Emerging Markets

No one left behind

If the world is to achieve net zero, investors’ current approaches to allocating capital must change. We examine the flaws in asset managers’ and owners’ interpretation, which has led them to set portfolio-level carbon targets that will stymie global net zero ambitions.

Oct 27, 2021

40 minutes

If the world is to achieve net zero, investors’ current approaches to allocating capital must change. We examine the flaws in asset managers’ and owners’ interpretation, which has led them to set portfolio-level carbon targets that will stymie global net zero ambitions.
Monitoring EM countries’ alignment with global climate goals: a new index to track EM climate performance.

The fast view

  • If the world is to achieve net zero at a speed compatible with the Paris Agreement’s goals, investors’ current approaches to allocating capital must change.

  • The approaches’ flaw lies in asset managers’ and owners’ interpretations of net zero, which has led them to set portfolio-level carbon targets that may actually stymie the world’s net-zero ambition.
  • The acute risk in these capital-allocation models is that emerging markets may be starved of the finance they need to transition to net zero. No net zero in some parts of the world means no net zero everywhere.
  • The first step is for investors to get better at assessing whether an investment or portfolio is aligned with a net-zero pathway that works for all the world. We believe core portfolios should move away from a myopic focus on carbon intensity and towards a focus on a transition. None of the current metrics offers a comprehensive tool.
  • The Net Zero Sovereign Index, introduced in this paper, provides, we believe, sovereign- debt investors with the best, independently verified assessment of Paris-alignment.
  • The next step is to create financial instruments that help capital allocators align with real-world decarbonisation. It is crucial that the developed world and global investor community increase funding to finance the transition in emerging markets. Asset owners must commit capital to a transition, and work with asset managers and policy makers to develop common usable standards for transition finance.
  • We hope that this paper and the Net Zero Sovereign Index encourage a deeper discussion about what capital allocators can do to help achieve a real and sustainable path to total net zero. Time is short.






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