More capital, transition frameworks and shareholder activism crucial to achieving net zero by 2050.
Our research reveals that investors are placing more emphasis on net-zero strategy in their investment decisions.Increasingly, companies must show their commitment to net zero to access capital. More than two-thirds of investors (68 per cent) were either already considering net-zero transition as part of their investment decision-making or intended to do so by the end of the year (2020).
On average, companies are investing just over 2 per cent of annual turnover in net-zero transition. However, almost all senior executives (97 per cent) admit this will need to increase. Globally, senior executives believe that an average of 60 per cent of the finance they need to transition will have to come from internal sources, such as retained earnings and reserves, and 40 per cent from external sources (of this, they expect 55 per cent to be equity financing and 45 per cent to be debt financing).
Although investors acknowledge there is more to be done, there are signs that individual investment management firms are using companies’ pace of decarbonisation to guide their investment decisions. Almost eight in 10 investment firms (79 per cent) are now actively assessing the impact of their portfolio on climate change and six in 10 (61 per cent) say that supporting transition to net zero is now an important factor in every investment decision they make.
More than three-quarters of senior executives (78 per cent) say that increased shareholder activism and investor scrutiny would be an important accelerator for net-zero transition – and so too the inclusion of net zero as a key part of company directors’ duties.
Net zero could be made more commercially viable by a combination of incentives and penalties alongside changes in demand and standardised frameworks. More than three-quarters of senior executives (77 per cent) say that an effective global carbon tax, based on a carbon price that reflects the true cost of climate change, would be an important factor in accelerating their transition.
Almost two-thirds of senior executives (62 per cent) believe the financial sector could help by providing incentives in the form of margin discount on loans and bonds linked to net-zero transition. Senior executives believe that if they could demonstrate the business case for transition, companies would be able to transition faster: 81 per cent believe that increased efficiency and cost savings would be a significant driver. They also believe that pressure from their supply-chain partners would help, with 79 per cent of senior executives citing this as a key accelerator.
Climate change is one of the greatest challenges facing the world today and we want to support our clients achieve a low-carbon just transition aligned to the Paris Agreement. We are engaging with all clients to understand their role in transitioning to low carbon in order to help them measure, manage and reduce their emissions. We are also developing sector-specific transition pathways for the most carbon-intensive industries within our portfolio. We want to play our part by balancing our lending – providing more funds to climate-positive companies and helping carbon intensive firms better manage their emissions. Collaboration is crucial and it is our hope that partnerships with the 2 Degrees Investing Initiative and Imperial College, as well as our work on the Collective Commitment to Climate Action will play an important role in helping the world achieve net zero by 2050.
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Reducing our emissions Our climate impacts are primarily from the clients we finance and support. We measure, manage and ultimately reduce the emissions related to our operations and the financing of our clients. For example, by 2030 we will only provide financial services to clients who are less than 5 per cent dependent on thermal coal. Meanwhile, we are committed to reaching net zero carbon emissions from our operations by 2030, and from our financing by 2050. We have targets in place to reduce our energy use and report our progress every year and have done for more than a decade.
Limited support for Paris Agreement Support for the Paris agreement is lower among companies in the Middle East, with just 35 per cent fully supporting the aims of the agreement. More than half (55 per cent) of companies require high levels of investment to transition. A major challenge for Middle East corporates is the economic impact of COVID-19 in delaying their net-zero transition (85% of senior executives).
More investment required for transition The biggest barrier faced by African companies is lack of finance (cited by 78 per cent of senior executives; 11 percentage points above the global average). Ninety per cent of senior executives believe short CEO tenure in their industry makes it hard for leaders to tackle net-zero transition, and 90 per cent believe effective global carbon tax would be an important factor in accelerating their net-zero transition.
