Finance

Partner Insight: Key net-zero policies


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.

i

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.

null

A diversified, low-tracking-error strategy with a portfolio temperature firmly aligned to the Paris Agreement

null

High-conviction, core exposure across industry sectors in bonds whose issuers are decarbonising towards net zero

null

Net-zero alignment through an active portfolio with the growth and defensive features of convertible bonds

 

Important information

For professional investors only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This document is approved at the date of publication.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalised recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person. A summary of investor rights and information on the integration of sustainability risks are available at: https://am.lombardodier.com/home/asset-management-regulatory-disc.html.

Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. ©2023 Lombard Odier IM. All rights reserved.

Advertisement



Source link

Leave a Response