Trends

It has been assumed that there are only three ways for decarbonising your portfolio:

• Divestment from high-carbon industries, such as oil, mining
• Working with companies to adopt carbon mitigation plans
• Offsetting emissions

But, funds can do far more than all this when making new investments. A coalition of 70 funds representing assets of $16tn have designed a “net-zero” framework to remove carbon emissions across their portfolios by 2050. The framework provides a comprehensive set of recommended actions, metrics, and methodologies to enable both asset owners and managers to become “net-zero investors.” The framework identifies five core components of a net-zero investment strategy:

• Governance and strategy
• Objectives and targets
• Sstrategic asset allocation
• Asset class alignment
• Policy advocacy
• Market engagement.

It covers four asset classes:

• Sovereign bonds
• Listed equities
• Corporate fixed income
• Real estate

This will cover the following:

• All banks with total assets of more than NZ$1 billion ($703 million)
• Insurers with more than NZ$1 billion in total assets under management
• All equity and debt issuers listed on the NZ stock exchange
• 200 of the country’s biggest companies and several foreign firms that meet the NZ$1 billion threshold will come under the legislation

This legislation is in line with the government’s policy to create a NetZero country. NZ public sector will be carbon-neutral by 2025 and will also buy only zero-emissions public transport buses.

As companies join the dots between environmental and social well-being and business resilience, the Chief Sustainability Officer’s role is changing.

• Higher Standards – Expectations from the sustainability team have increased as companies now demand higher health, safety and sustainability standards.
• Strategy + Risk – Sustainability is increasingly expected to be part of core strategy and risk mitigation, and the CSO is now expected to be aligned to both strategy and risk teams.
• ESG Reporting -The CSO’s work now matters even more to the CEO and CFO with increased ESG reporting. Further, there is increasing pressure from the financial world to link economic and business performance with sustainability targets to calculate executive pay.

At the moment, 7% of Russian banks already apply ESG principles in their business models, while 67% are preparing for the transition to ESG banking.

Russian Green Finance Guidelines have been issued. These focus on promoting private investment into projects aligned to national and international climate targets.

The Moscow Stock Exchange has created a Sustainability Sector for financing projects in the fields of environmental and social sustainability. The new sector will consist of three independent segments: green bonds, social bonds and national projects.

The global food, land and ocean use system represents up to 40% of employment. Five main areas in this system are in a state of transition. New skills and new opportunities in these areas will contribute to new jobs.

• Protecting the environment and ecosystem restoration
• New agriculture enabled by precision tech and bio-based inputs
• Cleaning up oceans and managing fisheries in new regenerative ways
• Sustainable management of forests
• Transparent and sustainable supply chains

Electricity generation and transportation collectively account for 40% of global emissions. Financing the transition in these two key sectors would need

• Moving capital out of high-carbon activities by through mandatory climate risk disclosure
• Taking climate considerations into financial decision making
• Incentivising green finance instruments

The two sectors would need to pivot in the following ways:

Energy pivots need to include

• Increasing energy efficiency in buildings, homes and cities
• Using renewable energy sources (solar and wind)
• Substituting fossil fuel-generated with renewables

Transport pivots need to include

• Scaling up Electric Vehicles
• Expanding and scaling battery storage solutions
• Helping the transport sector generate and use green energy

Boards usually have governance expertise on accounting matters. After India’s CSR legislation that required board oversight, some of them had started focusing on CSR as well. However, ESG is not CSR. It is about corporate strategy and management oversight of core business in the context of environmental, social and governance standards. With ESG standards gaining momentum across institutional investors, it is now expected that ESG should be a part of the board agenda. Boards need to be trained on the following:

• The difference between ESG, CSR, Sustainability and Brand promise
• What are the company/sector’s core issues and how this will change in the next ten years.
• Global risks, country risks and corporate risks.
• Reputational challenges that can emerge from business as usual.
• The opportunities for change.
• Global momentum on ESG and expectations.
• The challenges of measuring environmental and social risk.

Carbon scores of companies are a result of

• How you make things
• How you source raw materials
• How you ship out finished products

Learning and Collaboration for a zero-carbon future

Even if “how you make things” is standardised, “how you source” and “how you ship” have a significant impact on your carbon emissions, which is why knowledge sharing is so important. While companies make radical changes, there could be others who are only doing things differently-making small changes to achieve a significant impact.

A. Peer learning and knowledge sharing play an essential role in raising standards for a Net-zero world. Reducing carbon is therefore not a one-time effort, it’s a journey in which erstwhile competitors can become collaborators.

B. Cross-sector partnerships also emerge where skills and learnings in one are applied to the other.

5 years earlier than otherwise planned. This is a transition that will eliminate 65% emissions by 2030, 85-90% by 2040 and reach net zero emissions by 2045. This has 5 main implications

• Manufacturing – Germany is regarded as a global engineering powerhouse with industrial giants in automotive, mechanical engineering, chemicals, electric and electronic equipment. Decarbonizing these sectors will have ripple effects across the world too in terms of NetZero manufacturing, phasing out coal and investing heavily in renewables.
• Infrastructure – Since there will be a massive shift towards electric vehicles and low emission fuels, charging infrastructure will be intensified. Further renewable energy investments will mean a change in the electricity grid of the country as well as massive investments in technology infrastructure.
• Climate Finance – to fund the transition across manufacturing and construction, funding will be needed in massive quantities.
• Skills Transition – All the above will mean new skills and new jobs for a country in transition.
• Carbon Strategies – German companies will now need to define their own sustainability targets, assess sustainability risks that may impact their own activities and evaluate principal adverse impacts stemming from their own activities.

These sectors constitute about 30% of emissions but eliminating emissions in these sectors is difficult without using new technology solutions. The path to net-zero is deep-rooted and complex, transformative changes that enable this need science, real-world tools and scale to make the transformative impact we seek.