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Linda-Eling Lee

Managing Director and Head Of ESG & Climate Research


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With the close of COP26 comes a need for extraordinary action.

Though couched in the language of diplomacy, the agreement adopted in Glasgow, with its call for “financial institutions and the private sector to enhance finance mobilization,” speaks to the pivotal role that investors will play in producing a more sustainable world.

Among investors globally, the will is there. The imperative now is to find a way. Here are three things we can do to help achieve the summit’s promise.

 

Differentiate companies based on their emissions pathways going forward

Today we take companies’ net-zero pledges at their word. But the proof will be in their pathways going forward. That means we need to do the hard work of differentiating which companies in every sector will help us achieve net-zero and which will hold us back.

The work matters because 90% of listed companies are currently on an emissions pathway that would put global temperature rise above 1.5°C. That’s why we can’t simply divest our way to net-zero. Nearly every company needs to retool its businesses, or be replaced by new businesses better adapted for a net-zero economy.


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It’s a tall order. To reach net-zero in the coming decades, today’s listed companies would need to reduce emissions by an average of 10% each year. The track record shows that less than one-quarter of listed companies have managed historically to cut their emissions by that much.

To differentiate companies making progress from those that are stuck, investors will need measures that look forward and that can calculate companies’ complete carbon footprint. They’ll also need measures that can adjust to reflect actions delivered by companies (or not) compared with their intentions.

 

Insist on climate-related financial disclosures across the entire market

Investors need data about climate exposures that can help them reallocate capital toward climate solutions.

Without a holistic picture of companies’ emissions, the locations of their largest facilities and a list of their largest suppliers, investors are left to estimate and to second-guess. Companies also need to set net-zero targets worthy of the task at hand. Some companies aim to achieve net-zero across their entire carbon footprint, while others start with targets that address only a fraction of it.

That’s why we are calling for mandatory reporting of core climate data. It won’t help for only the leading companies to raise the bar on reporting without rules to bring up the laggards. We also need reporting standards that harmonize globally, which is why we welcome the commitment at COP26 to create an international climate disclosure standard.

 

Turn risks into opportunities to ignite the net-zero revolution

Investors know the net-zero revolution can create opportunity. The clean technology startups of today (or to come) could become the most valuable companies of tomorrow.

We don’t know yet who the winners of the net-zero revolution will be. But we do know that it will require development and scaling of technologies that are in their infancy. The world’s asset owners have the capital to fund new ideas, and capital runs toward opportunity.

We also know that the net-zero revolution, like the Industrial and digital revolutions that preceded it, will reach every corner of our economy and society. Five of the 10 most valuable companies in the world today did not exist 30 years ago, which is roughly the time horizon we’re talking about for reaching net-zero.

The decades to come could see a whole other set of companies dominating the market. As our CEO Henry Fernandez told Bloomberg in Glasgow, “We are going to see the most massive reallocation of capital and repricing of financial assets that history has ever given us. It’s a matter of at most years, but it’s already developing fast.”

If COP26 counts for anything, it’s that we must address climate change now, and everyone must do their part. With the right measures and disclosures, investors can do what they do best: allocate capital efficiently to fund the companies of the future that will benefit their portfolios by helping us live more sustainably.


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