KLP climate adviser sets out four barriers to achieving net zero

KLP chief adviser - climate change, Lars Erik Mangset, has set out four barriers that need to be overcome to achieve net zero and limiting global warming to 1.5 degrees Celsius.

In a TEDxSkift Talk, which was arranged as a countdown to the climate negotiations in Glasgow and presented Norwegian climate solutions, Mangset noted that it has been six years since the global community adopted the climate ambition of limiting global warming to 1.5 degrees Celsius. “Since then, emissions have continued to increase,” he said, adding that we are currently on track to reach global warming of 3 degrees Celsius.

“The probability of missing the 1.5 degree target is growing and businesses and financial institutions are increasingly becoming aware of the fact that a business environment in a 3 degree world is not a good one. In response to the growing emission gap 200 asset owners with USD 50trn in assets under management has voluntarily committed to aligning their investment portfolio with the 1.5 degree target. We’re talking about a capital base equal to the GDP of China, USA and the European Union combined,” he said.

“A mass movement has started but at the moment it is running in different directions. For it to have the global impact on emission levels that is so desperately needed, the investors need to move in the same direction. To achieve this, I propose there are four barriers that need to be tackled. The first barrier and the fundamental one is measurement.”

“If you ask an investor today, ‘what does a Paris Aligned investment actually look like’, there will be very different answers. We are not able to really measure the climate profile in our investment portfolio in a very good way. As an example, if you want to calculate how much CO2 does an investment emit per million dollars in revenue. By using that calculation, a coal company with 50m tonnes of CO2 can look better than a consultancy company with only 900 tonnes of CO2 emitted.

“The measurement challenge explains why investors’ net zero targets are defined in very different ways – this is why we need science-based approaches. One that makes a connection between how we measure emissions from our investments and make a connection to global emission levels in the real world. Unless valid measurements are used by investors then the mass movement will not be as strong as its potential.”

The second barrier is transparency and Mangset said that unless there is more transparency on how investors are measuring Paris Alignment goals, then “we will miss out important knowledge desimulation and sharing between investors.

“No one has the perfect solution today, it will need to emerge over time and that is why I think that the financial community should think as net-zero targets as we do with open software development where publicly accessible information underpins the creation of new ideas, new solutions and innovation. We need transparency for stakeholders – customers, non-governmental organisations, and politicians – so they can make the final judgement on how investors are actually aligning their investments towards the 1.5 degree target.

“Under the right conditions, transparency in itself can be a vital driver itself for creating a race to the top amongst the largest investors in the world.”

The third barrier is creating impact, which focuses on whether companies should divest from certain companies or remain invested and try to change them from within. He said that neither of these strategies will succeed unless there is a “critical mass” of investors that work together to achieve the changes in the companies.

“If investors can agree on what companies should do, then they can enforce that view by collectively voting together to actually change the companies from within.”

The final barrier is politics, as Mangset said it is “unrealistic” to expect that the financial sector should change the current emission rates. Specifically so, for institutional investors who manage money on behalf of overs such as pension funds. This is because investment portfolios mirror the real economy. If the real economy is going in one direction and investing in the opposite direction, may lead to unacceptable high risk and lower returns.”

He acknowledged that the financial sector can impact global emission targets in isolation from politics but he believes it has its limits. “I think it’s useful to think of the financial sector as a catalyst, one that amplifies climate regulations – if fossil fuel subsidies dropped then investment will fall. If high carbon prices are introduced, then capital will shift from financing brown activities to greener activities overtime. In absence of such policies there will always be opportunists in the market that will take advantage of profitable opportunities.”

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