In this series, White Marble’s Sustainability team highlights the key themes that we believe will take centre stage over the next 12 months and beyond. In the fifth article, Rebecca Vogel approaches one of the most high-profile topics in Sustainability and ESG: the transition to net zero.

It is true that every year is a big year for climate change, but this is a particularly important one. The COP26 summit is set to take place in Glasgow at the end of the year.  It hopes to bring countries together to accelerate action towards the goals of the Paris Agreement. Foremost among these is the goal to limit global warming to well below a two degrees Celsius increase above pre-industrial levels.

To this end, countries, cities, corporations and individuals around the world are being galvanised to reduce their emissions of greenhouse gases, ideally to zero. The practicalities of this can mean different things to different entities. There are a range of implications and measures that need to be taken for cities or national governments compared to companies or individuals respectively, but they are interrelated.

For many of us, at an individual level, this means a series of changes, big and small, to our everyday life. From the easy – like eating more locally sourced produce or reducing our red meat consumption – to more demanding shifts such as climate-proofing our homes, looking at how our pensions are invested and changing our travel habits.

For governments, city administrations and companies, taking active steps to reduce emissions and transit to cleaner ways of operating represents an extremely complex
challenge. Transformations are required in every sector of the economy, and it calls for sustained investments over a long period of time. For example, organisations should be looking at their providers and supply chains, and engage with them to evolve towards better, cleaner technologies.

If we look closer to the wealth and asset management industry, this concept of engagement is really key. Not only when engaging with providers, but also and very importantly, when investing directly in sectors that have a more concrete link to climate change, such as utilities and infrastructure.

The dangers of exclusions and divestment

Historically exclusions have been the most popular method by which ESG is integrated into investment decisions. But the pressure on asset and wealth managers to divest from certain ‘problematic’ sectors may actually be counterproductive in the drive to achieve a carbon neutral/net zero future.

For example, an asset manager announcing to the world that they have achieved net zero in their portfolios, by cutting all high-emitting holdings, may look good on paper but it does little to advance the bigger picture. Many of the companies that are subject to calls for divestment are the very ones that have the potential to contribute significantly to the systemic shift to a low-carbon economy.

Traditional energy providers are not the only sub-sectors to face this issue. Despite being one of the most efficient sources of clean energy, nuclear energy seems to continue to struggle with a severe reputational issue, and is often overlooked by investors. This is certainly in part due to the complicated conflicting moral and ethical views that many asset owners have on the subject, as well as the memories of disasters such as Fukushima and Chernobyl.

It is clear that the transition to net zero is a highly complex, multi-faceted process that will take considerable investments and require systematic behavioural changes. Rather than operating in isolation from one another, a partnership approach between investors and investees, the public and private sectors will have the best chance of producing win-win outcomes for asset owners, societies, and our planet.