The Responsible Investing Podcast Ep.21: Climate Action one year later - with Eva Cairns

Amanda Young: Hello I’m Amanda Young, your host for today. You are listening to the Aberdeen Standard Investments Responsible Investing podcast, discussing all things relating to responsible and sustainable investing.

Now today I’m delighted to have Eva Cairns join us again to discuss climate change. This time last year regular listeners will have heard Eva discuss the importance of climate change for investors, in the run-up to London Climate Action Week 2020. Now as we approached the same week this year, we thought it would be fantastic to have Eva back - again to provide us with an update on how climate action has progressed over the past year.

Now last year, we were at a crucial point where COVID was a key area of focus and one of the main drivers for emissions reductions, given that people were staying at home and economic activity was slowly grinding to a halt. In addition, the ‘Race to Zero’ had just been launched and there was a distinct focus on climate and how it was shifting to look at issues post-COVID recovery.

Now to those who missed Eva’s last podcast, do go back and listen to her previous episode. But as a brief reminder, Eva is our Head of Climate Change Strategy and helps Aberdeen Standard Investments navigate all things relating to climate change - from setting house standards, driving our approach to climate change and providing significant input into the development of house tools, such as carbon foot printing and the ASI Research Institute's, Climate Scenario analysis work.

As I’ve already mentioned, we are hosting this episode to coincide with London Climate Action Week, taking place this year between the 26th of June and the 4th of July. Now this week harnesses the power of London to promote Global Climate Action. It's an annual event bringing together world leading climate professionals and communities across London and beyond, to find practical solutions to climate change - and a really important week this year in the run-up to COP in Glasgow. It was only founded a couple of years ago in 2019, but London Climate Action Week has become the largest independent climate change event in Europe. Now Eva, thank you again for joining us

Eva: Hi Amanda, it's a pleasure to be here.

Amanda: So, let's kick off with what's changed over the past 12 months. What climate change developments have we seen in the industry since this time last year when we recorded our last podcast, and perhaps you can also recap on Race to Zero and what that actually means?

Eva: Yes, absolutely and I think just looking back - and I listened back to last year's podcast when we were just to start off the Race to Zero - the amount of activity in the climate space and the climate agenda, has been enormous.

So, the Race to Zero has really taken off - at country level, business level, for investors. We have seen a huge increase in commitments to Net Zero. So the Race to Zero was launched by the United Nations to really get those commitments increasing with the run up to COP26. And I remember last year talking about how far behind we were when it comes to setting policies and country level targets. And the US administration has now changed, and we have got a much more climate-friendly leader in the US with policies and investments behind those policies - so that's very encouraging. And we've also seen in China, the largest emitter, carbon neutral goal for 2060, so again hugely important to see that ambition from China.

And over 70% of emissions are now covered by a Net Zero pledge and we're also seeing businesses joining that Net Zero ambition and setting targets. There's for example an initiative called ‘Business Ambition for 1.5 degrees’ with over 300 businesses - growing on a weekly basis - saying we want to set targets and be in line with this one-and-a-half-degree ambition. So, and this is what Net Zero 2050 is all about, that Net Zero 2050 target is to ensure that we achieve the most ambitious goal of the Paris agreement, to keep warming to one and a half degrees.

And that's quite important for us as investors when we look at businesses. If climate change is on top of their agenda in terms of risks and opportunities for some sectors, they face different challenges. Some sectors are very hard to decarbonize, and renewables will only get them so far, so that's really important for us to think about. So as I say, huge amount of ambition. But just one final thing, I was going to say is that the reality, despite all those pledges, is that we are not on that Net Zero 2050 trajectory, and I think that's a real challenge. We were hoping 2019 was going to be a year of peak emissions, emissions dropped in 2020 by around six percent, but are on the rise again and so that's a real challenge for us to think about. You know, it's not just jumping on the Net Zero bandwagon but translating it into real business and policy action.

Amanda: And more recently Aberdeen Standard Investments has joined something called the Net Zero Asset Managers Initiative. Can you explain to us what that is and what it means to us as an investment house?

Eva: Yes absolutely, so as I was saying, that Race to Zero also has really taken off for investors. And firstly, we saw the Net Zero Asset Owner Initiative and a lot of some of our clients, we've seen big pension funds committing to Net Zero. And then at the end of 2020 the Net Zero Asset Managers Initiative was launched and that's really for asset managers like ourselves, to commit to working with our clients who have set Net Zero 2050 goals and developing the solutions to enable them to get there. And it's a real challenge to develop solutions, that don't just result in a good-looking portfolio report, but in real world decarbonization - and that is absolutely key for us. So, what we're doing at the moment is thinking about how we develop with Net Zero solutions across different asset classes, because it would be pretty simple to create a low carbon portfolio that's Net Zero aligned, by just removing all the carbon intensive companies. That's not gonna get us anywhere in the real world in terms of Net Zero - we need cement companies, steel companies and others who may be carbon intensive today - we need them to transition and actually to innovate and have support from investors to do that.

And so for us that's quite important that we focus on that forward-looking view, identify transition leaders, engage with them to support that transition. And this is actually also a key principle of the industry's Net Zero investment framework. That's something we've worked on with the Institutional Investors Group on climate change and have contributed to, that's actually another big area of development since last year, is just how the industry is working together and developing best practice and frameworks that help on that journey, and how we measure this portfolio alignment with real world impact is a key area of focus for us.

Amanda: So, you've touched on that, on the, you know, the initiatives that we've done with the industry. But in order to support the ability to offer Net Zero solutions to our clients directly, perhaps you can touch on what the key area of focus has been for us?

Eva: So, internally we've got a climate change approach and a strategy with different areas of focus and absolutely key to that is research and having the data and tools to feed that climate related research into our investment process. And one of the big areas of focus for us over the last year, has been Climate Scenario Analysis. So, we've worked collaboratively across the business led by our research institute, to develop a number of scenarios.

And actually, we did it a bit differently because we didn't just use off-the-shelf scenarios to tick a box for reporting and say – ‘you know we've done it’ - but we really wanted the scenarios to be plausible and meaningful. We developed a range of bespoke scenarios where we reflected some of the policy and technology assumptions that we thought were more realistic - so for example, that there will be differences in policy developments across regions and across sectors that allowed us to have what we think more plausible scenarios.

And so, we published a white paper in February this year that brings all of this together, the scenarios we've developed and the insights they have given us. Because this is really key for developing our solutions, to understand - okay we've got a range of possible future scenarios, which do we think is the most likely one at the moment? And we've assigned probabilities to the scenarios to be able to identify this expected probability weighted scenario, which was a really interesting exercise. And we can test how resilient our portfolios are to different futures, different possible futures, so that's been hugely insightful. You can look at a two-degree world and then very clearly see within a sector which companies are positively and which ones are negatively impacted in that world, and we can use that in engagement, in developing solutions and have very much have developed the tools to feed that into our investment process. And again, that brings that forward-looking view out that I talked a bit earlier, because we started with carbon foot printing and that's really important as a snapshot, as a baseline - but we need that forward-looking view. So, we have Climate Scenarios and the other area we're very much focusing on, is how we identify those credible transition leaders and how we bring that into our process.

So yeah, and as I was saying earlier, across all the different asset classes we are looking at developing propositions around climate change. In our real estate team for example, we published a Net Zero investment framework at the start of the year and we're developing a proposition in our Active Equities team that is based on these foundations of the Net Zero framework. So, a lot going on and we've actually summarized a lot of that in our recent TCFD reports, so we're also very active in kind of sharing knowledge, building transparency into what we do.

So last year actually, when COP26 was meant to be, we initiated our Climate Action Series and kicked that off with Nigel Topping, speaking with our Chairman about what, you know, what was really needed for that Race to Zero to be successful.

Amanda: Well, talking about COP26, we're coming up to that towards the end of the year and you know, most people will know this is the annual climate conference which was meant to take place last year, but postponed this year because of COVID. What can we expect from the climate conferences here in Glasgow and more specifically what would make COP26 successful?

Eva: Yes, the expectations are high, because it's a really important conference - and one of the most important ones since the Paris agreement in 2015 - to really address a number of gaps that we have currently.

So, the first one is that the ambitions gap, so - the pledges. It's great to see this increase in pledges and Net Zero commitments, but some research suggests that even if all those pledges were implemented, we would still not be below two degrees - we would maybe be at two and a half degrees - and so the Climate Action Tracker does some good analysis on that. So, all countries need to submit nationally determined contributions and when we look at the ones that have been submitted so far, it's just not sufficient. Despite all the positive language around Net Zero, there's still a big gap to achieve that.

And then even for those, the other one that's the gap, is an actual policy gap to put ambitions into practice with effective mechanisms. We still have a lot of, you know, countries being really ambitious but at the same time having fossil fuel subsidies, carbon price has not been high enough, so we need those effective mechanisms, and COP26 will hopefully be a place where that can be pushed and that can be agreed - how we put those ambitions into practice and support things like innovation for hard to decarbonize sectors and also finance flows.

So, the third area I was going to highlight is really the finance that needs to flow into emerging markets and thinking about the kind of allocation of ambition. And some of the developed nations should really bring Net Zero forward to as early as they can achieve -2040 for example or earlier - to allow emerging nations to achieve that goal a little bit later, and so that's also a very important topic for COP26.

Amanda: Well, it's going to be really interesting to see what happens towards the end of the year and perhaps we can have you on back after that to give some sort of roundup and analysis.

Now, I normally ask my guest for a little bit of inspiration at this point - which I did last year, you gave us a book. Over the last 12 months, has there been anything else that you have found inspiring that you might like to share with our listeners?

Eva: One of the very inspiring things for me is actually something that I listen to on a weekly basis, which is a podcast by Christiana Figueres. She was a key driving force for the Paris Agreement actually in 2015. And she does this podcast – ‘Outrage and Optimism’ with a couple of others, Tom Rivett- Carnac and Paul Dickinson, who was one of the founders of CDP. So it's brilliant, on a weekly basis, it's really enjoyable to listen to and they bring out some of the key things that are happening that week into this podcast. And actually ‘Outrage and Optimism’, it's just so relevant because the - you know - so many good things are happening when it comes to falling costs of batteries and renewables and net fuel pledges, but at the same time coal is still, new coal plants are still being built and so they have this balance of what are we are outraged about, but we very much focus on being stubborn optimists.

And they also wrote a book - ‘The Future We Choose’- to pull all this together and I read that book when it came out - I think it was at the end of last year. And it just starts the chapter off with a 2050 world when we haven't tackled emissions and how you can , hardly breathe clean air. And it's an awful start to the book and then it picks up with the mindset we need, and the actions we need to take and that was really, really, inspirational. So, I would definitely recommend that.

Amanda: That is brilliant thank you so much, I think this is the first time we've had another podcast recommended so well done for a first - two firsts - being our first guest that's come back twice. So finally, where to for the next 12 months on climate change, is there anything in particular our listeners should watch out for as we head into COP?

Eva: Yeah, I mean, if it goes at the pace that it's gone over the last year it's - so I think hopefully we're going to make quite a lot of progress. I think, one of the key thing for us as investors in the industry, is to really be clear on what Net Zero and portfolio alignment means for investors. I know there is work ongoing to actually have some clear, consistent methodologies so that they are comparable and meaningful to say to bring that forward-looking view in and say what does it mean for investor.

And on a global perspective, absolutely we need COP to bring some of the things to the table that I talked about earlier, to start for emissions to be peaking as soon as possible and to come down and to see some really, really, tangible actions of policy and at a business level. And let's say we're seeing some of that already, but we need to see more - so hopefully over the next 12 months - actually when Climate Action Tracker does their next assessment of what trajectory we're on - we're shifting more towards the below two degrees but yeah, we're not on that trajectory just yet.

Amanda: Oh thank you so much Eva, for being such a wonderful guest, it's been great to have us with you today.

Eva: Great, it was great speaking to you, thanks for having me.

Amanda: Now you've been listening to the Aberdeen Standard Investments Responsible Investing podcast, a podcast relating to all things responsible and sustainable investing - with a particular focus on the climate agenda in today's episode.

Thank you all for tuning in to our podcast, you can find all of our episodes on various podcast channels such as Soundcloud and Apple, as well as on the Aberdeen Standard Investments website. Until our next podcast, goodbye for now.