In brief: Net Zero tension at RI Europe

Net zero targets are creating tension between short-term portfolio-level carbon reductions and the need for real economy decarbonisation.

Delegates gather for RI Europe 2023
Delegates gather for RI Europe 2023

Net zero targets are too blunt an instrument to incentivise the right sort of behaviour. Indeed, in some cases they are pushing investors to make decisions that are detrimental to the global goal of decarbonisation.

That was the overriding feeling from the opening panel at RI Europe in London this morning, hosted by affiliate title Responsible Investor. The panel topic was whether financial institutions are on track to meet their 2025 goals.

“The first milestone of 2025 is easy… if you are prepared to sell a few toxic assets,” said Innes McKeand, head of strategic equities at USS Investment Management, giving the example of selling out of a highly carbon-intensive business like an emerging markets cement company. “You can hit the target easily if you sell your radioactive assets… is that the right thing to do? That’s another question.”

Morten Nilsson – CEO of Brightwell, which manages the BT pension scheme – referenced London’s Kings Cross, a real estate asset that the investor had upgraded from brown to net zero. This type of real world decarbonisation does not sit neatly with net zero targets, which penalise investors for acquiring “dirty” assets, even if they intend to transition them to be green. In trying to repeat that exercise, “all we get from that is the negative emissions of another brown site”, he said. “We need to be smart about that; we cannot and will not be directed by a net zero goal to do the wrong thing.”

Both USS and Brightwell are influential investors in private markets.

The growing tension between investors’ net zero goals and the wider decarbonisation of the real economy, and the need to balance the energy transition with inflation, means “this is a very tricky next couple of years we are entering”, said Nilsson.

The conference continues on Tuesday and Wednesday this week; stay tuned to New Private Markets for more insights.