UNEP FI Warns of Inconsistencies in FIs’ Transition Plans

New recommendations offer a baseline for asset owners assessing the credibility of their asset managers’ net-zero commitments and investment strategies.

Existing climate transition plans published by financial institutions do not sufficiently support national commitments to reach net-zero greenhouse gas (GHG) emissions by 2050, according to a new report by the UN Environment Programme Finance Initiative (UNEP FI).

“Making a net-zero commitment has become increasingly prevalent among governments, real-economy companies, and financial institutions, but the manner in which a commitment is constructed and implemented can vary from financial institution to financial institution,” UNEP FI noted.

To address the inconsistencies in net zero strategies, and as part of its guidance for G20 countries, UNEP FI has published 11 recommendations for credible 1.5°C-aligned net zero commitments from financial institutions. By outlining a high-level framework, UNEP FI aims to ensure that firms can achieve greater consistency and comparability across their target-setting and implementation of net zero goals.

The G20 input paper asserts that net-zero commitments should be: grounded in science-based evidence; include interim decarbonisation targets; disclose Scope 1-3 emissions as much as data allows; and pledge to end investing in any new fossil fuel developments with immediate effect. Further, financial institutions need to “establish transparency regarding GHG emissions and their allocation to real economy inventories and strive for real economy impact”, UNEP FI said.

These recommendations will serve as a baseline for asset owners assessing the credibility of their asset managers’ net-zero commitments and investment strategies.

Banks, insurers and investors have been urged to adopt the recommendations as soon as possible, while G20 policymakers are being encouraged to support their implementation.

“The purpose of these recommendations is not only to support financial institutions to credibly achieve net zero, but to catalyse change in the real economy,” said Eric Usher, Head of UNEP FI.

Funds failing to align with Paris

Existing net zero and Paris-alignment commitments by asset managers are not yet fully reflected in their product offerings, according to new research by disclosure platform CDP.

Its analysis of over 16,500 investment funds worth US$27 trillion revealed that less than 0.5% of their assets are aligned with a below 2°C temperature pathway – the equivalent of 158 individual funds. Over 60% of funds (8,000) are aligned with 2.75°C of global warming, while just 102 funds are in line with a 1.5°C temperature scenario.

Further, when considering funds’ exposures to Scope 3 emissions – such as the use of a company’s products or emissions across the value chain – the percentage of funds aligned to the Paris Agreement falls to 0.2%, or 65 individual funds. Only 15% of companies that report to CDP disclose Scope 3 emissions-focused decarbonisation targets.

For global leaders meeting in Glasgow to ensure the world is on track to limit global warming to 1.5°C by 2050, “this data is catastrophic,” said Laurent Babikian, Joint Global Director of Capital Markets at CDP.

“This is like an x-ray on the industry, exposing almost all assets on the planet to be out of step with climate objectives. It’s an urgent reality check for real, credible actions now from the financial community to step up engagement with their portfolios and take decisive action to transition their portfolios onto a 1.5°C path,” he said.

This follows the publication of UNEP FI’s ‘The Emissions Gap Report’, which highlighted that new national climate pledges combined with existing climate risk mitigation measures have put the world on track for a global temperature rise of 2.7°C by the end of the century. In order to keep global warming below 1.5°C, the world needs to halve annual GHG emissions within the next eight years, cutting an additional 28 gigatons of CO2 equivalent (GtCO2e) off annual emissions by 2030, the report warned.

Asset managers make new climate pledges

As part of its commitment as a founding signatory to the Net Zero Asset Managers Initiative (NZAMI), Fidelity International this week published its updated climate investing policy.

The asset manager pledged to halve portfolio emissions by 2030, from 2020 levels, and to phase out its exposure to the thermal coal sector in OECD countries by 2030 and by 2040 globally. The latter is in line with the International Energy Agency’s (IEA) 2050 roadmap.

NGO Reclaim Finance criticised the pledge, calling for immediate exclusion of all companies launching new coal projects, a commitment to ending support for fossil fuel expansion, and inclusion of Scope 3 emissions.

Rotterdam-headquartered Robeco also pledged to half the emissions of its investments by 2050, but further noted it would reduce emissions by 30% by 2025.

The top 200 emitters in Robeco’s investment universe will be subject to increased active ownership activities through voting and engagement, in order to encourage laggards to make and follow through on climate commitments, such as net zero by 2050.

Nomura Asset Management (NAM) has further committed to achieving carbon neutrality in its own operations by 2050, alongside its 2030 and 2050 decarbonisation targets for its portfolio.

Two sides of the same coin

UNEP FI’s climate-focused recommendations were augmented by a call for international financial networks and initiatives to “further advance the understanding of nature- and biodiversity-related metrics and indicators used in disclosures by corporates and financial institutions”. This should be done through organisations such as the incoming International Sustainability Standards Board issuing guidance, developing nature-focused metrics and establishing examples of best practice.

Industry experts speaking at Tuesday’s Climate Finance Day, hosted by Finance for Tomorrow, warned that net-zero by 2050 cannot be achieved without reallocating capital into nature-positive solutions, such as reforestation, pollination projects and managing water pollution.

“Half of global GDP depends on healthy and stable environments and biodiversity – and we know climate change and biodiversity are two sides of the same coin. If we want to be net zero in 2050, that cannot be achieved unless financial institutions invest in nature-positive projects and activities,” said Marie-Hélène Loison, Deputy CEO of the Agence Française de Développement (AFD).

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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