First China, then Japan, now South Korea. The three big east Asian economies have all recently introduced new climate change targets. Japan and South Korea pledged to become carbon neutral by 2050; China, by far the world’s biggest carbon emitter, has said it will achieve that goal by 2060. The moves follow last year’s EU plan to cut greenhouse gases to net zero by 2050. Those deadlines may sound too distant to be meaningful, but they mark an important shift.
Thirty years after the UN's first Intergovernmental Panel on Climate Change report warned that humans were warming the planet, too little has been done to curb the fossil fuel use and deforestation driving the problem. Another IPCC report in 2018 warned that emissions would have to nearly halve by 2030 and fall to net zero by 2050 to keep temperatures at safer levels.
The EU has taken that warning seriously. It is weighing a plan to more than halve emissions by 2030 from what they were in 1990. It estimates that step will require investment in the energy system alone to be €350bn a year higher this decade than it was in the previous one. The public sector would struggle to do this on its own even if it were not stretched by the Covid-19 crisis. More private capital needs to flow to greener activities. Asset managers must play their part.
The good news is there has been a surge in investment behind environmental, social and governance goals. A recent report predicts assets in sustainable investment products in Europe will reach €7.6tn over the next five years, greater than the amount in conventional funds. The shift could help to redirect corporate capital into more sustainable activities. The bad news is that significant gaps remain between asset managers’ rhetoric and their actions. Chris Hohn, the hedge fund manager, recently accused BlackRock and Vanguard of doing too little to force companies to set out transition plans to reduce their carbon emissions. A handful of big asset managers have filed motions on climate change at annual meetings in recent years despite marketing their green credentials. Some regulators too, in particular in the US, are showing worrying signs of pushing back against the advance of ESG.
On top of that, a lack of uniform standards defining what is and is not a green activity has opened the door to greenwashing. The European Commission aims to tackle this with its move to create a “taxonomy” or classification of green assets. Some financiers may have reservations about what they see as binary definitions of “green” and “brown” assets but the EU approach, however imperfect, will allow investors to distinguish between those companies acting to reduce their carbon footprint and those that are not.
The transition period will take decades. Companies will inevitably move along a spectrum — some brown, some green and some olive — but the important thing is to find ways to hold them to account. BlackRock last week made a welcome call for the array of different ESG reporting standards to be replaced by a globally recognised framework. Other actions, too, will be required to help underpin a transition, including carbon prices.
In the meantime, the EU has created a useful road map for the newer members of the 2050 net zero club. Setting a 2050 target is an important first step but it must be backed up with more immediate goals for 2030, and policies that nudge financial flows in the right direction. Other countries are looking at following this path, which cannot happen too soon. There is still time to act but the window is closing fast.
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November 03, 2020 at 05:00PM
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More capital needs to flow to greener activities - Financial Times
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