As more companies shift to net-zero commitments in the face of climate change, institutional investors play a key role in proliferating the practice through where they invest their clients’ money, said Lloyd McAllister, head of environmental, social and governance research at Newton Investment Management, during a session at the 2021 Global Investment Conference.

However, he suggested investors make careful considerations before undertaking these efforts. “These are commitments of intent to manage investments in a manner that contributes to net-zero outcomes. But these aren’t simple exercises. There’s a tendency to mock up something and consider the job done. We have to ask ourselves what this commitment will look like. It’s much more impactful to invest in companies doing the tough transition work and engaging with management teams in those different sectors rather than cutting them out, when they play such a crucial role.”

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In addition, McAllister said active investors must hold the companies they invest in accountable to their commitments and be a steward of their clients’ capital, ensuring the companies are responding appropriately to the various stakeholder demands. “We’re also focused on building capacity internally, to meet the needs and understand the financial risks and opportunities from climate change, as well as more basic demands around the carbon footprint of a portfolio.”

However, he noted investors should avoid making their clients’ portfolios net-zero while nothing changes in the real economy. “That’s where the tough work must take place.”

He pointed to the latest report by the International Panel on Climate Change, which found not only is climate change “unequivocally linked” to increased greenhouse gas emissions, but that to effect meaningful change, global carbon emissions must be cut by 50 per cent by the end of the decade. Contrasting the report, McAllister said the latest submissions of climate action plans by international governments to the United Nations would actually result in a net increase of emissions.

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“The key point is not to think of climate change as a narrow issue. It’s a long-term structural driver of change. . . . The very nature of our changing energy, food, transport and building systems are so interconnected that it’s like turning around a cruise liner. It takes time to change industries and consumer preferences.”

And as more companies make net-zero commitments, additional risks and opportunities will present themselves to institutional investors, he said. “It’s a combination of changing consumer preferences, technology innovation and regulation — and these are leading to sweeping changes across different industries. It’s not just about electric vehicles, it’s about changes in aviation. It’s not just about building, it’s about steel and cement. It’s not oil, it’s cobalt, nickel and copper. Each of these represents risks that need to be managed and opportunities for those who adapt.”

In addition, McAllister said stakeholders are increasingly seeing net zero as a non-negotiable item, noting that globally, roughly $43 trillion of assets under management have signed up for net-zero asset management, while 68 per cent of global gross domestic product is produced by governments that have agreed to go to net zero.

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“By adopting net zero and planning appropriately, it helps a company align with its stakeholders’ expectations, It also protects the company from the inevitable regulatory steamroller that will come in over the next decade [and] it also helps re-position business as focused on reducing exposure to high-carbon value chains and developing a replacement revenue stream that’s low carbon and future proof.

“While it may seem daunting, without a framework, natural market-based transition will take much longer. . . . [and] the cost of not doing anything is significantly more expensive than the costs of taking action today.”