The importance of policy for meeting net zero commitments

Claire Jones

Partner and Head of Responsible Investment

At the last count, 93% of the world’s GDP1 and nearly 60% of the world's 2,000 largest publicly-traded companies in the world by revenue had a net zero target2.

In addition, more than 325 asset managers – with USD 57.5 trillion in assets under management – had signed up to the Net Zero Asset Managers initiative.

Statistics like these provide a sense of optimism about achieving net zero emissions and limiting global average temperature rises to 1.5°C above pre-industrial levels.

However, despite the pledges, global emissions continue to rise, with the UN warning that we are on track for temperature rises of 2.6-3.1°C.

So there is clearly a massive gap between targets and actions. This is something that all long-term investors should be concerned about: keeping temperature rises as close to 1.5°C as possible is vital for the long-term health and stability of financial markets.

Investors should be actively demonstrating their support for credible net zero policies and working with policymakers to develop and deliver them.

Net zero commitments: the small print

Net zero commitments by investors typically say something like this:

"These commitments are made in the expectation that governments will follow through on their own commitments to ensure the objectives of the Paris Agreement are met, including increasing the ambition of their Nationally Determined Contributions and in the context of our legal duties to clients and unless otherwise prohibited by applicable law."(The Net Zero Asset Managers Initiative).

In other words, fulfilling their own net zero commitments is conditional upon the actions of others. The commitments assume economy-wide decarbonisation, driven by a supportive policy regime around the world.

This is not unreasonable – the real goal is to reach global net zero, not net zero for entities in isolation, but this can only be achieved by large numbers of actors working together.

However, if we start to see asset managers and others missing their interim targets, they have a get-out clause. They will be able to blame the failings of governments.

The role of policy advocacy

Given the importance of government policy for investors to meet their net zero – and hence financial – objectives, I think it’s unacceptable for investors to sit back and wait to see what governments will do. Instead, investors should be actively demonstrating their support for credible net zero policies and working with policymakers to develop and deliver them.

Net zero commitment statements go some way towards this. For example, when signing up to the Net Zero Asset Managers (NZAM) initiative, asset managers say they will:

“Ensure any relevant direct and indirect policy advocacy we undertake is supportive of achieving global net zero emissions by 2050 or sooner”.

Here’s the twist though: net zero commitments often fall short of requiring policy advocacy and, in my experience, the policy advocacy undertaken tends to be quite limited and focused on financial sector regulation.

On the plus side, I’m seeing that start to change. Investor initiatives such as the Principles for Responsible Investment and the Institutional Investors Group on Climate Change are stepping up their policy work and placing greater emphasis on real-economy policy.

LCP's climate policy work

At LCP, we understand that we also need to play our part in securing the policy changes required to achieve net zero, which is vital for long-term health and stability of financial markets. We are encouraging others to do the same. That’s why we’ve stepped up our work in this area. More generally, we’re placing greater emphasis on “systemic stewardship” – actions that seek to influence the outcomes for a whole system, with the objective of addressing systemic risks that have the potential to materially harm financial outcomes.

We’ve developed five “asks” for policymakers in relation to climate change.

Our five climate policy asks

We are using these asks to guide our conversations and thought leadership on climate policy, so that we focus on a small number of important areas for our clients. By publishing them, we are increasing the transparency of our policy work and inviting others to get behind our asks.

You can read more about each ask on our website. To find out how you can support the asks, please contact us.

The evolving policy landscape

Since we developed our policy asks, the UK political context has become more favourable for achieving them. The election of a new Labour government in July 2024 brought a clean energy mission, greater recognition of the need for policy clarity and certainty, and a big focus on crowding in private capital to finance energy transition.

The government’s mission to deliver clean UK power by 2030 should help to close the gap between the current reality and the scale of policy ambition needed to address systemic climate risk. However, much remains to be done to develop and implement policies that deliver on the mission. And decarbonising our power system will not be sufficient on its own to achieve net zero emissions.

There is a large role for investors in demonstrating their support for effective climate action, to give the government confidence to make difficult choices in the interests of long-term economic health. Also, in helping to shape climate policies, for example by providing input on how to create investable opportunities that will drive the net zero transition and the role of policy in overcoming barriers to investing in those opportunities.

Actions that investors can take

When deciding where and how to undertake climate policy advocacy, investors should consider where they have the greatest ability for influence.

For example, a UK-based investor may focus on the UK government, whereas a global asset manager is more likely to have influence with US policymakers. If national governments are not supportive of climate action, there may be opportunities to influence policies at regional, state or local levels instead.

Investors can undertake policy advocacy directly, or indirectly through industry collaborations. The latter can be an efficient and effective way of influencing policy, through demonstrating critical mass of support for the group’s policy positions. It is also helpful for policymakers to hear consistent messages from multiple parties. However, the need to achieve consensus can constrain the ambition of the positions adopted.

For smaller asset owners, direct involvement in policy advocacy may not be feasible, but you can still play an important role through holding your asset managers to account on policy advocacy:

What policy advocacy are your managers undertaking in support of their net zero commitments?
Are their climate policy positions publicly stated and aligned with your own investment beliefs and objectives?
How much climate policy advocacy are they undertaking and is this being done by suitably experienced staff?

In addition, you can add weight to others’ policy advocacy by using your voice to support position statements, such as LCP’s climate policy asks and the annual Global Investor Statement to Governments on the Climate Crisis.

1 Country-level target, proposed or agreed, assessed using purchasing power parity (PPP) GDP. Source: Net Zero Tracker [Accessed 7 November 2024].

2 Target proposed or agreed. Source: Net Zero Tracker [Accessed 7 November 2024].