FTSE Russell Insights

Making sense of climate collaboration

David Harris

Head of Sustainable Finance, Strategic Initiatives & Partnerships

Investors are increasingly working together in response to climate change—this type of collaboration is extremely powerful. Investors are now recognised as critical players to catalyse global decarbonisation. Outside of engagement there have been a variety of other investor climate collaborations to share experience and develop frameworks for investor action on climate. Each of these initiatives can be valuable, but the proliferation risks confusing newcomers. A new report from the PRI and LSEG summarises the key investor initiatives, and the tools and frameworks that have been developed to help investors navigate them.

Ever since climate change emerged as a financially material issue for investors to consider, debate has raged over the appropriate response. Carbon footprinting, fossil fuel divestment, climate-themed strategic investing, carbon-tilted indexes, climate scenario analysis, and transition pathways have all become part of the evolving climate change investment toolbox.

However, in the wake of the 2015 Paris Agreement, which calls for a balance between anthropogenic greenhouse gas emissions and carbon sinks by the second half of this century, a consensus has emerged around ‘net zero’.

Since the UK became the first major country to put a net-zero target in law, in June 2019, countries accounting for around 70% of global GDP have committed to balance their carbon books by the middle of the century (most have opted for 2050; some, for example China, 2060).

They join hundreds of companies, large and small, and, increasingly, the financial sector, including institutional investors. This movement towards net zero is accelerating ahead of the critical COP26 climate talks, due to take place in Glasgow in November, which are expected to accelerate international action to cut emissions. 

But making a net-zero commitment is the easy part. Putting entire investment portfolios on a pathway towards net-zero emissions is an undertaking of great complexity, even over a 30-year time horizon – and one that would stretch the resources of any individual institution, no matter how large.

As a physical phenomenon, climate change is characterised by considerable uncertainty. The policy response, too, is uneven. So is the evolution of public concern about the issue, and the development of the technologies needed to solve the problem. Corporate disclosure on the subject is inconsistent, with ongoing disagreement about what information companies should disclose.

In response, investors have come together in several collaborative initiatives. They have chosen to pool resources to engage with companies and policymakers on climate, and to develop tools and frameworks to help them understand the issue. Most recently, they have collaborated in setting targets and disclosing their progress towards these targets.

Initially, these initiatives have tended to involve institutions at the leading edge of the responsible investment movement. These are investors who have already expended considerable resources thinking about their response to environmental, social and governance issues in general, and climate change in particular.

However, the growing societal consensus around net zero is encouraging a much wider range of investors to begin exploring the climate issue. For these investors, the proliferation of these initiatives risks adding to their confusion about the subject.

In response, the Principles for Responsible Investment (PRI) and London Stock Exchange Group have produced a short report, The investor guide to climate collaboration: from COP26 to net zero | Engagement guide | PRI (unpri.org).

It provides an introduction which summarises PRI knowledge on factoring climate change in as a part of the investment process, engagement strategy, and disclosures, and how it could theorise potential target setting.

It then explains the three main COP26 investor initiatives: Race to Zero, the UN-convened Net-Zero Asset Owner Alliance, and its sister body, the Net Zero Asset Managers Initiative. It also reviews other important initiatives, namely Climate Action 100+, The Investor Agenda, Initiative Climat International, the Investor Decarbonisation Initiative, and the Paris Aligned Investment Initiative.

In addition, the report briefly summarises the various tools and frameworks, including the Transition Pathway Initiative, developed to enable institutional investors to collaborate in understanding and analysing climate risk and opportunity, and engage with companies to set credible transition strategies, establish targets, and disclose progress.

Taken together, these initiatives, frameworks and tools provide an enormous resource to help investors to better understand climate change and, crucially, play their part in transitioning the global economy towards a sustainable net-zero future. This report will inform both newcomers and those who have already started their journey to better navigate the advice and support available.

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