Turning Up The Heat On Investors’ Role In Net Zero

Getting traction on the critical information that will help investors to decarbonise their portfolios is the focus this year for two New Zealand-based organisations behind a survey that reveals momentum toward credible net zero targets has slowed in the local investment sector.

The 2022 State of Net Zero Investment in Aotearoa New Zealand survey shows that New Zealand investors overall are trailing their Australian counterparts on making pledges and taking climate action, while the Australians lag behind leaders in the EU.

The full report is now out, following a November 2022 summary report. As well as detailed findings, the full report contains case studies of funds and initiatives that are stepping up to the Net Zero challenge, and resources for investors.

This is the second annual survey by the Aotearoa New Zealand Investor Coalition for Net Zero, whose core members are the Centre for Sustainable Finance: Toitū Tahua, Mindful Money, and Australia-based Investor Group on Climate Change (IGCC).

As is the case worldwide, billions of dollars of private capital is needed alongside public funding for New Zealand to meet its net zero by 2050 commitments. New Zealand’s Climate Change Commission estimates $34 billion of additional investment across key areas of the economy is required by 2035.

In response to changing societal and regulatory expectations, investors, asset owners, banks and insurers around the world have been signing up to voluntary Net Zero pledges: commitments to reduce emissions across their lending and investment portfolios to net zero by 2050. After a flurry of pledge-making in 2021, momentum slowed over 2022. At the same time, scrutiny of investor climate action and inaction rose.

“Achieving net zero requires a huge and urgent transfer of capital to low emissions businesses and industries. This has major implications for how we understand risk over different time scales,” said Jo Kelly, Centre for Sustainable Finance chief executive.

“Increasingly investors recognise they have a crucial role to play, and that there is a benefit to participating actively in the transition. But there are certain system shifts needed to get money moving into climate solutions at the massive scale and speed required,” she said.

Critical enablers

Survey respondents said a lack of data, tools and definitions around climate investing and net zero strategies were the biggest barriers to more climate-aligned investing.

The Intergovernmental Panel on Climate Change (IPCC) estimates that financial flows globally are ‘three to six times lower than levels needed by 2030 to limit warming’.

Kelly said critical enablers for unlocking those flows in New Zealand – much of which will flow in from offshore – include:

• Establishing common, credible data and definitions of sustainable activities to give investors confidence and align New Zealand with the rest of the world.
• Deploying innovative models for equitably funding and financing climate solutions, including renewable energy and infrastructure, and the wider net zero transition.
• Direct and collaborative engagement by investors with companies – as part of wider investor stewardship – ensuring that companies’ capital allocation and investment decisions accelerate their path to net zero, driving rapid changes in the real economy.

“The Centre will be working to advance these enablers over 2023 as part of a wider push to build a robust, efficient sustainable finance market in Aotearoa New Zealand,” Ms Kelly said.

“It’s worth noting that the survey found a very strong desire across the industry for more collective engagement with New Zealand companies,” she said.

Drivers for change

Mindful Money founder and chief executive Barry Coates said the charity views consumers as a major driver of change towards the climate transition. “The public expects that the fund providers investing their KiwiSaver or investment funds will behave responsibly. Climate action is one of the priorities for investors. Mindful Money’s focus for 2023 will be on raising public awareness of actionsways that investors can support the transition to net zero, enabling them to take informed investment choices,” he said.

Mindful Money’s programme during the year will include enhanced disclosure of investment policies and practices on climate change. This includes providing free and public accessible information, such as new data on the portfolio holdings of all KiwiSaver and retail investment providers and their stewardship activities. Mindful Money will also work with the finance sector to scale up investment in climate solutions and engage with consumers to build demand.

Barry Coates added, "This Is a critical time for the Aotearoa New Zealand finance sector to step up its commitments. This survey shows relatively slow progress so far, but climate disclosure reporting is likely to provide new impetus. This survey clearly outlines the steps required to reduce financed emissions on a net zero pathway."

Climate risk Is finance risk

Report lead author David Lewis said, “Enabling finance to play its part in the net zero transition is pivotal. A bank portfolio or an investment fund is a window on the whole economy; if the financial sector is not decarbonising its assets, it means the economy isn’t.”

“Finance is a gatekeeper — businesses need loans from banks, money from investors, and the finance community is increasingly recognising that it can use that role to set expectations and help incentivise clients or investees to decarbonise, as well as directly investing in the solutions,” he said.

Kelly said, “We can expect that as more and more companies in NZ and elsewhere are required to report on their climate risks, the fact that climate risk is fundamentally financial risk will become much clearer.

“The evidence is unequivocal: the physical impacts of climate change, along with so-called ‘transition risks’ — a range of business risks, including litigation and reputation risks — will threaten the stability of the global financial system within our lifetime. The time to act is now,” she said.

© Scoop Media