The impact of climate change is one of the world’s biggest challenges. At COP26, we’re using our voice to influence action, and show how our climate capabilities can be part of the solution.
The extent of the impact that companies and investors can make depends hugely on the policy framework in which they operate. As COP26 begins, the opportunity is here for policy makers to put pledges into action, and steer the planet more firmly on a course to achieving the Paris Agreement’s objective to keep warming to below 2°C, ideally 1.5 °C, which requires net zero emissions by 2050.
It’s also arguably the last opportunity that policy makers will have to do this. Even after widespread intensifying of targets over the past year, current pledges would see the global average temperature rise restricted only to 2.4°C above pre-industrial levels. This leaves the world far short of what’s needed to achieve the more ambitious Paris target of 1.5°C.
We need bolder, collective action. This includes binding legislation to back up targets, more stringent carbon pricing, more joined-up policies, and greater investment in research and development. There’s also a big responsibility for the more advanced economies to commit to net zero targets, and ease the burden on the emerging economies that will inevitably transition more slowly.
During the pandemic, when much of global society was in lockdown, emissions fell by around 6%. To hit 1.5°C, we need to reduce emissions by 7% each year until 2050. The investment needed to do this is estimated at roughly $2 trillion a year, or up to $50 trillion in total.
While the scale of the challenge is significant, there are signs of hope. The growth of impact investing is encouraging, as people increasingly look to align their investments with the social and environmental issues that matter to them. The allocation of capital, and therefore our role as a provider of investment solutions, becomes increasingly important.
We have a responsibility to ensure we identify how capital can be put to work in a way that is going to create better long-term outcomes. This includes assessing how the carbon intensity of portfolios today might look in the future. Divestment from fossil fuel-intensive firms, for example, can reduce the carbon footprint of portfolios in the short term, but does little to aid the real-world transition to zero carbon energy.
As a signatory to the Net Zero Asset Managers initiative, we are partnering with clients on solutions that allow them to achieve their future goals, while ensuring that the outcomes created align to the real-world impact they’re looking for from their investments. We are committed to increasing the proportion of assets flowing into our net zero-directed investing solutions. Currently, around 30% of our assets under management are to be managed in line with net zero 2050 goals.
We’re continuing to develop these solutions across all asset classes, and to actively engage with our clients. We have launched four climate funds across credit, equities and multi-asset in 2021, which are focused on investing in companies leading in the transition to net zero. And we’re working with Phoenix, our largest client, to develop investment solutions for net zero, including an Active Climate Transition proposition in Equities.
If we can identify the companies that will thrive in a net-zero environment, then we can help our clients to be better investors. Our ability to do this is built on the strength of our insight.
Central to our approach is developing the tools to provide our clients with transparency, enabling them to understand the impact of their portfolios and make more informed choices. The reports we produce for our clients provide a platform to have broader discussions about their sustainable investing goals. We measure and track progress in our portfolios through tools that focus on real-world impact, and bespoke scenario analysis helps clients to manage climate-related risks and opportunities.
To make lasting change, engagement across the assets we manage is critical. As a founding signatory of Climate Action 100+, we work to improve standards, regulation and capital allocation strategies. As active owners, we continually engage with the most carbon intensive holdings across our funds, and provide transparency on progress against clear transition milestones that we set in line with industry frameworks, such as the Climate Action 100+ net zero benchmark.
We are committed to tracking and reducing the carbon intensity of our portfolios, and we’re currently refining our targets in this space, with a focus on ensuring that our commitments remain credible and measurable. We’ll continue to share our revised targets on our website.
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