The Sustainable Investing Podcast – Net-zero investment frameworks

Eva Cairns: Hello, everyone, I'm Eva Cairns your host for today and you're listening to the abrdn Sustainable Investing podcast, discussing all things relating to sustainable and responsible investing. 

I'm delighted to introduce today's guest, Daisy Streatfeild. Daisy is the director of the Investor Practices Programme within the Institutional Investors Group on climate change - the IIGCC - which supports members to better integrate climate risks and opportunities into their investment processes, decision making and disclosures. She also leads IIGCC’s Paris aligned investment initiative, which has developed the Net Zero Investment Framework as a guide for investors to develop and implement net zero investment strategies and this is indeed a framework that abrdn have contributed to and are using as a foundation for our own net zero solutions. Daisy joined the IIGCC in 2019, from the Inter-American Development Bank, where she was an advisor on sustainable infrastructure investment. She previously worked for the UK government in various program management and policy roles. Daisy holds an MA in politics from the University of Edinburgh, and an MSc in Environment and Development from the London School of Economics. Daisy, it's such a pleasure to have you with us today. Welcome. 

Daisy Streatfeild: Thanks, Eva, and great to be with you today.

Eva Cairns

So let's get started with your career, you've made such a tremendous contribution to investors when it comes to developing methodologies and frameworks for Paris aligned investing and we've spent quite a bit of time and working groups together, going through, you know, working through some of the details. You told me in advance that you used to be a bit of a climate sceptic at Uni, so can you tell me a bit more about that? And what happened to make a choose a career in climate change? 

Daisy: Yes, thanks Eva - yeah, that was almost 20 years ago, now, slightly shamefully. But as a student taught to think critically, I think my attitude was more when I started my environmental politics module of my politics degree was, you know, is this climate change thing really such a big deal? You know, it's just a bit of gas into the atmosphere, how bad can it be? And so, I asked my lecturer, if there was something straightforward, I could read on the science and she gave me a very small but very impactful book called “Dead Heat” by Paul Baer and Tom Athanasiou. And, sadly, I don't think they republished it from its early 2000s version but needless to say that, from that moment, from reading it, there was no other choice for me, but to focus my career on helping tackle climate change. It really changed my direction, and I guess, I don't know if I have that to thank, or not thank, for working for the last 20 years or so, towards trying to help on this issue. 

Eva: That's really great to hear that at Uni you got this moment of inspiration. And I actually, similarly, did Economics at Uni. And my dissertation, looked at climate change, thinking, you know, what is really the cost, the cost of all these climate emissions on society and focused my dissertation on that topic. And then that also took me down the climate change route so quite similar and nice to see that something that you're passionate about, that ends up being the space that you work. 

And so, talking about, I mentioned earlier that you were key in developing the net zero investment framework that was published this year - the final version of it – and this is this is now used by many investors to develop the net zero strategies. But can you tell us a bit more about what is the key message and key strengths of that framework and how can investors really use it to achieve real world decarbonisation impact?

03:54

Daisy: Well, thanks for your kind words about my role in it, but I think perhaps its key strength is that it wasn't just developed by me, it was really a collaborative effort of a huge number of IIGCC members, including abrdn and colleagues in your teams, and who represent a wide range of investors and therefore, we hope it represents a guide that is useful for both asset owners and asset managers of different sizes, types, from different jurisdictions, etc, to help them define and implement their net zero strategies. We also didn't try to reinvent the wheel and really looked across available methodologies, metrics, approaches etc, that were out there from different providers or being used by different investors to identify which of those we felt was the most robust but also practical as methods for both measuring alignments in net zero and also influencing that alignment and achieving that alignment over time. And I think that one of the key messages is that at its heart, it has a focus on investors using all of the levers at their disposal to drive impact on carbon emissions in the real economy. It isn't just about achieving one target or taking one kind of action, it really looks holistically at what investors can do, and how they can measure their progress towards aligning their portfolios, and more broadly, the actions they take with that goal of achieving net zero emissions by 2050. 

It also means it doesn't just go for a sort of simple solution to sort of get to a low carbon portfolio just divesting companies to achieve that, but really encourages investors to be engaging with their companies and assets and investing in a way that means the emissions from those investments are reducing and in line with net zero rather than just passing that problem to another investor by selling their shares in a particular asset, for example. 

Eva: Yes, I think you make a really important point that a portfolio that has a real-world contribution to net zero is not necessarily just a low carbon portfolio. Does that mean it's okay to hold fossil fuels in your portfolio according to the framework if they are transitioning to net zero? 

Daisy: So according to the framework, yes, but it's it's not a blanket yet that all fossil fuels are fine and we don't need to worry. But particularly for existing holdings of companies that are sort of generate revenues from fossil fuels, I think the key that we recommend is engagement with those companies and wanting to see those companies be setting out their own decarbonisation targets and really robust plans to ensure that those assets within the portfolio, even if they are high carbon now, are transitioning at the pace necessary to be consistent with achieving that global goal of net zero. And we definitely think that engagement is that first best approach for having impact, rather than just selling that investment to someone else who might not be wanting or able to engage in the same way. But I think there's a slightly different approach that we recommend when thinking about new capital allocation or additional investment into companies and whether it's relevant to really be adding investment, I guess, into those assets that are fossil fuel based, as it were and so, the framework does recommend that investors reflect what is required by science-based pathways towards net zero and that includes sort of no new thermal coal generation and exploration of tar sands, and their sort of investment decisions should ideally reflect that. And since we published the Net Zero Investment Framework, the IEA  has helpfully published its ‘Net Zero by 2050’ scenario, which sets out pretty clearly the milestones when certain activities will need to be phased out and investors should be taking that into account, either through making sure that the companies they're invested in have strategies that are consistent with meeting those sort of phase-out timelines, or by considering, you know, what they should be allocating additional capital to going forward. 

Eva: Yeah, and I think as you see, it's, it's a lot of it is not just a very simple blanket approach to something but has to be really well thought through and mentioned, then it's your investment framework, obviously, you need to then, you know, have the data to invest in transition leaders, climate solutions, to demonstrate the progress you're making towards that goal of net zero so data is quite key. Do you think we really have sufficient data to assess that real world, decarbonisation impact and portfolio alignment in a meaningful way? 

Daisy:  Yeah, I mean, I would certainly agree that data is the big challenge that a lot of our conversations with investors come back to as to whether they really have the data on companies emissions, and certainly companies plans or targets to be able to assess whether an investment is you know, what their current intensity is, when it comes to emissions and what their likely future trajectory is to understand if they will be investing in the transition or investing in something that's going to be a long term high carbon holdings. So, I think this varies a lot globally. I mean, I think in Europe with a lot of the regulations that have come in that level of kind of data reporting from companies and assets is really growing and it's relatively straightforward in that context for investors to be assessing those parts of their portfolios. I think it's a very different case when you look at emerging markets, for example. And so we recognise that this is a journey that investors are on to be able to improve that data, while they are attempting to kind of manage their portfolios more effectively towards net zero. But we certainly think we shouldn't let data and the challenges there be the enemy of getting started. But it is really important that we're communicating that on a lot of these metrics, we don't have kind of full and comprehensive and necessarily really robust ways of measuring, and this is going to be an iterative process as we go forward. 

Eva: So, data is clearly one challenge. And I think the other challenge is essentially the climate policy support to take us to a net zero 2050 world, you know, looking at the industry assessments that current policies for example would take us to a 2.9 degree warming world compared to pre industrial levels and the pledges to 2.4 degree world,  so really falling short of the goals of the Paris Agreement and so this is also key for investors obviously as a condition to help provide that certainty for capital allocation in line with net zero and now all eyes are on COP26 which is in a few weeks and really critical for making some of these tough climate policy decisions. So what are your hopes and expectations for COP26? Do you think it can really keep that 1.5 degree target alive?

Daisy: Yeah, it's a good question and I think one of our hopes, I think, is that it manages to go ahead despite the pandemic as a first thing, but I think it does look likely that that's going to be the case and then we're looking at what we want to see achieved there. And I think, as you mentioned, currently, with their sort of pledges and targets that individual countries have set, we're not on track for even 2 degrees, and certainly not 1.5 degrees, which is the sort of key goal of the Paris Agreement. And so, of course, the most important thing is about raising that level of ambition to make those pledges consistent, or as close as we can get to that to the 2 and then the 1.5 degree.  And particularly, I think when it comes to the nationally determined contributions, the presentation of the targets that different countries are setting that have been put forward, what we really need to see is a bit more focus on the level of ambition in the short term. I think it's very clear from the scenarios that, you know, it's good to have the term ambition and many sort of countries are beginning to step up on sort of longer term 2050 goals but we really need to understand that the short term and how action that's going to keep us on track on that pathway towards net zero and the progress it's going to be made by countries and the policies in the in the short term because that's really critical. So I would say ambition within the nationally determined contributions, particularly short term targets is key. And we are seeing announcements around this, so there seems to be some momentum, and we hope that really is insufficient to sort of get us all the way as it were.

I think another more specific expectation or hope, and I know that the UK Government is putting a lot of focus on this, is around investment in coal. And we recently heard from the Chinese government, that they will be stopping their support for thermal coal in third party countries, as it were, so external support for coal and I guess we would hope that that is followed on by an announcement around their own domestic use as well because I think that phase out of coal very rapidly is sort of perhaps the most important immediate area of progress that we really need to see to stay on track with the Paris Agreement, so that will be a second area.

And finally, and maybe just sort of speaking personally, because the work we do is very focused on achieving net zero reducing emissions, but we also do think about kind of resilience, adaptation and the risks to investors portfolios from the physical impacts of climate change. And so I think, along with many of the developing countries at COP, we would also like to see progress made on kind of prioritising adaptation. Even in a 1.5 degree world, there's going to be substantial physical impacts of climate change that need to be handled. We're working with our investors to enable them to better manage those risks to their portfolios. And yesterday, they launched a new tool for investor expectations to help investors engage with their companies on physical risks and increasing resilience. And I think seeing something on that also come out of COP, of  really meaningful action to improve the resilience of the global economy would be also very helpful.

Eva: Yeah, I think absolutely, that importance of understanding physical risks, especially, you know, looking at the latest IPCC report that came out in August saying that physical risks will be, you know, even more frequent, even more severe than previously expected, we really need to be prepared for the impacts of that, in addition to you know, decarbonising to reach that net zero goal. 

So definitely quite a lot to take into the kind of investment decision making and as you say, net zero is a big, big topic, and also one of the driving forces – can we say so - in collaboration with others behind the net zero asset managers initiative that we joined at the start of the year. And, you know, we have to be honest, it is a real challenge for asset managers to set targets in this world of policy, misalignment, data gaps and clients with many different objectives. So how can this be overcome? And you know, I know you've had lots of conversations with asset managers on those topics, so can you tell us a bit more about that?

Daisy: Yes, that's part of a lot of my day to day work at the moment, because it's been very exciting to see the number of asset managers who've signed up to make the net zero commitment. And it was really a goal of ours when we were developing the net zero investment framework, that once we had those kind of resources, tools, guidance for investors as to how they can deliver on that zero and set those strategies that then investors would feel comfortable in making those formal commitments to net zero, so we did set up the net zero asset managers as a global collaboration with a number of other networks as well. It's really been very exciting to see from thirty initial signatories to now over 120, I think almost half of the world's AUM has now signed up to the initiative, and that's potentially game changing, which is fantastic. 

But you're right, that its also a challenge. And as I mentioned before, it is going to be an iterative process in terms of gathering data, setting targets and achieving against them, and it's very much embedded in the core of the asset managers commitment is that concept of needing to work with clients to provide kind of products analysis etc, that will enable them to be bold in agreeing to have their funds managed in line with net zero, as well as addressing some of those data gaps. So asset managers only have to declare a proportion of their assets at the moment that we manage in line with net zero. And that's partly reflecting that we know that for certain types of asset class, there are the methodologies or data to be able to really know if you're achieving or measuring your achievement against a net zero pathway. So, while we're having asset managers sign up, and we want them to commit to as much of their portfolio being managed in line with that zero and setting their targets, we're also working in the background with our partners and with our members to address some of those gaps with working groups that IGCC has to look at private equity infrastructure, and now derivatives as well. And so, we are kind of trying to fill those gaps as we go forward. 

Eva: Yeah, that's an interesting challenge. And I just want to talk a little bit more about your own kind of personal inspiration when it comes to change, you know, what, what are the things that inspire you, will have inspired you and keep you motivated on a daily basis? Whether that is, you know, people or any, any books or podcasts, we'd be quite keen to hear your thoughts. 

Daisy: Well, absolutely, for me, it's people more than anything. And I think I'm sort of inspired or kept motivated by the knowledge that people can change things. And we need big changes when it comes to addressing climate change, but people can make that happen. And I think the example I always go back to is, I worked alongside the teams in government in the UK setting up some of the most significant policies and subsidies for renewables in the UK. And I'm still friends with many of them, and because we're geeks, we frequently send each other screenshots from an app called Grid Carbon, which is a great app, by the way, I encourage everyone to look at it. But today, the grid carbon is 146 grammes of CO2 per kilowatt hour, and 33% of that energy is coming from wind. And last year, we averaged more than 40% from renewables in the grid over the average of the year. And people did that. That wasn't magic - it happened from very, very small amounts of renewables in the grids to now kind of approaching half. It's just incredible, what actually the work of people and people deciding to try and address something can have, and now I get to work every day with investors who are working just as hard to look at how they can influence the transition to net zero and set those strategies and manage their portfolios in different ways. And that makes me really optimistic, because I think people change things and when I see just the volume of effort now going into this, this issue, I think it does make me optimistic, even while the challenges is very great. 

As you mentioned, podcasts, I will not be allowed not to mention the podcast I regularly listen to, but it's also to declare a vested interest. One of our members podcasts – ‘Talking Responsibly’ which is Adam Mathews and David Hickey of the Church of England Pensions Board, which I think is excellent. But as Adam is the co-chair of the Paris Aligned Investment Initiative that developed that zero investment framework, I'd be remiss if I didn't give him an advertising opportunity, but it is something I listen to regularly. And  I think really helps kind of with giving an honest view of the challenges and the problems and the complexity of you know, achieving net zero as an investor, and I think is provides some great insight on all of the topics we've talked about today.

Eva: Yeah, no, I fully agree, I think David and Adam are great hosts as well and it's definitely worth a listen. So finally wrapping up our conversation and just looking into the future. Where do you hope the investment industry will be in relation to climate change in about a year's time? 

Daisy: So, it's a really good question and there are so many potential answers, and I don't want to be too greedy with where I hope investment industry ends up. 

I mean, there are obviously some things we're working on in terms of net zero commitments, were it would be great to see, you know, us, you know, increase the same, again, would be fantastic in terms of the number of net zero asset managers making commitments. I think that may be an ambitious goal, because those that were most ready to sign up to something like that have already done so. But yeah, we want to keep the growth of the investor community working towards net zero really powering forward, because I think scale has everything in terms of sort of shifting the market and, creating a virtuous circle with policy and company action as well. 

And I think yeah, I think the other thing that I would like to see some progress on would be this data challenge. And I think what we're seeing now and something we're working on very directly with our members is around how we engage with the sort of data and service providers, to ensure they are providing what investors need, and we're already seeing quite a lot of response. So I think data is an area where we can we can really kind of harness the power of digital AI and with everyone pushing in the right direction, it's nut we should be able to crack so I would hope we've made substantial progress on or being able to help investors with better quality and reliability of data and consistency of measurement over the next year, which is a key core element of being able to really credibly achieve net zero.

Eva: Fantastic, well I look forward to continue to work with you on that journey and it's been such a pleasure to have you with us Daisy, thanks a lot for your time and your inspirational contributions. 

Daisy: Thank you very much for having me on Eva, and I should say I should also thank you and your colleagues at abrdn who have been really key parts of our working groups along the way to develop the framework and it's really great to see all the work that abrdn is doing on these issues. So congratulations for all the work that is going on at abrdn and hope to continue to work to solve some of these challenges that remain as we go forward.

Eva: Thank you so much, Daisy, great speaking to you.

You have been listening to the abrdn Sustainable Investing podcast, a podcast relating to all things responsible and sustainable investing, and today a focus on net zero investing with real world impact. Thank you all for tuning in to our podcast. You can find all our episodes on various podcast channels such as Spotify and Apple, as well as on the abrdn website. 

Until our next podcast, goodbye for now.