In the race to meet the emissions reduction targets set by the Paris Agreement, governments around the world are enforcing policies to decarbonise their economies. This poses a key transitional risk for investors, given the potential impact on industry and business operations. Meanwhile, investors face pressure from financial regulators to provide more information about their portfolio exposures to carbon.
To what extent are companies in different geographies required to decarbonise by law, and to what degree must investors decarbonise their portfolios? We examine four key markets – the UK, the European Union, the US and China- summarising their climate targets and programmes in place to support them, as well as the disclosure regimes for businesses and the financial industry.[1]
UK
Climate change
Aims to cut emissions by 78% (from 1990 levels) by 2035 and to reach net zero by 2050.
Industrial Policy
The Net Zero Strategy (Build Back Greener) sets out policies and proposals for decarbonising the economy. These were updated in March 2023 under the paper Powering Up Britain, which included the Net Zero Growth Plan.
In September 2023, British Prime Minister Rishi Sunak announced a series of U-turns on net zero policies, including delaying a ban on sales of new petrol and diesel cars to 2035 from 2030. Sunak also relaxed a target for phasing out the installation of new gas boilers and scrapped tougher energy efficiency rules for rental properties. He ruled out other policies, such as forcing people to share cars, fly less, and eat less meat and dairy.
The opposition Labour Party has pledged to restore green policies if it wins the next general election, likely to be held in 2024.
Corporate regulations
The largest companies and financial institutions are required to disclose climate-related risks and opportunities in line with the TCFD as of April 2022.
Investor disclosures
The Financial Conduct Authority (FCA) is preparing to introduce a package of measures aimed at preventing greenwashing by asset managers. The Sustainability Disclosure Requirements (SDR) include sustainable investment labels and restrictions on the use of sustainability-related terms in product marketing. The FCA proposes classifying funds through three categories: Transitioning, Aligned and Impact.
UK corporate schemes with more than GBP 1bn in assets needed to start implementing and documenting their work to meet the TCFD guidelines, including publishing climate-change governance changes from October 2022.
EU
Climate change
In July 2021, the European Commission (EC) published plans to cut greenhouse gas (GHG) emissions by 55% from 1990 levels by 2030, with the goal of reaching net zero by 2050.
Industrial policy
The EC’s Green Deal Industrial Plan (GDIP) provides a framework for the transformation of the EU’s industry. It is based on four pillars:
- a predictable and simplified regulatory environment
- faster access to funding
- enhancing skills
- open trade for resilient supply chains.
Corporate regulations
The Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose the social and environmental impact of their business and how climate change affects them.
The EU Emissions Trading System (EU ETS) is the largest compliance carbon pricing scheme in the world by market value. It affects companies based in the EU across key emitting sectors, increasing their cost of business.
The Carbon Border Adjustment Mechanism (CBAM) is effectively a carbon border tax. It is expected to come into force in 2026, impacting non-EU companies intending to export to the bloc.
Investor disclosure
The Sustainable Finance Disclosure Regulation (SFDR) sets ESG disclosure rules for asset managers and other financial market participants.
The SFDR organises financial products in three categories:
Article 6: no sustainable objectives, or environmental or social characteristics:
Article 8: promotes environmental or social characteristics
Article 9: has sustainable investment as the objective
SFDR regulation also embeds PAI (Principle Adverse Impact) indicators, a significant portion of which aim to measure climate impact.
US
Climate change
In January 2021, the US officially rejoined the Paris Agreement. The Biden administration is committed to cutting emissions to 50-52% below 2005 levels by 2030. It set goals to create a carbon pollution-free power sector by 2035 and net-zero emissions economy by 2050.
Industrial policy
The Inflation Reduction Act of 2022 (IRA) includes numerous investments in climate protection, such as tax credits for households to offset energy costs, investments in clean energy production and tax credits aimed at reducing carbon emissions. This is the third piece of legislation since late 2021 that seeks to improve US economic competitiveness and productivity. The Bipartisan Infrastructure Law (BIL), the CHIPS & Science Act and IRA together introduced USD 2 trillion in federal spending over the next decade.
The Infrastructure Investment and Jobs Act (Bipartisan Infrastructure Deal) earmarks funding to improve sustainability, including building EV charging stations, deploying clean energy and environmental remediation.
Corporate regulations
The Securities and Exchange Commission’s (SEC) Climate-Related Disclosure requirements are expected in October 2023. In 2022, the SEC proposed requiring certain climate-related disclosures in initial filings and annual financial reports. The proposal is similar to International Financial Reporting Standards Foundation corporate reporting standards (IFRS) for sustainability and climate risk.
Investor disclosure
- Federal regulators have proposed guidance on how banking organisations should manage climate-related financial risks.
- Biden’s Executive Order 14030 directs federal agencies to adopt a “comprehensive, government-wide strategy regarding: the measurement, assessment, mitigation and disclosure of climate-related financial risk to the federal government programs, assets, and liabilities”.
The SEC released two ESG-related rule proposals in May 2022 that apply to investment advisers and investment companies.
China
Climate change
‘30-60′ goal
- Peak CO2 emissions before 2030
- Achieve carbon neutrality before 2060, including methane and hydrofluorocarbons
The government plans to source 25% of its energy from non-fossil fuel sources by 2030, with the goal of reaching net zero by 2060.
Industrial policy
The 14th Five-Year Plan outlines China’s vision to build a ‘modern energy system’. Focus areas include:
- Accelerating development of non-fossil fuel energy
- Maintaining centralised and distributed power systems
- Developing offshore wind capacity
- Accelerating construction of a hydro power base in the southwest
- Safely promoting coastal nuclear power stations
- Constructing multipurpose and complementary clean energy bases
Additional policies and targets that support the five-year plan include:
Mobility
- New energy vehicle (NEV) production quotas
- NEV subsidies
Corporate regulations
The Securities and Exchange Commission’s (SEC) Climate-Related Disclosure requirements are expected in October 2023. In 2022, the SEC proposed requiring certain climate-related disclosures in initial filings and annual financial reports. The proposal is similar to International Financial Reporting Standards Foundation corporate reporting standards (IFRS) for sustainability and climate risk.
Investor disclosure
- Federal regulators have proposed guidance on how banking organisations should manage climate-related financial risks.
- Biden’s Executive Order 14030 directs federal agencies to adopt a “comprehensive, government-wide strategy regarding: the measurement, assessment, mitigation and disclosure of climate-related financial risk to the federal government programs, assets, and liabilities”.
The SEC released two ESG-related rule proposals in May 2022 that apply to investment advisers and investment companies.
Find out more about investing for Net Zero
At Lombard Odier Investment Manager our TargetNetZero solutions aim to deliver performance, provide diversification and help drive the transition.
A diversified, low-tracking-error strategy with a portfolio temperature firmly aligned to the Paris Agreement
High-conviction, core exposure across industry sectors in bonds whose issuers are decarbonising towards net zero
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