Decarbonising the atmosphere is the most ambitious target that’s been set to limit rising global temperatures to within the levels set by the Paris climate agreement. But putting in train the processes that can achieve that target is proving difficult.
The financial system will be key to finding the resources to bring that change. But as the most recent A-Team Group ESG Insight webinar made clear, that’s not proving to be an easy task. While banks, asset managers, pension funds and insurance firms are taking huge steps to ensure their portfolios are working towards a net-zero carbon future, they are facing stiff challenges.
The chief difficulty they have is sourcing the right data to benchmark and track their progress. Some are also struggling to find the right technology and business models to help them reach their goals, according to panellists on the webinar, which was entitled “From Data to Impact: Empowering Asset Managers and Owners with ESG Solutions for Net Zero Transformation”.
Industry Collaboration
Progress is being made, said the panellists, who were represented by senior ESG market participants. Through several voluntary alliances, asset managers, owners and insurers who control almost US$70 trillion dollars are working together to establish best practices, set targets and share information on reaching net-zero in the coming decades, said Anne Scott, global climate solutions lead at Aegon Asset Management.
Through these groupings, financial institutions are establishing a blueprint about what a net-zero strategy looks like and highlighting the tools that are available to help reach them.
However, the alliances have been undermined recently by departures from their ranks by companies – particularly asset managers – concerned about greenwashing within the net-zero frameworks and the fear of legal action. This needn’t be seen as an indication of waning engagement with the sustainability project, argued Elisabeth Seep, head of sustainable investing products at Rimes. Instead, she said, it illustrates the critical importance of transparency in setting and monitoring the pathways towards net-zero – and that comes down to data.
Like all ESG processes, data is the fuel that keeps the net-zero engine running. Investors want to be able to see clearly what their portfolio companies are doing to decarbonise their activities and how close they are to reaching their net-zero goals. But like all other ESG pieces, that data isn’t always there, and when it is it’s often derived from proxies or estimates, which need to be updated and enriched as direct data becomes available.
The situation is likely to ease substantially in Europe with the first disclosures next year under the European Commission’s Corporate Sustainability Reporting Directive (CSRD), which will bring the directly submitted data of around 55,000 companies into institutions’ systems. Importantly, said Laurent Babikian, global director of data products at CDP, is that the directive will require that data to have been verified by third-party assurers first.
This, he said, will bring a greater level of confidence and trust in the data and act as a bulwark against greenwashing.
Optimal Information
With this will also come transparency, which is vital for all stakeholders to get a view of portfolios’ progress towards net-zero and the risks that they face. That applies to communicating how data is used, argued Wendy Walford, head of climate risk at Legal & General, who said stakeholders needed to know how much of a change in progress is due to actual decisions and actions taken by the underlying companies, and how much of it was due to evolving data and methodologies.
This circumspection also applies to the metrics used to report on progress, she added. Institutions need good quality information to be able to make optimal decisions.
While many companies may appear to be making progress towards reducing their carbon footprints, statistics offered by Babikian suggest the picture isn’t as rosy as it might seem.
He cited a survey of 1,500 companies that found just 5 per cent of companies had made net-zero commitments that were aligned with the Science Based Targets Initiative’s (SBTi) pathway to reducing global temperatures to within 1.5 degrees Celsius of pre-industrialisation levels. This even though half of the companies had said they met those criteria.
That means more needs to be done to bring companies within reach of the Paris targets. And to do that, the panel agreed, meant greater harnessing of data and analytics.
For Scott, validation of that data was also essential, and Walford argued, also, that being aware of the changing face of ESG regulations would put organisations in a strong position to meet their goals. Getting the net-zero piece right, concluded Seep, would bring huge benefits of portfolio growth and reduced climate while also lessening the likelihood to exposure to greenwashing.
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