The corporate journey to net zero

Last year marked a watershed in the global call to action on climate change. The Intergovernmental Panel on Climate Change – composed by the world’s leading scientific minds – reaffirmed that unless deep reductions in greenhouse gas emissions were made imminently, global temperatures would rise above 1.5°C from pre-industrial levels within this century. On the heels of this, global leaders gathered in Glasgow at CoP26 to reconfirm the Paris Agreement pledges. But we need to move from pledges to plans and from plans to action.

While global policymakers will certainly play a decisive role in achieving these ambitious goals, every actor in the global economy has a role to play. As investors, the effects of climate change will have a material impact on both asset prices and investment returns. In parallel, as asset managers and owners, the way we choose to direct the capital we manage on behalf of our clients has an impact on climate change outcomes. And this creates a continuous feedback loop – mitigating climate change through our capital flows contributes to reducing risks over the long term.

But to act, we must first measure and understand. When taking an inventory of our own greenhouse-gas emissions, it’s immediately clear that the overwhelming majority are associated with our investments. In 2021 the International Energy Agency estimated that the portfolio emissions of global financial institutions are on average over 700x greater than their own direct emissions. These portfolio emissions fall under our indirect influence, as opposed to those coming from our own operations or purchased energy.

Our role as financial institutions is to support the transition in the real economy through two levers: by allocating capital towards solutions that help other sectors decarbonise, and to be active owners to ensure the companies we own set their targets and plans.

Decarbonisation target setting

Reducing our net direct and indirect greenhouse-gas emissions down to zero requires first setting clear, science-based and externally verified targets. Standards setting is evolving, but we cannot wait for commonality to emerge to act, so in this fast changing landscape, choosing the appropriate frameworks, partners and broader networks to navigate the transformation is key. To this end, last year, Pictet signed onto the Science Based Targets (SBTi) and Net Zero Asset Managers initiatives.

Reporting on progress

It’s not enough to set ambitious targets, but we must be transparent and accountable on our progress towards them by committing to increased transparency and disclosure – both in our products and at an entity level. Progress and material exposures to transition sectors will be reported on annually and should reflect what we are trying to achieve, a low carbon, nature positive future in 2050. In practice, portfolio decarbonisation that doesn’t lead to decarbonisation in the real economy is meaningless and simply shifts the problem elsewhere.

Practicing engagement and advocacy

This is why the most powerful tool at our disposal as investors is our voice. To start with, we will progressively ask all of our issuers and third-party fund managers to set validated, science-based targets aligned with a 1.5°C warming scenario. From there, through engagement and advocacy, we have a spectrum of pressure we can activate, from positive influence, to direct pressure on management and eventually collective action. The good news is that this transition is well under way. The world of finance has never been short of great minds. But the challenges we face will require collaboration with great minds across different sectors and industries if we are to address the complexity of implementation. We must channel these talents and thought leadership towards innovating and adapting the solutions that we offer our clients in alignment and facilitation of a net-zero emissions future. This is how we will ensure future generations can both improve their wellbeing and benefit from the abundance a balanced planet provides humanity and all the creatures that inhabit it.