World leaders will gather later this year in Glasgow, Scotland, for what could be the most consequential moment for climate diplomacy since the Paris agreement: a United Nations conference at which signatories of the 2015 accord are expected to ramp up their ambitions for cutting emissions.
The event in Glasgow also may be a significant moment for financial markets. Former Bank of England Governor Mark Carney, who was appointed UN Special Envoy for Climate Action and Finance in 2019, has laid out a strategy for building a net-zero world in which every financial decision is made with consideration for the climate. Among his desired outcomes is the development of a portfolio-alignment framework that investors can use to gauge where they stand on the path to net zero.
Currently, opinion is divided. The two co-chairs of the Transition Pathway Initiative, an entity supported by the likes of Pacific Investment Management Co. and UBS Group AG that assesses companies’ preparedness for the transition to a low carbon world, offered a scathing criticism of implied temperature-increase metrics last month. Faith Ward and Adam Matthews said there’s a lack of reliable emissions data to make the computations and the metrics rely on assumptions.
By contrast, the Net Zero Asset Owner Alliance, a $5 trillion coalition of pension and insurance funds, including Axa, Aviva and Calpers, said this month it supports standardization and development of portfolio-warming metrics. Decoene said Axa, which leads the Alliance’s warming-potential working group, is aware of the weaknesses, but it’s still “actively promoting temperature metrics.”
The question of whether portfolio-alignment scores are informative or misleading forms part of a broader question about climate models. A recent paper by a group of academics and climate scientists suggests financial markets may misuse them because they operate on different time horizons and with different priorities, increasing the likelihood of mispricing climate risks and even greenwashing.
Generation Investment’s Blood warned against nitpicking. Even with flaws in the early models, warming-potential metrics can provide insight on the gap between a portfolio’s constituents policies and the goals of the Paris accord, he said.
“If we just continue with incrementalism, we aren’t going to get there,” Blood said. “We may need to rethink the allocation of capital. Perhaps climate impact needs to be the driver of that over the next five years. And perhaps we should debate the repercussions of a three-degree world.”
Action must be immediate and decisive to cut emissions, Blood said, and that should mean changes in the way investors make decisions. “If we have 10 years of great returns and yet are locked into a three-degree world, that is a terrible outcome for all our stakeholders,” he said. “Perhaps we should be measuring returns differently?”
This article was provided by Bloomberg News.