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The investment industry should unleash its fiduciary capital to address climate change

By Craig Baker | October 29, 2021

Trillions of dollars of private investment capital can potentially be unleashed on the climate challenge if COP26 can set the collaborative mood.
Environmental Risks
Climate Risk and Resilience

As COP26 in Glasgow approaches, most of us working in the investment industry recognize the critical opportunity – and responsibility – we have to influence and facilitate climate transition.

The way we allocate and steward our own capital and our clients’ capital, the projects and industries we support, and the climate-resilient infrastructure we help get off the ground in the years to come will shape the speed and effectiveness of efforts to reduce emissions and limit global temperature rise to around 1.5⁰C above pre-industrial levels.

I am heartened by the way much of the investment industry has already mobilized itself to be a strong and active voice in the wider debate about climate action plans and in the buildup to COP26. Nevertheless, one thing that has become abundantly clear from having been personally involved in Willis Towers Watson joining some of these initiatives and establishing our own corporate net zero pledge and a net zero pledge for our delegated investments by 2050 is the need for broad collaboration to turn talk into action.

For me, my colleague Roger Urwin neatly summed up the collaborative challenge of addressing climate change at speed and scale when describing a thought experiment called the 4321 pin code in an article for Investment and Pensions Europe. The basis of the thinking is that governments and policymakers have four units of power, corporations three, the finance sector two and people one unit. But since more than 10 units are required to solve the climate change challenge, the soft power of finance, and truly sustainable organizations, have the potential to punch above weight. The finance sector’s two units, for example, can be multiplied by combining with people (through democratized finance) with corporations (through enlightened ownership) and with policymakers (through empowering regulation).

So what might this mean for what we need out of COP26? For that, I’d defer to the Act Now document produced by the Glasgow Financial Alliance for Net Zero, of which we are a member.

But to highlight a couple of aspects I’d like to see emerging from COP26 in slightly more detail, I think that defining the road map of solutions and the measurement standards that will help guide investment decisions are of fundamental importance.

What I mean by the solutions road map is the alternative power sources and technologies that policymakers will incentivize for a cleaner future, so that investors can follow the lead and support initiatives with private capital. And on measurement standards, we as investors need to be working from the same playbook. That’s why we’re taking steps to fill gaps in climate transition metrics ourselves with initiatives such as our recent launch of the STOXX Willis Towers Watson Climate Transition Index with Qontigo. By building balanced, mainstream portfolios aligned with the goals of the Paris Agreement, this will enable investors to address the financial risk to company share prices caused by climate transition. In addition, these approaches help investors to allocate capital in a way that is better aligned with commitments to reduce real world emissions.

We all need to be working together to unleash the real power of fiduciary capital on solutions to climate change.


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