Net-Zero Commitment ‘Not Concessionary’ Amid Climate Transition

Managing Climate Risk
Suzanne Cosgrove

Suzanne Cosgrove


A slow march toward climate-friendly investments appears to be picking up the pace just as global asset managers, regulators and policy-makers gear up for the 26th United Nations Climate Change Conference of the Parties (COP26) climate talks slated to be held in Glasgow in November 2021.

The COP26 summit, originally scheduled for 2020 but delayed because of COVID-19, aims to get countries to agree on a path toward net-zero global emissions by 2050. 

While a U.N. conference might not seem relevant to finance, a Thursday webinar sponsored by the London Stock Exchange Group (LSEG) and the Principles for Responsible Investment (PRI) hammered home the idea that a bridge between climate science, policy and investment has become crucial. 

A commitment by fund managers to net zero by 2050 “is not concessionary, it builds on the work we are already doing by acknowledging that climate change is a material financial risk,” said Jean Hynes, managing partner and incoming CEO at Boston-based Wellington Management. “A transition to a low-carbon economy is underway and is unlikely to reverse,” she said.

“As the world emerges from the shadow of the COVID pandemic, governments, business and the financial world are refocusing on the greatest threat to the well-being of humanity and to the ecosystems on which we depend,” said LSEG and PRI in an investor guide to climate collaboration published in conjunction with the webinar.

Launched in April 2006 with 100 signers, PRI is a U.N.-backed group that now claims to represent more than 3,000 global investment managers and asset owners. 

Sustainability, particularly related to climate migration and water scarcity, is increasingly important to long-term valuation strategies, Hynes told the webinar viewers. As evidence, Hynes cited the physical and investment risks presented by the wildfires in Australia and California, and the extended deep freeze in Texas that affected both power and water sources. 

The impact of climate-related exposures is not fully priced into the market, Hynes said. In addition, “investment in credible carbon offsets should not be the primary tool to reach net zero, but they can be used (by portfolio managers) to continue holding select companies that are on the right track but have not yet achieved significant emissions reductions,” she said.

Addressing regulatory issues, Bob Litterman, chairman of the Commodity Futures Trading Commission’s Climate-Related Market Risk Subcommittee and a partner at Kepos Capital, noted that climate change is expected to affect multiple sectors, geographies and assets in the United States, and could pose systemic risks to the U.S. financial system. 

The CFTC subcommittee’s “recommendation No. 1” was that the United States establish an effective price on carbon consistent with the Paris Agreement, he said, a goal stated in its report to the CFTC published last fall. “This is the single most important step to manage climate risk and drive the appropriate allocation of capital,” and will only happen if a strong, economy-wide price is in place, Litterman said.

As the probability of regional climate-related disasters increases over the next several decades, the cost of insurance, reinsurance and federal backstops also is expected to rise.  “But these are still early days in climate risk management,” Litterman said.

Financial market participants recognize they need leadership from regulators, and also need additional data and analytical tools to monitor and disclose environmental risk, he said. Greater collaboration is needed — the lack of common definitions is hindering efforts by market participants and regulators to manage risk.

Nonetheless, there are many recent positive signs of change, Litterman said. He noted that since the CFTC subcommittee climate report was published, the Federal Reserve, Treasury and other regulatory agencies have evaluated the issue.

Progress is also evident as business organizations like the Business Roundtable, Chamber of Commerce, and the National Association of Manufacturers all now support market approaches to reducing emissions, he said. Even the American Petroleum Institute is reportedly changing its position to back market incentives to reduce emissions, he noted. At the same time, fund managers are pledging to align their portfolios with the transition and investment banks are competing to help investors achieve their sustainability goals.

While global incentives on emissions have moved forward, greater collaboration is key. Until incentives are harmonized, “capital will not flow where it should at the scale needed,” Litterman said. “Time itself is a scarce resource” in the race to insure against the risks from climate change.



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