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Climate transition & the role of asset managers

Asset managers control a significant volume of financial capital. How this capital is managed will play a critical role in whether or not we are able to tackle climate change.

Asset managers’ influence – both in terms of where and how they allocate capital – has the potential to bring about greater accountability and responsibility throughout the investment value chain. Their actions also have the power to influence which issuers – whether they be companies or countries – have access to capital, and at what cost.

We believe the fixed income industry has an important and unique role to play for two reasons:

  1. Its assets are so much bigger than the equity universe – approximately USD128.3 trillion for fixed income versus equities at approximately USD34.8 trillion.

  2. In our view, the funding levels required for the low carbon transition can only be met by the debt market.

What asset managers expect from governments and policymakers

There has been much talk about what policies are needed, but now’s the time for action. We need collective and co-ordinated implementation that is commensurate to the threat of climate challenge. There are some encouraging signs of progress and momentum, but not at the speed and scale that’s needed globally.

In our view, governments need to:

  • Scale-up their carbon ambitions
    This means strengthening plans to cut carbon emissions, as well as adopting aggressive targets for net zero by 2050 or sooner. The finance community needs certainty on the direction of policy so it can plan and invest accordingly.

  • Work with the investment community to develop innovative climate finance solutions
    Public finance alone cannot fund the needed transition. In particular, funding needs to be directed to emerging markets, which are the most vulnerable, to help them mitigate impacts and build resilience.

  • Ensure the carbon transition is ‘just’
    This means policies and regulations which promote and enable the efforts of other stakeholders, such as civil society or the private sector, for a ‘just’ transition. Governments have a responsibility to establish a minimum safety net and build social adaptiveness to stop people being stranded by the low carbon transition.

Challenges to the climate transition and the key priorities that need to be addressed

As with all large-scale change projects, challenges are inevitable and numerous. Here are some of the main ones we’re anticipating:

  • Lack of urgency and ambition
    Carbon emissions are rising faster than ever before and many changes may already be irreversible. But we can still prevent the worse-case scenario, but only if we act immediately. Covid has shown how policies can be enacted overnight when faced with an existential threat. That same focus and mindset needs to be applied to the climate challenge.

  • Lack of partnerships and collaborations
    No single party can stop climate change, so collective action is required. In this regard, the COP26 UN climate talks are the most important in six years and are, in our view, the best chance governments have to inspire and enable global collaboration efforts with ambitious binding commitments.

  • Negative messaging
    Whilst it is important to highlight the risks of climate change, more can be done to point out the opportunities for society to #BuildBackBetter, as climate change offers humanity the chance to reset the dial. The message of hope is a powerful motivator.

  • Denial remains
    Despite the recent Intergovernmental Panel on Climate Change (IPCC) report stating that the role humans play in warming the planet is ‘unequivocal’, there are still some who dispute this. Until this is acknowledged, inertia will remain a barrier to meaningful action at the scale and pace required.

 

To learn more about our views on climate change and how we can invest to have a positive impact, visit our Responsible Investing content hub.