How Wall Street can win on climate in 2021

This year, financial institutions must make a significant leap forward on climate – from pledges to progress.

Even amidst a global pandemic, 2020 proved that climate finance and ESG are more than passing fads, with net-zero financed emissions commitments from Morgan Stanley, JP Morgan, and a group of 30 international asset managers – Net Zero Asset Management Initiative – with $9 trillion in assets under management.

At the start of 2021, leading investors openly recognize that climate change presents a massive systemic risk and a multi-trillion dollar opportunity. But for the vast majority of firms, the real work of implementing climate and ESG integration is ahead.

With increasing public, government, and shareholder attention on climate, here are three ways that sustainable finance leaders will emerge in 2021.

1. Integrate climate into core business

A 2050 net zero vision may be an inspiration, but it is not a plan. To realize its ambitions, Wall Street must integrate climate into its core business, evolving its approach to capital allocation and changing its relationships with carbon-intensive industries. Asset owners will demand no less of asset managers.

This transition will require a far sharper focus on short-term, sector-specific benchmarks tied to de-carbonization pathways. Starting with the high-impact industries that matter most for solving the climate crisis.  For example, in the oil and gas sector, investors can assess progress and pace toward net zero by monitoring companies’ methane emissions, flaring intensity, capital expenditures, lobbying, and governance. Concentrating on five key metrics over a five-year period will allow investors to distinguish climate leaders from laggards.

As with other core financial issues, monitoring metrics is just the start. To advance their climate commitments, investors should pair metrics with accountability. For asset managers, corporate climate performance should strongly inform investment stewardship, proxy voting, and fund construction.

For banks, climate benchmarks should influence loan eligibility, interest rates and debt covenants. Wall Street knows how to set quantitative targets and factor corporate performance and risk into financial decisions – now climate must become part of the new business as usual.

2. Align proxy voting with climate goals

Advancing sustainable investing in 2021 will also necessitate a shift in proxy voting among the world’s largest asset managers. Last year, BlackRock and Vanguard voted against the vast majority of climate-related shareholder proposals filed with S&P 500 companies. BlackRock opposed 10 of 12 resolutions endorsed by the Climate Action 100+, a coalition it joined last January, and later signaled an intention to support more climate votes in future years

There’s a better way. Both PIMCO and Legal and General Investment Management supported 100% of climate-related proposals filed with S&P 500 firms during last year’s proxy season, sending a powerful message to CEOs about the materiality of climate risk.

As asset managers around the world unveil new ESG products and brand themselves as sustainability pioneers, proxy voting will become the litmus test for climate authenticity in finance for 2021.  

3. Support regulations and policies required to decarbonize

While the finance community has traditionally taken a hands-off approach to public policy advocacy, industry norms are changing. Investors understand that scaling the climate finance market depends on Paris-aligned government action, and some have proven willing to engage on issues ranging from carbon pricing to methane standards.

With the incoming Biden administration prioritizing climate, investors should double down on climate-friendly advocacy, supporting both financial regulations and regulations of carbon-intensive sectors consistent with a 1.5ºC scenario.

As BlackRock CEO Larry Fink has emphasized, updated regulation of the financial system is needed to help monitor and manage economy-wide climate risks. As linchpins of capital markets, banks and asset managers have a crucial role to play in pushing federal agencies to safeguard the economy from climate-related shocks. For example, supporting rigorous mandatory climate risk disclosure from the SEC and appropriate ESG rulemaking from the Department of Labor can help investors build Paris-aligned portfolios.

However, investor-led policy advocacy cannot end with financial regulation. As the Global Financial Markets Association noted, reaching net zero by 2050 involves both financial regulation and environmental regulation of carbon-intensive sectors.

The right mix of emission standards and incentives can slash pollution, drive technological innovation and improve the economics of low carbon investments. Given the rise of passive index investing, supporting government action in carbon intensive sectors is essential, as leading financial firms favor continued investment over sector level divestment.

In particular, policies and regulations to cut methane emissions and flaring, to accelerate vehicle electrification, and to clean up the electric grid should be top priorities in 2021.

Gabe Malek, Coordinator for Sustainable Finance at EDF, also contributed to this post.

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