In an interview with the chair of the Net-Zero Assets Owner Alliance, Oliver Balch asks what institutional investors are hoping to hear from governments at COP26

When development charities, ecologists and a splattering of diplomats met in Rio de Janeiro nearly three decades ago at the landmark Earth Summit, there was barely a suit in sight. As for bankers, not a whiff.

In Glasgow, by comparison, leaders from the finance world are lining up beside heads of state to get their voice heard. That’s welcome. According to the OECD (not an organisation given to hyperbole), $6.3tn in infrastructure is needed per year between now and 2030 to stand a chance of achieving the Paris Agreement.

Government pockets are not that deep. Financing the low-carbon transition will require private capital markets to step up and start directing finance to the clean solutions of tomorrow.

The private sector is really strong in terms of ambitions, but action on a company-by-company basis is not sufficient

Asset owners – think, pension funds, endowment funds, foundations and the like – are ready to do so, but they need policymakers to “come up with long-term plans” and set “substantially higher ambitions”.

So says Dr Günther Thallinger, board member of the German insurance and asset management company Allianz SE. A former consultant with McKinsey, the 49-year-old Austrian is heading to COP26 in his capacity as chair of the Net-Zero Asset Owner Alliance (NZAOA).

“The private sector is really strong in terms of ambitions, but [action on a] company-by-company or project-by-project [basis] is not sufficient. We need an aggregate view, at least on a country basis,” says Thallinger, whose big ask at COP26 is for clarity around government-endorsed transition strategies for key sectors such as energy, transport, and agriculture.

The alliance he is representing in Glasgow has already done some of the hard work here. Of its 56 members, 29 have already developed target-driven plans to decarbonize their portfolios by 2025.

The plans, which align with the IPCC’s zero-overshoot and low-overshoot pathways, take into account the changes required at a sectoral level, as well as setting goals for investor financing and company engagement.

This isn’t asset owners suddenly becoming tree-huggers, Thallinger says: “As long-term investors, we have committed that our portfolios are going to reduce the capital climate impact. And for that reason, we do need to know how our assets are going to evolve.”

For Thallinger, the more financial institutions calling for progressive action on climate change, the better

A better question is whether policymakers will give them a hearing in Glasgow. After all, the alliance is not the only finance-oriented organisation in town, by any means.

The Institutional Investors Group on Climate Change, for instance, which represents members with more than $60tn of assets under management, is hosting an event on accelerating the net-zero economy, including an expected call on utilities, which account for 40% of emissions worldwide, to up their game. (See also ESG Watch)

Parallel alliances also exist for banks, asset managers and (as of 13 October) the insurance sectors. To complicate (or perhaps simplify?) matters, these three initiatives now sit with NZAOA under the UN-backed Glasgow Financial Alliance for Net Zero, chaired by former Bank of England governor, Mark Carney.

For Thallinger, the more financial institutions calling for progressive action on climate change, the better. As for getting heard, he makes the point that the NZAOA is the only asset owners’ group with a formal link to the UN (it was convened by the United National Environment Programme).

He also notes that its members’ 1.5C pathways are unique in setting targets for 2025, as opposed to 2030 or beyond: “I would be actually very keen to learn whether you could find any group of organisations or companies, irrespective of sector, that has chosen to set targets for 2025,” he says.

Imagine for a moment that he was given the keys to the delegates’ chamber in Glasgow. What would be his specific policy requests to the world leaders present?

Divestment is not the mechanism we want to use to manage our portfolio. What we really want is a transformation of the assets

As with so many other business delegations at COP26, top of the list would be some form of carbon price. That said, Thallinger takes a “yes-but” position here. Yes, because without one “there will always be emissions”. The but is that any price mechanism has to be “as global as possible” to avoid free-riders gaining unfair advantage.

What such a mechanism might look like is the subject of a recent short discussion paper by NZAOA. Among the principal recommendations are that a carbon price has to be legally binding, long-term and science-based. In addition, the alliance says it should set a high starting price and transparently ratchet up thereafter, as well as include a carbon price floor for G7 and G20 countries.

But a carbon price alone won’t cut it. “Non-pricing instruments” are also key, Thallinger argues. The swift phase-out of fossil-fuel subsidies would be high on his request list, for instance, as would expanding access to clean, affordable energy.

Yet, he is wary about any move that might force divestment by asset owners from polluting sectors. The NZAOA has already made commitments to pull out of coal, but it is cautious about following the International Energy Agency’s call earlier in the year to also mandate a withdrawal from the oil and gas sectors.

Such hesitancy is less to do with the future viability of fossil fuels. Thallinger openly acknowledges that the current energy mix “moves us significantly away from 1.5C” and that any new investment in oil and gas would make achieving the Paris Agreement “very, very difficult”.

Instead, it speaks to a preference among asset owners for engagement. “Divestment is not the mechanism we want to use to manage our portfolio,” he explains. “What we really want is a transformation of the assets.”

What were once long-term climate risks for the alliance's assets are now much more immediate

The theory being that having “skin in the game” enables asset owners to influence the strategies of oil companies and other high-carbon emitters. Pulling out entirely, as nearly 1,500 investors have reportedly committed to do, is to exit from the discussion.

At the same time, Thallinger concedes that asset owners have “limited capacity” to engage with multiple companies. Hence, another of his asks: standardised and (“ideally”) audited reporting so investors can have performance indicators that are both comparable and trustworthy.

Another important strand to NZAOA’s positioning is the need to take action now. What were once long-term climate risks for their assets are now much more immediate. Thallinger is not a huge fan of carbon credits for that reason, worrying that they might take the focus off absolute emissions reductions.

Likewise, his preference when it comes to technological investments is to stick to proven solutions that can deliver near-term results. Encouraging the uptake of renewables in the power, transport and industry sectors is a straightforward case in point. Similarly, the benefits of investing in forest protection and reforestation are “quite obvious”.

Even if asset owners wanted to take a punt on nascent technologies, their long-term mandates typically prevent them doing so, he adds: “We need the moonshot possibilities that might deliver in 10 or 15 years … but as long-term investors we have very limited amounts that we can invest in very risks assets.”

COP26 marks a significant landmark for this relatively new institution. Much work still needs to be done. Most notably, almost half of its 56 signatories have still to develop interim carbon reduction targets (members have a 12-month grace period to do so).

The alliance’s members commit not to ask the companies that they invest in anything that they are not already asking of themselves

Policy positions also remain to be ironed out, such as the alliance’s view on whether the EU should legally require oil and gas companies to fix methane leaks (no official line at present) or include nuclear energy in the EU taxonomy (“a very difficult question”).

Still, to its credit, the alliance’s members commit not to ask the companies that they invest in anything that they are not already asking of themselves. Like reporting against climate targets, for instance, something the alliance recently did in its first progress report.

Up front, the report makes clear that decarbonisation is not an “end goal in itself”, but rather a tool to ensure a greener, cleaner global economy. In other words, asset owners want to hold onto their assets. That requires a viable economic system. Will we get one? That all depends. As Thallinger concludes, “we need to deliver”.

 

NZAOA  Net-Zero Asset Owners Alliance  sustainable investing  Glasgow Financial Alliance for Net Zero  COP26  Carbon Pricing  divestment  GHG emissions reduction