ROBECO - Mon, 09/13/2021 - 16:32

How should investors act? Here’s the path to Paris-aligned investing

Commitments are being made across business and society to help achieve the goals of the Paris Agreement. Experts estimate that countries with net zero targets represent as much as 61% of global emissions and 68% of global GDP.1 In the shorter term, however, there is a critical ambition gap. While science tells us that we need to halve global emissions by 2030, the policies envisaged by national governments will result in a mere 0.5% reduction, according to the United Nations.2 This means there is a hundredfold gap between ambition and reality.

A forceful policy response, sooner or later, is inevitable. Leading investors are anticipating a low-carbon future by aligning their portfolios with the goals of the Paris Agreement. According to Robeco’s 2021 Global Climate Survey,3 climate change will be central to the investment strategy of almost 90% of global investors in the next two years, while over 50% of investors will commit to aligning their investments with the ambition to realize a net zero economy by 2050.

Companies have since 2015 had access to science-based market standards with which to align their business strategies with the goals of the Paris Agreement. Until recently, there have been no such market standards for investors. The absence of an industry-wide methodology has not discouraged the investment community from taking action, though, and investors have increasingly been focused on mitigating climate change through various approaches.

These include driving the reduction of carbon footprints, excluding fossil fuels, engaging with companies in high-emitting sectors, implementing climate risk metrics and models, and investing in green bonds and other climate solutions. With the recent introduction of four frameworks for Paris-aligned investing, published by various initiatives, these tools and measures can now be integrated in a consistent fashion and deployed to create a fully Paris-aligned approach.

New investor initiatives show how to build climate into portfolios

We’ve set out the key components for Paris-aligned investing, based on guidance from the Net Zero Investment Framework of the Paris Aligned Investment Initiative, the Target-Setting Protocol of the Net Zero Asset Owner Initiative, the financial sector guidance of the Science-Based Targets initiative, and the EU Benchmarks Regulation.

We also share Robeco’s views and experiences from developing our own net zero roadmap with interim targets for 2025 and 2030. Our view is that integrating climate change and other sustainability factors into the investment process leads to better-informed investment decisions and healthier long-term, risk-adjusted returns.

While the future is low carbon, the costs and risks of the transition towards that goal are not yet sufficiently understood and priced into the market. That is why we believe that being at the forefront of the low-carbon transition is sound from a portfolio and risk management perspective. We provide a number of case studies with concrete solutions for Paris-aligned investing. These solutions include the climate strategies we have developed in line with the EU Benchmarks Regulation.

Further, we discuss our research that shows the benefits of incorporating information about carbon betas as a forward-looking investment metric, which correct for the biases inherent in traditional carbon data. Our engagement on climate with carbon-intensive companies in the utilities, automotives, and oil and gas sectors is also presented as a practical solution.

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