The sustainable investor for a changing world

Front of mind | Article - 5 Min

The Paris climate targets require investors to act

On the subject of achieving the Paris climate targets, Jane Ambachtsheer, Head of Sustainability at BNP Paribas Asset Management, is forthright. She says the world will not hit the mark of capping global warming at 1.5 degrees Celsius if we wait for governments to act. That judgment helps explain BNPP AM’s drive to ensure that investments contribute to attaining the climate goals.

Last year’s climate summit in Madrid exemplifies the current situation. The longest UN climate talks on record turned out to be inconsequential for climate negotiations and deeply disappointing for the world’s fight against climate change.

The talks reflected a growing polarisation between the major emitting countries which blocked any attempt at the mandatory strengthening of national emissions-reductions plans, and the leadership shown by vulnerable countries and the European Union.

There was disappointment as well on the technical side. There were hopes that the parties would finally agree on the rules that should govern global carbon markets (Article 6 of the agreement). However, this was postponed for talks to be held this year.

Largest ever joint call for climate action to governments

The silver lining of the COP were the commitments from what the UN calls non-state actors. A record 613 investors with USD 37 trillion in assets (including BNPP AM) sent the largest joint call for climate action to governments in history.

And COP-25 saw the first ever-public commitment from an oil giant to reach net-zero emissions by 2050. Meanwhile, the European Investment Bank (EIB), in an unprecedented move, announced that it will phase out lending for almost all fossil-fuel projects after 2021. It is now the first multilateral development bank to go this far with a fossil-fuel lending policy.

Yet while companies, investors and civil society are showing progress on climate mitigation and adaptation, the reality is that governments are moving slowly. Even so, we must be hopeful about the next decade – and in particular this year: we need to see improved climate pledges on the table by the time of COP-26 in Glasgow.

Reason for optimism

In 2006 Al Gore’s documentary, An Inconvenient Truthwas one element of a wake-up call on climate change. The film contributed to raising worldwide awareness and galvanising a movement to counter global warming and pollution.

While the threat of climate change is now taken much more seriously, it is more than ever a race against time. Climate science has made major advances and green technologies such as solar power are quickly becoming mainstream. And climate is at the forefront of public debate again – thanks in no small part to Greta Thunberg, the world’s new Al Gore.

The greatest gains have been on the economic front: the cost of renewable energy has fallen notably. According to IRENA, renewable power is already the cheapest source of electricity in many parts of the world. With prices set to fall further, the cost advantage of renewables will only grow.[1]

Public pressure, government support and continued improvements in the economics of renewables and related technology costs – notably regarding battery storage – should make further advances likely. This in itself should improve the odds of meeting the Paris Agreement.

When politics moves

With current policy, we are heading for an average global temperature rise of more than 3°C, according to Climate Action Tracker. That means governments will need to start acting if they really want to stop climate change and investors should prepare for such measures.

In anticipation of sweeping policy changes, the Principles for Responsible Investment (PRI), together with other organisations, has drafted the Inevitable Policy Response and assessed its consequences. It expects that by 2030, leading countries will have taken steps to phase out coal usage and will have introduced additional CO2 pricing. By 2035, they will have banned the sale of new fossil-fuel powered cars.

It is important that financial institutions and investors anticipate such measures and respond to them. At the same time, they can actively contribute through adopting a climate investment strategy.

Exerting influence

For stakeholders such as investors and asset managers, there are various ways to bring influence to bear. One is through voting at shareholder meetings.

In 2019, BNPP AM was one of the most likely managers to back pro-climate resolutions. Among the resolutions examined by Majority Action, we supported more than 95% of shareholder proposals on topics such as improved emissions disclosure and reduction plans, transparency on lobbying, and governance reforms to improve accountability.

An investor can also seek dialogue with companies and other issuers of securities. For example, BNPP AM, Church of England and Sweden’s AP7 fund have asked large European and US companies to align their lobbying activities with the Paris goals. This initiative is part of a wider effort by the Climate Action 100+ investor group seeking to ensure that some of the world’s largest companies take the necessary action on climate change.

One successful outcome of Climate Action 100+ engagement is that Shell is now leaving the American Fuel & Petrochemical Manufacturers lobby group, citing divergent climate policies as it supports the Paris objectives. The oil and gas company is reviewing its alignment with a total of 19 industry organisations.

Finally, investors can exert influence through their investments, by financing or excluding certain activities. BNPP AM, for example, does not invest in tobacco or coal-fired power plants.

Limiting warming to 1.5° Celsius: investors’ role

Aligning investment portfolios with the goal of limiting the global average temperature increase to 1.5° Celsius poses a number of challenges.

  • Few companies’ business operations are currently aligned with 1.5°C.
  • The data and methodologies used to measure the impact of companies (and their temperature pathways), are not yet optimal.
  • The current political climate requires tougher engagement on government policy.
  • The business lobby favouring the status quo is stronger than that supporting a transition.

Support is coming from initiatives such as the New Climate Economy, which looks at the economic benefits of the transition to a low-carbon economy and the jobs that it generates.

As a long-term investor, it is essential to focus on the future, and in particular, three key themes guide our in-depth research, engagement and thematic investment. These are the energy transition, environmental sustainability, and equality and inclusive growth. In line with this focus, BNPP AM has launched an energy-transition strategy, a zero-carbon strategy and a circular-economy fund.

These efforts are in line with work we are doing on climate-related financial disclosures and classifying business activity, for example, in connection with the European Commission’s new taxonomy for sustainable investment.

Looking ahead, a key focus for the industry is on measuring impact: environmental impact, and more broadly, impact aligned with the UN Sustainable Development Goals (SDGs). This is a topic we are working on, and we look forward to sharing our advances with investors in the months ahead.

This article based on an interview with Jane Ambachtsheer with

[1] The costs for renewable energy technologies decreased to a record low. The global weighted-average cost of electricity from concentrating solar power declined by 26%, bioenergy by 14%, solar photovoltaics and onshore wind by 13%, hydropower by 12% and geothermal and offshore wind by 1%, respectively, the International Renewable Energy Agency said in May 2019.

This article has appeared in The Intelligence Report

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Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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