COP26 speech: Financing a resilient net zero
The transition to net zero provides the greatest investment opportunity of our generation.
It is estimated to require $125 trillion to 2050, according to new research carried out by Vivid Economics for Race to Zero. The research outlines the investments required to meet net zero as an aggregate and breaks it down by sector, regions, investment actor and timelines.
To give this some scale, this will mean a tripling of investments each year to 2030 from current levels and doubling further to $4.8 trillion by 2040. 70% of such investments are expected to come from private sectors, either directly by financiers or by supporting companies through their capital expenditure plans.
The good news is that by 2030, up to four-fifths of decarbonisation technology investments could be better value than conventional, emissions-intensive alternatives. So, it makes sense to support companies to invest in a way that is future-proofed.
But research also finds that investment requirements and the opportunity sets vary across different sectors, due to technology maturity and policy dynamics for each sector. There is no ‘finance fits all’.
LGIM manages $1.8 trillion of assets for clients and customers globally. We know that the path to net zero is different for every company in every sector.
As a leading global asset manager, we are addressing this through engagement and commitments including our Climate Impact Pledge, which we established after the Paris agreement. The Pledge is one example of our sectoral engagement approach: this year we deepened sectoral coverage into 15 subsectors from the initial six. Each sector has specific assessment criteria, scoring and escalation models.
We have seen positive change through such engagement.
• For example, a US utility company, which said climate change was not the concern of its business four years ago, has now committed to net zero.
• A Japanese car manufacturer that once barely addressed operational emissions is now committing to electric vehicle sales.
• An insurer that once stated that the life-insurance business has no impact on the climate in Hong Kong has now started to understand its carbon footprint and decarbonising its balance sheet.
All of these steps are happening because we understand their contextual, business challenges and regulatory pressures.
We have created a global research and engagement platform that brings together all asset classes, from equity to debt and private assets, to determine the exposure of sectors and companies to the climate and the relevant risks and opportunities, allowing us to shape our sectoral investment decisions across the capital structure.
One such sector is the built environment. We build, retrofit and manage properties in our real assets business. We also invest in listed real assets companies and are one of the UK’s leading house builders. All homes built by Legal & General will be capable of operating at net-zero carbon emissions by 2030. We will open the UK’s first net-zero carbon retirement community by 2030. And our pioneering modular homes manufacturing facility in North Yorkshire is already producing homes that have the highest level of energy ratings.
Traditionally, energy has been provided by an electricity provider. These providers centrally sourced coal, which was burned to create electricity, which was then sent through grids into our homes and businesses. We now have the technology that allows us to generate our own electricity on our roof, and store it in-house or even in our electric vehicle.
Over the past 18 months, I have been co-chairing the COP26 Business Leaders Group, alongside COP President Alok Sharma, which aimed specifically to establish effective cross-industry collaborations and to deliver against agreed commitments. As diverse business representatives, we have come together in a way which illustrates what is needed to help to deliver the net-zero transition. We need to keep up the development of collaborative policy frameworks, collective debates, and real delivery through forums such as the Glasgow Financial Alliance for Net Zero and Nature Positive.
Climate can unite us all: it is not just the greatest challenge, but also the greatest opportunity, of our lifetimes.
COP26 can be the catalyst for agile, bigger, and more effective net-zero actions.
So, when we leave Glasgow, our greatest task is to move from pledging to doing – to put into practice what we have all promised. Inaction is not an option.