The Responsible Investment Expert: How asset management should respond to the climate threat

As CEO of the United Nations-backed PRI, Fiona Reynolds heads the world’s leading proponent of responsible investment. She discusses how capital markets can contribute to the green-energy transition; the relative responsibilities of developed and emerging economies; and the PRI’s priorities for 2020 and beyond.

4 minute read

Fiona Reynolds
Fiona Reynolds, CEO, Principles for Responsible Investment

What are the main impediments to the transition towards sustainable energy, particularly in emerging markets?

In 2016, we set a goal of holding global average temperatures well below two degrees Celsius and pledged to make concerted efforts to limit the increase to 1.5 degrees.

Yet, more than three-and-a-half years on from the signing of the Paris Agreement, a clear gap has emerged between the ambitions we set and the practical actions required to secure the results we so greatly need. This ambitions gap is one of the key challenges in the transition to sustainable energy. At this point, even with full implementation of existing Nationally Determined Contributions (NDCs), we now expect temperatures to rise to 3.2 degrees Celsius, according to the UN Environment Programme’s (UNEP) annual Emissions Gap Report.

In emerging markets in particular (though not exclusively), this gap is exacerbated by other significant challenges: political instability, lack of necessary infrastructure, difficulty in attracting foreign investment and economies dependent on high fossil-fuel sectors, such as coal mining. Furthermore, these countries face the challenge of enabling a just transition – ensuring the interests of workers and communities are fully accounted for in plans to shift to a net-zero economy.

What can individuals, investors, companies and countries do to change the energy mix and reduce emissions in time and at the scale needed?

We need to reduce our emissions by 7.6 per cent annually for the next decade to stand any chance of reaching our 1.5-degree target, according to the UNEP Emissions Gap Report. Achieving this will require critical action at all levels – by individuals, investors, companies and countries. The key is to get all these stakeholders moving together, at pace, towards this common goal.

This process must include setting net-zero targets at a country, investor and company level. We’ve seen some countries already doing this, including the UK, France, Norway, Sweden and New Zealand, as well as investors in the Net-Zero Asset Owner Alliance and businesses that have committed to the Business Ambition for 1.5C Campaign. But further action is still required.

We need to reduce our emissions by 7.6 per cent annually for the next decade to stand any chance of reaching our 1.5-degree target

At the government level, The Inevitable Policy Response (IPR) forecasts a number of key policies, including rapid reduction in the use of fossil fuels (including bans on coal) and a switch to renewable-energy sources; a transition to electric vehicles from internal combustion engines (including bans); a reduction in deforestation and an increase in afforestation; and a higher carbon price.

What are your views on the relative roles and responsibilities of developed and emerging markets?

G20 countries alone account for 78 per cent of all emissions

Successfully achieving the transition to a low-carbon economy will rely on the efforts of all markets – emerging and developed alike. What’s at stake will affect everyone and we’ll fail, or succeed, collectively.

However, as the G20 countries alone account for 78 per cent of all emissions, they will undoubtedly need to bear the brunt of the responsibility. They need to legislate for net zero by 2050 and reduce their emissions more quickly. Currently, only two of the G20 – France and the UK – even have net-zero targets, so clearly there’s a long way to go.

Developing countries then need to closely follow these actions and can already start to leapfrog to clean energy, given the current cost curves.

How can industry bodies such as the Task Force for Climate-related Financial Disclosures (TCFD) help accelerate the transition?

The PRI has brought in mandatory TCFD-based reporting from 2020 for our signatory base

TCFD has become the principal framework for assessing climate risk and has led to increased harmonisation across the industry. Scenario analysis – TCFD’s forward-looking element – has been critical in providing investors and companies with a view of the future and an understanding of how they will be impacted by the transition. This has led, and will continue to lead, to more informed decision making and an understanding of how to align with the goals of the Paris Agreement.

To encourage investor adoption of TCFD, the PRI has brought in mandatory TCFD-based reporting from 2020 for our signatory base. We continue to need transparent, comparable data throughout the value chain to better manage and reduce emissions. TCFD is contributing to this disclosure, which the PRI strongly supports.

We also see asset owners playing a key role in engaging with managers and companies to ask for better data and more transparency. The Net-Zero Asset Owner Alliance is a great example.

What changes in capital markets are needed to meet the Paris targets?

Reshaping the capital markets in order to meet the Paris targets will require engagement throughout the entire investment chain, from asset owners at the top, to investment managers and the companies in which they invest. We will need to see all actors setting, and working to fulfil, ambitious climate targets, starting by committing to net-zero emissions by 2050. In conjunction, we need the necessary policy measures to come into place to enable capital to flow to finance this transition.

In terms of policy, what are some of the weak spots that need to be fixed urgently? Are there possible “quick wins”?

We see potential for quick wins in emissions standards for vehicles and energy efficiency in homes

The IPR shows the pressure for policy action on climate will only increase and come from all angles – environmental, social and economic. The longer the policy response is delayed, the more forceful it’s likely to be.

Some of the major weak spots we see on the policy side include: financing of coal, a meaningful carbon price, fossil-fuel subsidies and decarbonisation of high-emitting sectors. On the other hand, we see potential for quick wins in emissions standards for vehicles and energy efficiency in homes.

What are your priorities in terms of climate change in 2020, and over the longer term?

The 2020s will be a decade for action and COP26 in the UK will be crucial to this, as countries will submit new NDCs, which need to be far more ambitious. A key priority will be to see more countries with net-zero pledges, and governments, companies and investors stepping up to the plate with increased vigour and ambition to help deliver on them.

Alongside this, we need to see policy action sooner rather than later; the longer this is delayed, the higher the cost will be. In addition, we need to see the asset management community voting in line with asset owners and creating more successful shareholder resolutions.

Finally, we’re facing calculated, negative corporate climate lobbying, which is working against our efforts and slowing political, financial and business action on climate change. The effects of this lobbying are currently being played out in the US, where recent Securities and Exchange Commission proposals could see the rollback of shareholders’ rights, creating new roadblocks for investors who wish to signpost critical ESG issues with corporate leaders. Further work to counteract big corporate lobbying is therefore a key priority for 2020 and beyond.

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