- The report shows where capital can be directed most effectively, including 10 priority technologies, to meet the record investment in climate solutions required by 2050.
- The report underscores areas where investor engagement is needed to help corporates prioritise investments in key technologies and to obtain the corporate disclosures needed to further advance the measurement of investor contributions towards net zero.
- Methodologies for translating real economy investment needs into investment benchmarks to inform portfolio construction are explored.
- First stage in presenting a range of metrics for investors to track the contribution of a portfolio and its assets to net zero emissions reductions outlined.
- IIGCC and its climate solutions working group are now working with FTSE Russell to apply the outlined investment trajectories and metrics to the listed equity market.
7 April 2022 — The Institutional Investors Group on Climate Change (IIGCC) has today published a new report which aims to support investors in understanding the $126 trillion of investment in climate solutions required to meet the goals of the Paris Agreement.1
The report, entitled Climate Investment Roadmap: A tool to help investors accelerate the energy transition through investment and engagement, was developed with support and analysis from Vivid Economics. The findings support the key themes identified in the IPCC’s latest report on mitigation of climate change, including the need for policy changes to facilitate greater investment in climate solutions.
The investment gap: Seeing the opportunity
While recognising the need for a combination of private and public sector capital, the report provides initial guidance to investors on the investment opportunities presented by the green energy transition through a detailed investment roadmap based on the IEA NZE scenario by world region and technology between now and 2050 (see p3). For example, the investment trajectories show the Asia Pacific region requires the largest scale up in financing relative to historic levels at $9.1 trillion in the 2020s and that electricity ($10 trillion) and transport ($4 trillion) are the sectors requiring the most globally over the same period. Clearly, each investor must make a judgement based on their own risk-adjusted return profile, but the geographic and sector analysis provides broad guidance.
For investors looking to maximise their contribution towards decarbonising the global economy, the report also provides investors with a technology prioritisation framework. The framework provides 10 suggestions for technologies to prioritise in their investment decisions (solar PV, wind, grid-scale electricity storage, new electricity lines and EV batteries) and engagement activities (building retrofits, EV chargers, hydrogen-based electricity generation, forest restoration and green steel) (see p63).
The priority engagement activities – which relate to policy and regulation – can be characterised as ‘technology and market development’ and applies to technologies that face barriers to institutional investment in the 2020s, including technological immaturity, unsupportive policy environment or lack of financial instruments accessible to institutional investors.
Stephanie Pfeifer, CEO, IIGCC, said: “While investors alone do not shoulder the responsibility, we cannot escape the truth that we must see a rapid and significant step change in the amount of investment currently being channelled towards climate solutions if we are to reach net zero by 2050. Using the best available date, this report helps investors understand where their investment would have most impact on mitigating climate change.”
Measuring and tracking: Investor contributions to net zero emissions
The report is also relevant to investors as it addresses one of the major practical and strategic challenges for institutional investors seeking to play a part in supporting a Paris-aligned pathway: translating real economy need – as highlighted by the investment trajectories – into portfolio allocation. To do this, investors need to understand whether, and how much, assets in a portfolio contribute to closing the climate solutions investment gap.
The report therefore outlines possible financial metrics for investors to measure and track the contribution of a portfolio and its assets to net zero emissions reductions (see section 4). This includes a proposed Green Investment Ratio, which measures the share of a portfolio’s total investments that is financing climate solutions, and a Priority Net Zero Investment Ratio, which measures the share of a portfolio’s total investments that is financing technologies that are a priority for achieving net zero emissions by 2050 or sooner.
In addition, the importance of corporate engagement to obtain the corporate disclosures needed to further advance the measurement of investor contributions towards net zero is outlined in section 4.
Stephanie Pfeifer, CEO, IIGCC, said: “We are all aware of the scale of investment required to meet the goals of the Paris Agreement, but being able to connect the real world need with portfolio construction – and then measuring contributions – is crucial for investors. Failure to do so means investors may not contribute optimally towards meeting the current net zero pathway investment gap. We now look forward to feedback from investors on the metrics and to developing these further in the next phase of the project.”
“The report also highlights the role investors need companies to play in providing relevant climate-related disclosures, for example through metrics such as green capex. Without these, investors fail to have a clear and informed picture of the progress made by underlying companies towards delivery of their transition plans.”
Operationalising Paris-aligned investment metrics: IIGCC and FTSE Russell
IIGCC is now working with FTSE Russell to explore methodologies and options for applying the net zero investment trajectories and investment in climate solutions metrics outlined in the report into the listed equity market.
The objective of the next phase of work is to help investors operationalise the report’s Paris-aligned investment metrics and trajectories by integrating them into investment processes and the building of Paris-aligned equity portfolios and benchmarks.
IIGCC’s new climate solutions working group will assist on the next phase to ensure investor representation and consideration.
Ross Gillam, Head of Media Relations, IIGCC
+44 (0)738 850 6013
The Institutional Investors Group on Climate Change (IIGCC) is the European membership body for investor collaboration on climate change and the voice of investors taking action for a prosperous, low carbon future. IIGCC has more than 375 members, mainly pension funds and asset managers, across 23 countries, with over €51 trillion in assets under management.
IIGCC works to support and help define the public policies, investment practices and corporate behaviours that address the long-term risks and opportunities associated with climate change. For more information visit www.iigcc.org and @iigccnews.