Top of institutional investors’ wish lists for COP26, ahead of any policy directly related to finance, is simply that governments should set more ambitious targets for climate action, according to a recent survey spanning three continents.
In a study completed just over a week ago, NatWest Markets canvassed the views of 77 ESG investors. About a third were in the UK, a third in the rest of Europe and just over a sixth in each of north America and Asia Pacific.
Asked what was the most critical area of focus for policymakers in Glasgow, 25% picked ‘More aggressive global climate goals and contributions’ — well ahead of any other answer.
“It’s quite clear that while there is support for new decarbonisation tools, investors are fundamentally calling for two things,” said Arthur Krebbers, head of sustainable finance for corporates at NatWest Markets in Amsterdam. “One: more aggressive targets, and two: more money.”
Investors’ top choice backs up the impetus the financial sector has tried to give COP26 through the attention it is paying it, especially through the Glasgow Financial Alliance for Net Zero, which comprises net zero alliances for each financial sector, including banks, insurance companies, asset owners and asset managers.
“There was an argument amongst some in the 2000s that climate action was disastrous for the economy,” said Krebbers. “If business leaders are saying the opposite, it does help in the political debate.”
Pushing the wrong way
Among large Western companies and sophisticated financial players, pleading that climate consciousness is a threat to business may no longer be fashionable. But outside that circle, and in disguised ways even within it, this remains a powerful concern.
In July, InfluenceMap, a company that researches corporate lobbying on ESG issues, found in a study on attitudes to European climate policy that industry associations which oppose early regulation on emissions often make “claims that accelerated, unilateral climate action threatens European business competitiveness”.
The trade bodies for airlines, shipowners, and the makers of cars, cement, chemicals, petrol and steel “continue to represent powerful blockages to tougher regulatory approaches proposed by the Commission to accelerate sluggish sectoral emission reductions”, InfluenceMap said.
Cross-industry bodies such as the French employers’ group Medef, Germany’s BDI, Spain’s CEOE and Italy’s Confindustria were also “largely unsupportive of the EU Commission’s attempts to tighten European climate regulations to help deliver the bloc’s 2030 emissions targets,” the company said.
In that context, evidence that financial institutions support governments being ambitious on climate, rather than opposing it, remains valuable to the climate cause.
Fundamentally, investors appear to grasp that this action is necessary. “There is an expectation and hope that when goverments have committed themselves to more aggressive targets, it will spur further political and market momentum around the innovation and upscaling of the products needed to meet those targets,” said Krebbers.
At an even more basic level, he said, investors had read the research and knew that “if you add up all the nationally determined contributions, we’re not going to get to 1.5°C.”
Investors applied the same logic to political organisations, he said, as to considering an investment in a specific company — they assessed whether its decarbonisation targets were stretching enough.
We can’t do it alone
One of the most often repeated phrases in sustainable finance is that the bulk of financing for the low carbon transition will have to come from the private sector.
But the NatWest survey suggests investors do not believe they can do all the heavy lifting themselves.
As their most important policy priority for governments, 17% picked ‘Supporting transitioning countries, particularly emerging markets’ while 16% chose ‘Supporting transitioning sectors’. Together, those options were the top priority for a third of the investors.
“The hope is that if there is more impetus [from governments] behind supporting the parts of the economy and globe that are still very reliant on coal and other carbon-intensive fuels, that that support won’t just be lip service but translate into financial commitments,” said Krebbers.
This support would be necessary partly because of the jobs that rely on high carbon industries. Such finance was needed, Krebbers said, “from the point of view of global solidarity and realpolitik, because if emerging markets don’t come on board, it will be very difficult for developed markets to pull off 1.5°C. There is political will in many emerging markets, but not necessarily enough available financial capital.”
Ultimately, Krebbers argued, if governments get behind transition finance, “Hopefully this will also translate into the private sector, where amongst parts of the market the transition label still has some stigma.”
But the barriers to financing the transition are not just psychological.
“Unfortunately, private capital isn’t always well adjusted to the high up front investment needed for higher risk decarbonisation technologies,” said Krebbers. “If all the green money was just channelled in the bond market, we’re not going to resolve the innovation and entrepreneurship we’re going to need. We need to look at other parts of the financial ecosystem. Public-private partnerships can work well in areas such as carbon capture and storage.”
He referred to the high hopes for clean tech venture capital in the 2000s and early 2010s, which had led to a number of firms going bust because they backed companies that did not have commercial solutions.
A lot of green success stories had needed favourable regulation or direct government support to get going, Krebbers said — such as Tesla, which had been helped by California’s limits on car emissions.
Considering the need for seed capital to incubate new technologies, Krebbers said he was a little surprised that public-private partnerships had not seemed to be a priority for investors in the survey.
‘A common green taxonomy’ was chosen by 17% and ‘Carbon pricing’ by 15%.
Two other suggested options got much less support: ‘Coordination on new financial regulation’ was picked by 6% and ‘Developing public-private partnerships’ by 4%.
