13th July 2023
Exploring (and hopefully understanding) the terminology and acronyms of the investment world used in and around the issue of climate change. Many of the changes we are going to need to both reduce and to live with, the impacts of climate change require considerable sums of money. If that money doesn’t come through government from taxation, it has to come from the financial markets.
“Climate change is having an ever-increasing impact on global capital markets. It presents a wide and complex range of risks from physical impacts such as flooded factories, to regulation risk such as the imposition of expected carbon taxes, litigation risk and transition risk as company cash flows and profits are affected by the move to a low-carbon economy. There is also mounting evidence that companies who care about their broader eco-systems, tend to financially outperform those who do not. ” https://www.transitionpathwayinitiative.org/investors
IPCC – Intergovernmental Panel on Climate Change, organised by the United Nations. The UN currently has a membership of 193 nations.
COP – conference of the parties being “the supreme governing body of an international convention (treaty, written agreement between actors in international law). It is composed of representatives of the member states of the convention and accredited observers. Scope of the COP is to review the “implementation of the Convention and any other legal instruments that the COP adopts and take decisions necessary to promote the effective implementation of the Convention” https://en.wikipedia.org/wiki/Conference_of_the_parties
The 28th United Nations Climate Change Conference will take place in Dubai in November this year and is commonly referred to as COP28. Other COPs also take place such as the 15th United Nations Biodiversity Conference which met in Montreal in December 2022.
Paris Agreement (sometimes referred to as the Paris Accords) – “an international treaty on climate change. Adopted in 2015, the agreement covers climate change mitigation, adaptation, and finance. The Paris Agreement was negotiated by 196 parties at the 2015 United Nations Climate Change Conference in Paris. The Paris Agreement’s long-term temperature goal is to keep the rise in mean global temperature to well below 2 °C above pre-industrial levels, and preferably limit the increase to 1.5 °C, recognising that this would substantially reduce the effects of climate change. Emissions should be reduced as soon as possible and reach net-zero by the middle of the 21st century. To stay below 1.5 °C of global warming, emissions need to be cut by roughly 50% by 2030. This is an aggregate of each country’s nationally determined contributions.” https://en.wikipedia.org/wiki/Paris_Agreement
Net zero targets – a zero target would reduce carbon/ greenhouse gas emissions to absolute zero. Net zero would reduce emission on balance to zero – ie remaining emissions that could not be avoided being offset by processes that absorb unwanted emissions. If the desired effect of curtailing global warming is be achieved, these offset amounts need to be minimal.
Offsetting – a process whereby one invests in a project that will remove greenhouse gas emissions from the atmosphere and absorb them in such a way that they are not re-released. This removal might be achieved through planting trees which over their life time will absorb CO2 (the main greenhouse gas) from the atmosphere via their leaves and ‘lock’ them away in the trunk, roots and branches of the tree. It might equally be achieved by growing other plants including seaweeds. Greenhouse gases can also be ‘locked’ into the soil by developing peat bogs, by creating grasslands (that will not be tilled as this will release the gases from the soil) or by pursuing regenerative methods of farming. Some offsetting projects don’t plant new forests but rather concentrate on maintaining existing forests where trees will not be routinely cut for timber. This may particularly apply in regions of virgin rainforest where the investment can be an alternative income to that obtained from clearing the forest for agriculture. The idea behind offsetting is that where emissions from an operation cannot be reduced to zero, that the residual amount of produced by the operator is offset by an equivalent re- capturing of gases. To be of value, carbon offsetting schemes need to be scientifically proven to be effective, and to be certified so that the offsetting cannot be resold. Offsetting should always be a last resort.
Climate Transition Plan – an action plan that outlines how an organisation will develop or change its use of assets and resources, and its entire business plan to meet agreed climate targets – typically halving greenhouse gas emissions by 2030 and reducing them to net zero by 2050. In November 2021 the UK Government set up a Transition Plan Taskforce (TPT). As of 2023 listed UK companies are required to publish transition plans with guidance from the TPT using rules agreed with the Financial Conduct Authority (FCA) – although apparently it doesn’t have to have net zero as its target.
Just Transition – “ A ‘just transition’ means moving to a more sustainable economy in a way that’s fair to everyone – including people working in polluting industries.“ Greenpeace. In the financial world the Impact Investment Institute this year produced a set of Just Transition Criteria to enable investors make better judged investments that will fulfil the objectives of a just transition – https://www.impactinvest.org.uk/wp-content/uploads/2023/05/Just-Transition-Criteria.pdf (This pdf is an interesting read)
IEA – International Energy Agency is an “autonomous intergovernmental organisation, established in 1974, that provides policy recommendations, analysis and data on the entire global energy sector. The 31 member countries and 13association countries of the IEA represent 75% of global energy demand. The IEA was set up under the framework of the Organisation for Economic Co-operation and Development (OECD) in the aftermath of the 1973 oil crisis to respond to physical disruptions in global oil supplies, provide data and statistics about the global oil market and energy sector, promote energy savings and conservation, and establish international technical collaboration on innovation and research. Since its founding, the IEA has also coordinated use of the oil reserves that its members are required to hold.” https://en.wikipedia.org/wiki/International_Energy_Agency. In May 2019 the IEA reported that investors should not fund new oil, gas and coal supply projects if the world wants to reach net zero emissions by mid-century – “The pathway to net zero is narrow but still achievable. If we want to reach net zero by 2050 we do not need any more investments in new oil, gas and coal projects,” said Fatih Birol, the IEA’s executive director. “It is up to investors to chose whatever portfolio they prefer but there are risks and rewards.”
Transition Pathway Initiative (TPI) – supported by research from the LSE and the Grantham Research Institute, this scheme assesses the performance of major companies using publicly available data so as to rate the companies on their Management Quality (ie how well their business plans relate to measuring and controlling their greenhouse gas emissions) and Carbon Performance (how well their business plans align with the UN Paris Agreement goals). This information is then made available to anyone who is interested and in particular to investors who want to ensure that the companies they invest in are transitioning appropriately to net zero. https://www.transitionpathwayinitiative.org/
NIBs – National Investment Bodies – the Church of England has three such bodies comprising:-
Church of England Pensions Board – “We provide retirement housing and pensions, set by the Church of England, for those who serve or work for the Church. We assist over 42,000 people across almost 700 employers with their pensions, carefully stewarding the funds under our care of around £3.2 billion.
Church Commissioners for England – “ The Church Commissioners manages a £10.3bn investment fund. The money it makes from those investments contributes to the cost of mission projects, dioceses in low-income areas, bishops, cathedrals, and pensions. The Church Commissioners also provides administrative support for the Church. We contribute about £1.2bn every three years to various parts of the Church of England, around 20% of the Church’s annual running costs, which makes us one of the largest charitable givers in the UK.”
CBF funds which are managed by CCLA (Churches, Charities and Local Authorities (CCLA) Investment Management Limited). These are the fund managers who look after most parish investment monies.
Ethical Investment Advice Group – this is a Church of England group that provides ethical investment advice for the Church (and others who wish to access their web site where their thoughts are given in detail including theological reflection – https://www.churchofengland.org/about/leadership-and-governance/ethical-investment-advisory-group
Fiduciary Duty – A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence — Lord Millett, Bristol and West Building Society v Mothew A fiduciary duty in terms of finance sense exist to ensure that those who manage other people’s money act in their beneficiaries’ interests, rather than serving their own interests. (https://en.wikipedia.org/wiki/Fiduciary) For example, money given by its congregations and other donors must be managed for the benefit of the Church of England, and within that for example, many given to the Pensions Investment Board must be managed to benefit present and future C of E pensioners.
TCFD – Task Force on Climate-related Financial Disclosures: when buying and selling investments one needs accurate information that enable you to assess the risk of making or loosing money. A new risk is that of climate change, and investors need accurate and standardised information so that they can fairly value what they are buying and selling. Ensuring such information is forthcoming – is disclosed – is the function of the TCFD. https://www.fsb-tcfd.org/about/
Climate Action 100+ is a group of 700 global investors – including the Church of England Pensions Board – who undertake to to engage with the major companies* that will play a significant role in the transition to a net-zero emissions economy. Individual or small groups of these investors engage with a particularly company to monitor performance, and develop and implement company specific strategies that will ensure they meet the necessary targets on the route to net zero. https://www.climateaction100.org/about/
(* eg ArcelorMittal S.A. (steel), BP, E.On, Carrefour, National Grid, Honda Motors, Nestle, Quanta’s airlines etc)
Paris Aligned Investment Initiative -“ Paris Aligned Asset Owners are a global group of 56 asset owners, with over $3.3 trillion in assets. They have committed to transitioning their investments to achieve net zero portfolio GHG emissions by 2050, or sooner, drawing on the Net Zero Investment Framework to deliver these commitments”. The Church of England Pensions Board is a member of this group. https://www.parisalignedassetowners.org/ The Initiative is delivered by four investor networks covering the different regions of the globe. The network for Europe is The Institutional Investors Group on Climate Change (IIGCC).
Net Zero Investment Framework – The Net Zero Investment Framework, published in March 2021, provides a common set of recommended actions, metrics and methodologies through which investors can maximise their contribution to achieving global net zero global emissions by 2050 or sooner. Its primary objective is to ensure investors can decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with a 1.5°C net zero emissions future.
Net Zero Asset Owners Alliance – “Convened by the UN, the Net-Zero Asset Owner Alliance seeks to transform member investment portfolios to net zero GHG emissions by 2050. 29 institutional investors make up the alliance, representing over $5 trillion in assets. The alliance also works with other finance-related climate initiatives, such as Climate Action 100+ and The Investor Agenda.” https://netzeroclimate.org/net_zero_tools/net_zero_asset_owner_alliance/ All three Church of England Investment Bodies are part of this alliance.
Net Zero Climate – an Oxford University based which “brings together principles and policies, practical tools, and progress tracking to help businesses and policymakers achieve that [net zero emissions] goal.” https://netzeroclimate.org/ As well as hosting the Net Zero Asset Owners alliance, they provide tools for organisations including ‘How to set a net zero target’ :
1. Pledge at the head-of-organization level to reach net zero GHGs as soon as possible, and by mid-century at the latest, in line with global efforts to limit warming to 1.5C. Recognise that this requires phasing out all unabated fossil fuels as part of the transition.
Set an interim target to achieve in the next decade, which reflects maximum effort toward or beyond a fair share of the 50% global reduction in CO2 by 2030.
Targets must cover all GHGs, including Scopes 1, 2, and 3 for businesses and other organisations, all territorial emissions for cities and regions, all portfolio/financed/facilitated/insured emissions for financial entities, and all land-based emissions.
2. Plan Within 12 months of joining, publicly disclose a Transition Plan, City/Region Plan, or equivalent which outlines how all other Race to Zero criteria will be met
Include what actions will be taken within the next 12 months, within 2-3 years, and by 2030.
3. Proceed Take immediate action through all available pathways toward achieving net zero, consistent with delivering interim targets specified.
Where relevant, contribute to sectoral breakthroughs.
4. Publish Report publicly both progress against interim and long-term targets, as well as the actions being taken, at least annually.
Report in a standardised, open format, and via platforms that feed into the UNFCCC Global Climate Action Portal.
5. Persuade Within 12 months of joining, align external policy and engagement, including membership in associations, to the goal of halving emissions by 2030 and reaching global net zero by 2050.
Net Zero Engagement Initiative – launched by this Initiative expands the number of companies with whom investors are actively engaging vis a vis net zero targets beyond the Climate Action 100+ list. This should enable mot investors to develop portfolios where an even greater number of the companies they invest in, are aligned with the Paris Agreement. For more details visit their website – https://www.iigcc.org/resource/net-zero-engagement-initiative/
Net Zero Standard for Oil and Gas – Convened by members of IIGCC and informed by the Transition Pathway Initiative (TPI), this standard “sets minimum expectations for what must be included in net zero transition plans from oil and gas companies, to create a level playing field in corporate reporting and meet investor expectations for credible and comparable company net zero transition plans.” https://www.iigcc.org/resource/net-zero-standard-for-oil-and-gas-companies/
The standard notes “time is very much against all of us and we need to accelerate the pace and scale of commitments… These calls to action from industry groups and scientists alike, must translate into real, drastic, and immediate emissions reductions in all sectors. Emissions reductions across the board means significant fossil fuel demand destruction… Therefore it is essential that oil and gas company boards know that those with credible independently verified net zero* strategies will be supported by their investors. Equally important sis that this without will be challenged.” *Further on the standard specifies that these net zero strategies should include scope 3 emissions as well as scopes 1 and 2.
The Green Tau 