Mark Carney, chair of the Global Financial Alliance for Net Zero, has called on investors to develop skills and tools to properly evaluate climate risk in asset portfolios.

Speaking at the Australian Council of Superannuation Investors’ conference last week, he said investors were increasingly putting more value on companies that were aligned on net zero commitments.

Global markets are starting to link these commitments and how governments and companies are working towards net zero. “What we’re starting to see as those commitments are operationalised in the financial sector, is that climate and relative alignment to the answer on net zero pathways is becoming an increasing driver of value in markets,” said Mark Carney, vice chair and head of transition investing at Brookfield Asset Management and the former governor of the Bank of England.

At COP26 in Glasgow, countries agreed on a number of global commitments for the next decade including a pledge to further cuts to carbon dioxide emissions and a clear plan to cut the use of coal, which is responsible for 40 per cent of annual carbon dioxide emissions.

However, investors need to improve their skills and tools to assess the climate risks and carbon intensity of their investment portfolios in order to properly assign valuations. “I think the challenge for all of us…is to develop expertise very rapidly, to assess how well aligned our portfolios are with the transition.”

New regulations

Moving to a mandatory reporting regime under the auspices of the International Sustainability Standards Board is another key plank towards achieving net zero. The current reporting standards under the Task Force for Climate-Related Financial Disclosures are only voluntary.

Launched at COP26, the ISSB is tasked with establishing a comprehensive global baseline of sustainability-related disclosure standards, which will go a long way to reduce the fragmentation and the inconsistent disclosure obligations currently.

“The role of the ISSB is to establish standards to meet the needs of investors and provide guidelines for robust investment decisions,” said Sue Lloyd, ISSB vice chair. The deadline for the industry to comment on the draft standards closed last week and the ISSB is currently evaluating the feedback.

Global regulators are very focused on climate risk and how the financial services sector operates and finances the transition said Geoff Sumerhayes, senior advisor to environment consultant Pollination and former executive board member of the Australian Prudential Regulation Authority.

“Regulators globally are highly engaged on this issue as they should be as this is a material risk…We need financial institutions to transition and it’s also a massive opportunity for you as institutions with trillions of dollars of investment.”

He explained going forward, global regulators will be focused on increasing targets and scope 3 emissions as standards for financial institutions, how institutions understand and manage nature-based risk and the development of taxonomies.

Whole-of-economy approach

Australia’s newly elected Labor government has announced a 43 per cent emissions reduction target by 2030, a significantly more ambitious target compared to the previous government. But to achieve net zero, there needs to be a whole of economy approach that includes the social aspect of the transition said Fiona Reynolds, chief executive of Conexus Financial, publisher of Investment Magazine and former head of the UN’s PRI.

“At the moment, what the government is talking about is really about the energy transition. But that’s not enough, that transitioning the energy is not going to get us to net zero.”

However, the government needs support for its plan, notwithstanding the shortcomings according to Reynolds. “As the private sector and investors [in Australia], we must support the transition even though we don’t think it is perfect,” she said.

Investors also have an obligation to manage stranded assets and those affected workers and employees responsibly and not just through portfolio divestment.

“We all need to recognise the imperative of a just transition. In other words, we won’t be able to proceed with the full transition, unless we bring along workers and communities and particularly those who are most affected,” said Carney.


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