Patel, who manages EdenTree’s Responsible and Sustainable UK fund, said he chose not to invest in a business model “which has little to commend for ESG investors, where the relationship between capital and labour is so asymmetrical”.

“The rise of the ‘S’ in ESG during the pandemic has highlighted social inequity and injustice within society,” he reasoned.

“The Deliveroo business model is best characterised as a race to the bottom with employees in the main treated as disposable assets which is the very antithesis of a sustainable business model.”

Sophie Lord, executive director of strategy at Landor & Fitch, added that the backlash to Deliveroo’s IPO is a reminder that ESG investing is “more than green commitments and pledges to reach net zero”.

“The ‘S’ of ESG – societal commitment, people, inclusivity, diversity – is just as important and brands that fall foul of this are putting their own sustainability at risk,” she added.

While the company’s IPO was hotly anticipated – in part – due to the mass uptick in demand for takeaway deliveries during the pandemic, numerous studies and surveys have shown that demand for ESG-compliant portfolios has also increased significantly.

Research from Calastone published earlier this month found that 84% of all equity fund inflows globally were into ESG-specific products.

But Lee Wild, head of equity strategy at interactive investor, added that preparations for the float have “not been ideal” aside from any social or governance issues, and that there were “several clear warning signs that all was not well”.

“Firstly, the company does not make a profit, even though the pandemic provided the biggest tailwind it could hope for,” he said.

“That benefit will fade as lockdowns end and diners return to pubs and restaurants over the summer. Remember, too, that Deliveroo had to be bailed out by Amazon last year, and it continues to operate in a highly competitive market.”

Is the problem with IPOs?

In addition to several company-specific headwinds Deliveroo has faced in the run-up to its IPO, risks regarding investing into freshly-launched companies have been well documented. Research from Dimensional Fund Advisors, which studied 6,000 US IPOs from 1991 to 2018, found that on average they underperformed the broader US market by more than 2% per year.

Joshua Mahony, senior market analyst at IG, said Deliveroo’s arrival on the stockmarket has done “far more to highlight the innate risks of investing in fresh listings” than to deliver value to their 70,000 new shareholders.

Ship shape and ready to float? IPO market picks up but headwinds remain for small launches

“This listing comes at exactly the wrong time for shareholders, with rising Treasury yields bringing pressure on growth/tech stocks, and valuations based on a period of massive upheaval for the restaurant business,” he said.

“No doubt, the company has the ability to grow into its valuation over time, but the expectation that we will see poor momentum for pumped up growth stocks does not exactly fill investors with complete confidence.”

Gervais Williams, head of equities at Premier Miton, said Deliveroo’s setback is likely to deter larger growth-orientated stocks from listing in London, but that small-cap IPOs could well continue to thrive.

“I expect many more to come, and brokers tell me they have a long list of potential IPOs in the next three quarters,” he explained.

“In a way, I do not think that the UK will greatly lose out as a result, as one of the key features of the UK stockmarket universe is that it is different from the US.

“If inflationary pressures were to build, and were growth stocks to have an extended period of underperformance, then many investors would start to reallocate capital away from the US into other exchanges that were less correlated. The UK very much meets this criteria.”