What can net zero-minded investors still achieve in a ‘hot house’ world?

Delayed action on the climate crisis has led the global community to veer dangerously close to exceeding 1.5C of warming this century. 

As a result, experts are currently examining a host of different investor-focused climate transition scenarios informed by the science on delayed action. 

Consequently, many investors take a different strategic approach to navigating the reality of delayed action on the climate crisis, including on how credible action can be implemented in relation to net zero transition, nature-related risks, and carbon removals.

During the PRI in Person conference, last week in Tokyo, a host of climate experts sat together with a number of major global investors to discuss how to translate the latest net zero transition scenarios into investor strategy.

Alvin Low, director, macro strategy at the $287 billion Singapore investment company Temasek acknowledged that climate scenario analysis had come a long way. "I recall back when we first begin looking into it in 2019, it was a very much an emerging space. The sort of set of scenarios that we had to contend with was pretty much the IPCC scenarios. Now, fast forward 4 years later, we have seen a proliferation of scenarios. We now have the IPR, which we are discussing today, NGFS, IEA and many others. It’s very much part of the mainstream now – a required tool or recommended tool by various industry bodies or regulators.

But much of the debate at PRI focused on how the carbon budget was rapidly shrinking, he acknowledged. "In the earlier session today, one panellist mentioned this in a different way: that even if we stop all emissions right now but continue with deforestation, we will pretty much go beyond the 2 degrees scenario.

This points to our need for carbon negative solutions, and within that, nature has to be an integral part of that discussion.

That’s why last year in 2022 we at Temasek created a platform called GenZero, which focuses on decarbonisation solutions. It has 3 pillars: “technology-based solutions”, “nature-based solutions”, and last but not least, “the carbon ecosystem enablers”. By seeding this platform and by having a technical specialist, we are looking at growth companies in-depth, which will really help us to strive towards a net zero future that we so crave for" Low said.

Climate scientist Sven Teske, of the University of Technology in Sydney (UTS), could not agree more. "Delay net zero and the job will be much harder for investors," he warned.

He pointed at the "rapid, steep and unprecedented changes" investors worldwide are facing.

"Let's put colour to that. Every quarter we delay, the likelihood we won’t meet 1.5 degrees only increases."

However, Teske said “there is also hope, look at recent progress in steel and electricity, decarbonising the power sector is vital but possible."

Net Zero Investor's Annual Conference | 11th December 2023 | London

Low argued the "most important use of climate scenarios and analysis is now to push for more engagement."

In addition, Jakob Thomä, project director at Inevitable Policy Response (IPR), pointed out that "61% of investors now believe net zero will be reached but after 2050."

Investors' efforts are simply not enough, he stated. "Economics are now an accelerator, not a brake, now transition will be determined by social, geopolitical, nature and social issues."

Danielle Welsh-Rose, head of sustainability investment specialists and APAC sustainability at abrdn, acknowledged the "challenge" for investors but did stress there is a difference between forecasts and scenarios.

“1.5 degrees Celcius is not realistic anymore, 2.3 [degrees Celcius] is more likely," she shared. "That is our forecast, we are definitely in an energy transition, just not at the pace we need.”

Welsh-Rose added: “When we look at different scenarios, there is very little movement. The impact is dispersion, a very distractional valuation uplift. The result surprised me a little bit to be a honest.”

Meanwhile, Low said there is no other option than to speed up carbon removal efforts, particularly when it comes to biodiversity.

“A lot what we have been talking about is how the carbon market is under pressure. If you continue with lets say deforestation we need carbon negative solutions, nature needs to be an integral part of that discussion," he said.

"Temasek takes a Gen Z project, we focus on tech, nature-based solutions and focus on carbon consistent enablers."

Teske, however, is highly skeptikal. "I am very helpful about nature based systems but we achieved very little in the last 30 years, when it comes to carbon offsetting, right now we can just capture a day or two."

"So right now we can delay global warming by a day, or two, at most," he said to the laughter of the audience.

Jakob Thomä, project director, Inevitable Policy Response (IPR), could not agree more. "Yes, the hot house world has arrived."

So what should investors do next? "Maybe put a gun to the head of portfolio managers, investors should take a view and put their money where their mouth is," Thomä concluded.

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