The trigger
A key trigger for the developments in the past weeks was a letter sent to 60 US asset managers on 20 December. The letter was sent by the US House of Representatives Judiciary Committee, probing the recipients about their involvement with the Net Zero Asset Managers Initiative and the engagement collaboration Climate Action 100+.
Such involvement is regarded by the Committee as a potential violation of antitrust laws and fiduciary duty.1 In the Committee’s ongoing investigation, NZAM and Climate Action100+ are assessed as “climate cartel of left-wing environmental activists and major financial institutions” that “has colluded to force American companies to decarbonize and reach net zero”. 2
Similar political pressure is behind the withdrawal by the six largest banks on Wall Street from a net-zero initiative for banks as well as the recent decision by the Federal Reserve to discontinue its membership of the Network for Greening the Financial System (NGFS), the global network of central banks focused on addressing climate change.
Changed landscape
At Robeco, we welcome the review announced by NZAM, as it will enable the group to sharpen its strategy toward 2030. Not only in the US, but also globally, the policy landscape is very different from what it was in 2020-21, when investors, corporates and governments massively committed to net zero. These commitments amount to 93% of global GDP and 88% of global emissions.3
By and large, governments have not delivered on their commitments. Despite remarkable progress in countries like the UK, government policies are putting the world on course to a temperature rise of 2.9 degrees. The recent Climate COPs have failed to deliver meaningful progress, leading jurisdictions like the EU are slowing down their green ambitions, and the sharp upsurge in trade protectionism is limiting the uptake of green technologies.4
It is remarkable that, for the same period, net-zero-committed investors can report good progress. Most investors, including Robeco, report impressive figures on portfolio decarbonization in the order of 40% or more.5 Clearly, this has not gone hand in hand with emission reduction in the real economy, nor with increased climate policy ambition.
Against this background, it is appropriate to pause for a while and reflect on the role of investors in society’s road to net zero.
Inflated expectations
We believe that net-zero initiatives got off to a bad start. The launch of the Glasgow Finance Alliance for Net Zero (GFANZ) at COP26 in the Scottish city in 2021 was celebrated as a watershed moment, with USD 130 trillion of private capital waiting to be deployed for the net-zero transition. These were inflated expectations of investors driving society’s progress to 1.5 degrees. The critical role of the government did not get a lot of attention.
Effective mitigation of climate change needs a mission-driven government rising up to the challenge.6 John F. Kennedy’s mission to put the first man on the moon created technologies that underpinned the competitive advantage of US corporates for decades. The internet and digitalization – and the success of the Magnificent Seven – are directly based on inventions banked by the US Department of Defense. More recently, China deployed state entrepreneurship to develop global dominance in renewable technologies and electric vehicles.
With the right incentives instituted by government, the market shows virtually unlimited ingenuity in creating innovations and scalable solutions. Transitioning to net zero is up to the market; investors and industry must craft, deploy and scale the solutions. But it is governments who pave the road. For example, the EU Green Agenda with regulations like SFDR and CSRD7 is a critical basis for the net zero plans of investors and corporates.
Learning curve
Looking ahead, we believe that net-zero initiatives will follow the same pattern as most learning curves: an initial peak of inflated expectations, followed by disillusionment, before progressing through a slope of enlightenment toward productivity.8
Our research and interactions with clients show that net-zero-committed investors – around 40% of the market9 – take a long-term perspective and remain committed. The science didn’t change, so they stay on course. What changes and evolves, are the tactics and the tools – this is the slope of enlightenment in the learning curve. For example, the initial focus on portfolio decarbonization has demonstrated clear limitations; it is now being amplified and reinforced by transition finance approaches based on forward-looking climate analytics.
We can only hope that the stage of disillusionment does not take too long. The renewable energy boom shows that net zero can work. More and more countries are decoupling economic growth from an increase in emissions,10 bringing the world economy close to the point where total absolute emissions will start to decline. Unfortunately, after the 2024 elections super-cycle, the global geopolitical landscape is marked by fragmentism and nationalism, which for climate change mitigation is an unfavorable scenario.
The imperative for climate action is only increasing. Global temperatures keep rising – 2024 surpassed the threshold of 1.5 degrees – and more and more people are suffering the physical impacts of climate change. Integrating these climate risks leads to better-informed investment decisions.
At Robeco we continue to be committed to carefully navigating the net-zero transition, managing both risks and opportunities, to the benefit of our clients and long-term value creation.
Footnotes
1 https://judiciary.house.gov/media/press-releases/judiciary-committee-probes-60-companies-over-esg-ties
2 Committee of the Judiciary, US House of Representatives (2024), Climate control: exposing the decarbonization collusion in ESG investing, page i.
3 https://zerotracker.net/
4 UNEP Emission Gap Report 2024
5 By year end 2023, assets managed by Robeco decarbonized 43.7% against the 2020 baseline.
6 Cf. The work by Mariana Mazzucato on the entrepreneurial state
7 Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD).
8 For example, https://en.wikipedia.org/wiki/Gartner_hype_cycle
9 Robeco Annual Global Climate Survey 2024. In a few months we will publish the 2025 edition.
10 See: https://ourworldindata.org/co2-gdp-decoupling
SI Debate
Important information
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong. This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions. The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
