By Laxmi Aeshwarya Kumar, Project Specialist UNEP FI, Paul Smith, Climate Change Specialist, UNEP FI

With the World Meteorological Organization confirming July 2023 as the hottest month ever recorded in human history, COP28 later this month in Dubai will be a pivotal moment to respond to the first global stocktake on climate action.

The stocktake serves as an ‘inventory’ to understand what countries have so far achieved on climate action, to identify gaps, and to decide on the way forward. The stocktake is scheduled to conclude at COP28 and is intended to raise ambition on the principal Paris goal of minimising emissions. An advance technical report, released in September, found that countries must rapidly accelerate their impacts, ambition and implementation of actions to avoid breaching the goals of the Paris Agreement. This clear warning should focus delegates’ minds on the need for action to reduce emissions as they address the myriad of interrelated issues underpinning climate action, ranging from the adaption gap, gender topics, scaling renewables to a just transition. However, it is finance – and particularly private finance – that remains essential for the transition to a low-carbon economy. So, what are institutional investors doing and what further can they do to support global net-zero ambitions? Both the Founding Partners of the Investor Agenda and the Legal Framework for Impact (LFI) project shed light on the policy environment necessary to scale private climate finance.

Fiduciary duty & climate change

An extensive legal analysis authored by Freshfields and commissioned by the Generation Foundation, the Principles for Responsible Investment (PRI) and UNEP FI, finds that investors in all 11 jurisdictions covered by the report must go through a process to identify the systemic risks and opportunities that are material to their investments and most are likely to have a legal duty to pursue sustainability outcomes where those can have an impact on financial returns.

In the case of climate change, which is widely acknowledged as a system-level risk – i.e., risks that could lead to the collapse of entire markets or the financial system as a whole – investors may have a legal obligation to consider what actions they could take to increase the positive impacts of their investments on the climate, decrease the negative impacts, and to act accordingly. Risks and opportunities faced by individual firms can also impact long-term shareholder value, which is the touchstone of fiduciary duty.

But what is keeping investors from taking greater action?

Many investors have already integrated climate targets in their investment activities through stewardship, policy engagement and capital allocation. Yet, some investors face uncertainties about what the law requires or says with regard to obligations under fiduciary duty and pursuing sustainability impact objectives. Other barriers include a lack of disclosure mechanisms (depending on the jurisdiction in focus) and a poor or absent infrastructure to pursue sustainability impact objectives, as well as backward looking interpretations of the law including competition law. The politicisation of sustainable finance in some jurisdictions is also having a chilling effect with some investors hesitant to act on sustainability issues to the detriment of long-term returns.

Changes needed in policy

To close the gaps in the legal landscape, policy reforms are necessary. LFI has highlighted the changes needed with regard to investors’ legal duties such as clarifying and changing the scope and interpretation of investors’ duties and discretions, and improving the circumstances in which the rules are applied.

Wider climate policy also needs to change and encompass a ‘whole-of-government’ approach in order to accelerate and scale the recent shifts that have for example occurred in industrial strategies in the US through the Inflation Reduction Act, in the EU through the Fit for 55 policy and in China through the N+1 strategy. The seven Founding Partners of the Investor Agenda – AIGCC, CDP, Ceres, IGCC, IIGCC, PRI and UNEP FI – recently published a report identifying eight key features of good climate policy frameworks that can enable investors to unlock the capital needed to meet the goals of the Paris Agreement. Based on the report, effective public climate policy should:

• Articulate clear commitments to climate action.
• Have clear targets for delivery, including interim targets.
• Be comprehensive and at scale i.e., policies should cover all major areas of the economy.
• Develop sector-specific policies that would clarify the role of different actors and sectors such as the private finance sector.
• Provide the right incentives, including fiscal policy and financing, to encourage changes in the real economy and encourage investors to provide the capital to make these changes.
• Deliver a just transition, which is fair and inclusive, provides decent work opportunities and leaves no one behind.
• Be transparent by enabling corporations and investors to report on climate risks and opportunities, climate management and transition actions.
• Support transition planning, so that organisations have actionable plans to underpin their commitments to the low-carbon transition.

Over the past six years, investors have called for increasingly ambitious action through the Investor Agenda’s Global Investor Statements and this report provides a springboard for further global advocacy work in 2024.

What’s next?

There is a lot of uncertainty around the potential outcomes of COP28, but policy at the global and domestic levels needs to change if we are to accelerate progress on climate action. However, investors can and are already taking positive action in response to the global climate crisis. We are seeing best practice examples through initiatives such as the UN-convened Net-Zero Asset Owner Alliance, the Investor Agenda’s Investor Climate Action Plans and the Glasgow Financial Alliance for Net Zero. Calling for greater policy ambition will continue through the work of the Investor Agenda and the Legal Framework for Impact, as it provides investors with a legal footing for climate action.

Coordinated and scaled-up climate action across all sectors and actors remains our best blueprint for a liveable planet for present and future generations to come.