Our climate is trying to kill us. Floods, wild fires, droughts – achieving net-zero emissions appears to be easing when it they just keep coming.
The good news is we can save ourselves.
The climate-changing greenhouse gases emitted from everyday activities like farming, manufacturing, traveling and heating our homes are making our planet warmer and therefore causing such extreme weather events.
Lowering these emissions so they can all be absorbed by carbon sinks, such as forests, the oceans, soil or machines, could keep global temperature rises to 1.5°C above pre-industrial levels, a safe average set by the Paris Agreement.
Many governments, including Britain’s, along with institutional investors have set 2050 as a deadline to achieve just that.
The bad news is we have reached a point where progress on achieving net-zero emissions appears to be easing when it needs to accelerate. Following years of rapid growth, momentum losing its edge in the face of political and economic issues.
“Limiting [global] warming to 1.5°C [by 2050] is out of reach,” says Mhairi Gooch, senior responsible investment consultant at Hymans Robertson.
Gooch, who leads the firm’s net-zero work, describes the target as “ambitious but plausible” back when the Paris Agreement was set 10 years ago. But today it appears progress has not moved as fast as predicted.
However, all may not be lost. “Limiting warming to below 2°C is still very much in reach,” Gooch says, before adding that a temperature rise of at least 3°C is likely.
Troubling times
Green is falling out of fashion.
Low economic growth, wars in Europe and the Middle East boosting fossil-fuel stocks and lawmakers in the US are to blame. Indeed, with growth becoming a rarity in the developed world, governments are having to decide between meeting their sustainable goals or boosting their economies.
In Britain, not everyone is con dent that hitting net-zero emissions can be achieved within the next 25 years. The Climate Change Committee, which advises the government, has warned that progress is slow.
The lack of optimism can be put down to the slow adoption of heat pumps, plans to expand London City Airport, the proposed new runway at Heathrow and awarding new oil and gases in our atmosphere, the UK appears to be on the wrong path.
There is also a backlash against attempts to create cleaner sources of energy, especially in the US. Sustainable regulation is set to become a lot looser, if not reversed under President Trump who has already quit the Paris Agreement.
In some states, the backlash has led to litigation. In November, Texas attorney general Ken Paxton sued Blackrock, State Street and Vanguard. He believes their efforts to phase out oil and gas could cause higher energy bills. Blackrock has since pulled out of a large asset management alliance aimed at achieving net zero.
Yet for the pension schemes that asset managers like Blackrock work for, mitigating the material financial risk of climate change is part of their fiduciary duty. And the financial risks are getting worse.
Extreme weather patterns have caused more than $3.6trn (£2.8trn) worth of damage since 2000 and could knock more than a fifth (22%) of GDP by the end of the century.
Research from AXA shows that investing 2% to 3% of cumulative global GDP in mitigation and adaptation measures could prevent 10% to 15% in GDP losses.
Yet investment in sustainable funds globally fell by half in 2024, compared to the previous year, despite inflows into the wider fund universe being the second highest in the past seven years thanks to a rally among US stocks.
If this continues sustainable assets under management could be worth $35trn (£28trn) in the next five years, Bloomberg Intelligence believes. This is a downward revision on the previous estimate of $40trn (£32trn).
Indeed, the era of impressive sustainable investment growth between 2016 and 2022, which saw such assets under management grow by 10% a year to $30trn (£24trn), appears to be over. Bloomberg Intelligence predicts that litigation risk and negative sentiment will see the US’ share of such assets under management drop from 30% to below 20%.
This comes despite Bloomberg Intelligence predicting that low-carbon companies will see their earnings jump by more than a quarter this year, beating the 18% expected by the benchmark.
How to achieve net zero
With so much uncertainty and with a changing geopolitical situation, how are pension schemes approaching the transition to a regenerative economy?
For Jennifer Devine, head of the Wiltshire Pension Fund, climate change is an important consideration when managing its investment portfolios. “As an open defined benefit scheme we are going to be here for 100 years, so it is something we have to think about,” she says.
Wiltshire builds its investment strategies around the various scenarios of how climate change could impact the scheme’s investment returns and funding positions.
“Obviously, anything looking into the future is an approximation, and methodologies change,” Devine says. “We have tried to make it as evidence based as possible, so the committee can put numbers around this big concept and make proper decisions o the back of it.”
Of course, there is no one-rule-fits-all to decarbonising portfolios. Different asset classes need to be approached differently. If you want to clean up your equity holdings, you could look at the scope one and two emissions. If you are looking at property, there are the EPC ratings or you could examine the methods of construction.
Wiltshire also has a dedicated climate portfolio to tap directly into the transition, such as investing in renewable infrastructure or funding tech designed to reduce the carbon in our atmosphere. “That portfolio is trying to come at the problem from every angle,” Devine says.
The Wiltshire Pension Fund has set a target of cutting 50% of its carbon emissions by 2030. “I don’t know if we will hit that target on the nose,” Devine says. “It is a bumpy journey; it is not going to be a smooth path.
“Massive global macro-economic events over the last five years have thrown us quite a few curve balls,” Devine adds, pointing to the invasion of Ukraine and its impact on energy stocks as an example.
“We set ourselves quite an ambitious target initially, and whether we will hit that or not, I don’t know, but we have been making progress in the right direction.”
For Gooch, a credible net-zero strategy has to be thinking about the real-world effect of the decisions investors make. Selling high-emitting companies is just shifting the problem around.
“Our core message this year at Hymans is about investing in reducing emissions, not reduced emissions,” Gooch says. “Everything is about transition. We have to transition all parts of all sectors, industries and economies. That includes emerging markets and fossil fuels. They all need to transition and quite quickly.”
Craig Campbell, UK head of responsible investment at Aon, agrees that divesting is simply passing the problem on to somebody else. “It is much better, albeit di cult to measure, to use your role as an active steward of capital to engage better behaviour towards decarbonisation.”
It’s good to talk
Deciding where to invest is not the only lever asset owners can pull to make their portfolios carbon neutral. “Engagement is absolutely essential, and you have to constantly raise the bar on this,” Gooch says.
And the engagement side of portfolio management always needs to be improved. “There is obviously a lot of backlash on ESG, in the US in particular,” Gooch says. “That is where we just have to go stronger as asset owners, on our beliefs as these are important topics. They are financially relevant. They underpin our economies and financial system. They should not be an afterthought,” she adds.
German sports carmaker Porsche is one corporate where investors have much to discuss with management. The company is believed to be set to continue making petrol-powered cars for longer than planned due to demand for one of its electric models collapsing by as much as 50% in the first nine months of 2024.
Then there is BP. There are fears the oil and gas giant could move away from renewable energy as falling pro ts have left its share price depressed and some of its shareholders are demanding change.
This comes as a coalition of global pension schemes and insurers collectively managing $1.5trn (£1.2trn) worth of assets has called on their peers to improve how they interact with their portfolio companies to fight the financial impacts of climate change.
The Asset Owner Statement on Climate Stewardship, which counts the stewards of some of the largest pots of retirement savings in Britain as members, wants asset owners to ensure that their asset managers meet their net-zero expectations.
“Time is running out in the lead up to 2030,” Leanne Clements, head of responsible investment for People’s Partnership, said in a statement. “Asset owners and asset managers must work together in partnership to drive meaningful change – not only in the companies in which we invest, but in the underlying economic, social and environmental systems upon which our members depend,” she adds.
And asset managers are failing to use their votes to hold companies accountable for their social and climate impacts. Their support for shareholder resolutions aimed at tackling social and environmental issues slumped to a new low in 2024, according to responsible investing campaigner Share Action. Only four out of 279, or 1.4%, of the shareholder proposals assessed by the campaigner received majority backing, down from 21% in 2021.
The Wiltshire Pension Fund holds the asset managers who are not delivering their sustainable goals to account, and publicly in various reports. “We are not secret about what we are doing,” Devine says.
For Campbell, this is important. “You are relying on asset managers to invest money on your behalf in line with your goals,” he says. “It is absolutely crucial to ensure that managers are engaging with companies to decarbonise them in line with your goals.”
A sound stewardship strategy offers many benefits, Devine says. “Engagement can help not only reflect what the beneficiaries want, but you can also use it to set an example in the industry as well.”
But engagement can only take your portfolios so far and for Campbell this could mean you achieve “near zero”. “Before the endpoint you will have to invest in a carbon-offsetting strategy, because there will be some emissions in the portfolio that will just be too hard to abate,” he says.
Meet the new boss
One area where engagement may not help is with the new president of the United States, who wasted little time pulling out of the Paris Agreement, so does his election make net zero by 2050 more less likely?
“Over the last five years, we have weathered some significant events,” Devine says. “We saw our returns chart plummet and come back up again during Covid and have seen wobbles around the conflict in Ukraine. Although we want to understand how our investment managers are dealing with those issues, it doesn’t impact our strategy.”
“We are here for 100 years, so have to look beyond short-term noise,” she adds. “We still believe, and the modelling shows us, that net zero by 2050 is the right outcome financially for our pension fund. So we won’t change our strategy o the back of short-term political noise.”
Trump has created more uncertainty, but longer term there is potential for sharp shifts in policy once he departs.
“While we are not on track today, there is a significant level of expectation that policy will shift in the future to help bring us into that position,” Gooch says. “So for pension schemes, building a net-zero strategy should be about navigating this transition that is already underway has plenty of momentum and that we will likely see further shifts in the future.”
We need them. If they don’t come our climate will continue to try killing us and the generations that follow.
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