The Road to 2050: Understanding the link between investing and climate strategies

November 17, 2021 - 5 minutes
A bird's eye view of a river flowing through a forest.
Approximately 124 countries have set net-zero targets by 2050, representing 40% of global emissions and 51% of global GDP1, with 13 of those countries and the EU having made that target legally binding. As target dates draw near, the global community is assessing whether we are collectively on track to meet our climate goals.

We tackled these issues during our inaugural ESG conference, The Road to 2050: Navigating the ESG Landscape. For our "Destination: Net-Zero" panel, we brought together Ezgi Barcenas, Chief Sustainability Officer, AB InBev; Bob Holycross, Vice President, Sustainability, Environment, and Safety Engineering, Ford Motor Company; and Bill Murphy, National Leader, Climate Change & Sustainability Services, KPMG; to discuss the link between climate targets and the steps corporations are taking to get there.

Key themes from our panel included:

Integrating climate risk

Efforts to understand and incorporate climate risks have come into sharp focus in corporate strategy and strategic decision making. "In recent years, [companies] have gone from thinking about ESG in terms of being good corporate citizens and it being a 'nice to have' to ESG being part of board-level decisions and presenting real material financial risks," says our moderator Glenn Gibson, Vice Chair and Regional Head for TDS USA.

Investors are increasingly focusing on how companies integrate and respond to climate risks and, where possible, turn these into value generating opportunities. Companies that proactively identify and manage climate risks are often preferred in a market focused on achieving global climate targets. Building internal capacity on climate risk can be a challenge. Panelists emphasized that cross collaboration, not only within a company, but also across its supply chain, is key to effectively weaving sustainability and climate awareness into a company's corporate culture. As environmental risk and performance data is incorporated into business strategy decisions, the process evolves from risk management to an enabler of a company's commercial vision.

"ESG has moved well beyond just being a green company or having environmental credentials," says Bob Holycross. "You may have a separate quality function and a team that's dedicated to [ESG], but it has to be embedded everywhere in your products and in your processes to ensure all decisions and strategic direction are in line."

Communicating impact to investors

Sustainable debt markets have taken off over the past few years, growing at a 56% compound annual growth rate from 2015, as well as increasing 40% from FY20, as of Q3/212. With ESG focused asset management on track to reach $50 trillion by 20252, the focus on climate remains king, as the number of clean energy funds increased 7x in the first half of 2021 (vs. the same period last year). As a result, private sector climate targets are turning out to be a formidable force in shaping capital markets. As major financial players set net-zero commitments at the portfolio level, the companies these institutions lend to, insure and invest in feel increasing pressure to set their own climate commitments and demonstrate credible performance against them.

One key challenge these financial players face is assessing the credibility of corporate climate strategies and the reporting of progress against targets. Our panelists agreed that more transparent, comparable, and complete data on emissions baselines and subsequent reductions is sorely needed to effectively assess climate performance and inform investment decisions.

"There's a fair bit of effort required by corporates, not just to gather the emissions information from across their organization and suppliers, but to compile it in accordance with appropriate global protocols," says Bill Murphy. "The next step is creating emissions forecasting capabilities. In order to make informed capital budgeting decisions and achieve targeted reductions, there has to be a way to measure the impact of planned changes in operations - whether through efficiency initiatives, increased use of renewables or introduction of new technologies - and the contribution they're going to make in improving the company’s emissions profile."

To close these information gaps, our panelists suggested that both investors and issuers build up or bring in the right expertise, specifically in areas such as carbon accounting, climate risk, and clean technology, to better inform investment decisions. Providing clarity on the climate impact of specific technology or engineering interventions and using consistent and globally recognized metrics to communicate that impact will allow investors (and other stakeholders) to engage and direct capital more effectively.

What does this mean for green investing going forward?

Investors across the board have called for increased transparency and consistency on baseline data, targets and performance indicators to demonstrate holistic progress against low carbon targets. The next level of green investing will see even more data about material use – water, waste – integrated and the ever-increasing sophistication of data analysis will help investors clearly identify leaders and laggards.

"For a company like Ford, with the reach that we have globally and the scale that we have -- that's an opportunity," says Holycross. "Something that we take very close to heart in terms of our legacy and our obligation. When we think about the transitions that we've been making, how we do provide solutions at scale is very much at the forefront of our strategy.

"We have to do this in a very sustainable way in terms of how the vehicles are produced, the materials that are used and how we interact with the supply base and really look at the whole life cycle."

Investor appetite for green investments is high, but the demand for better quality, investment-grade data is clear. Going forward, discerning green investors will look for more and better impact data. Companies can bolster their appeal by using science-based climate data, and reporting progress against commitments transparently.

Learn more about our services and our Sustainable Finance & Corporate Transitions team

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