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January 2021 | Issue 230
Opinion ESG
All types of financing will have to incorporate ESG risks and use their real economy influence
Fatima Hadj
Chairwoman, structured finance advisory board Principles for Responsible Investment
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Fund managers can no longer ignore, postpone or hide from measures to tackle climate change
When the world’s largest investors, with trillions of dollars in assets, aim to align their entire portfolios with the goals of the Paris Climate Agreement, it is time for the CLO industry to pay attention. Achieving the sustainable development goals for climate change requires the finance industry to prepare for the complete decarbonisation of the real economy.
A global campaign rallying the private sector, including finance, has been launched to achieve net zero emissions by 2050. The objective is to build momentum ahead of the UN Climate Change Conference in Glasgow in November 2021.
The direction of travel is clear, and the ambition is high and broad, encompassing all asset classes, from private equity to private debt, including CLOs and leveraged loans.
The race to zero campaign promotes actions that lead to zero emissions in sectors such as energy, tourism, transport, food and retail. The list of sectors joining is growing, with the healthcare sector, responsible for 4.4% of net global emissions, the latest to step up.
The largest pension funds and insurance companies gathered under the United Nations-convened Net-Zero Asset Owner Alliance (NZAOA) a year ago to make the bold commitment to transition their portfolios to complete decarbonisation by 2050.
Working towards decarbonisation
In October, the NZAOA published a consultation paper asking for feedback on potential targets, including a 16% to 29% reduction in carbon emissions from 2019 levels by 2025 on public equity and corporate debt portfolios.
Investor engagement, it suggested, would focus on encouraging action from the largest 20 companies not aligned with the net zero emissions target, or on companies responsible for 65% of emissions in a portfolio. This could occur directly with companies or through asset managers.
In parallel with the NZAOA, the Institutional Investors Group on Climate Change (IIGCC), a European association of asset owners and managers, published guidance on how investors can put this objective into practice for strategic asset allocation, corporate fixed income and public equities, sovereign bonds and real estate.
The IIGCC developed a net zero investment framework. This provides a basis on which investors can define strategies based on three pillars. Specifically, this covers setting the direction and portfolio structure for alignment towards the target, shifting alignment of assets to meet portfolio goals and externally influencing matters through policy advocacy and market engagement.
Net zero targets will create new risks
Investors should aim to assess net zero targets at sector and company level. Some sectors will be losers and within each sector there may be a huge amount of variation. Some companies will seize the opportunities in the transition and others will cease to exist. All types of financing will have to incorporate ESG risks and use their real economy influence. It is no longer optional.
This is just the beginning. A forceful policy response to climate change is inevitable and exposes investors’ portfolios to significant risk. Policy announcements are expected to accelerate between 2021 and 2025, with the UN Climate Change Conference a key milestone. The first three sectors identified for stronger regulation are among those most disrupted by the coronavirus crisis: oil and gas, utilities and transport.
Fund managers must be prepared. The race has already started, with the two main carbon emitting countries joining the community. China president Xi Jinping committed in September 2020 to net zero by 2060 and US president-elect Joe Biden has declared that the US will rejoin the Paris Climate Agreement.
Achieving sustainable development goals together: Principles for Responsible Investments is a UN-linked campaigning organisation committed to keeping market participants posted on the key milestones, industry actions and ESG tools that can help transition portfolios to net zero carbon.
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Global credit funds & CLO's
January 2021
| Issue 230
Published in London & New York.
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