Net-zero transition is ‘opportunity of a lifetime’, BoE senior adviser states

Written by Michael Griffiths

01/04/2022

Investors and asset managers have the “opportunity of a lifetime” as they look to transition their portfolios towards net-zero, a senior adviser at the Bank of England (BoE) has stated.

Speaking at the 2022 Sustainable Investment Summit last week, organised by Insurance Asset Management, the BoE’s Michael Sheren spoke to investors about public and private sector moves that could drive the implementation of net-zero carbon and biodiversity in the global economy.

Sheren highlighted that financial firms have committed $130trn of assets to support net-zero carbon, but warned that this figure is currently “parked” in bonds, stocks, real estate, private equity, and that it is “not moving out particularly fast”.

“I was convinced for the last few years that it would be transition risk that would rock the valuations around assets and investments, but unfortunately, the acceleration around physical risk has been striking,” Sheren said, warning that some scientists are “terrified”.

“In Antarctica, temperatures were recently 30 degrees warmer than the normal temperature. Last year, we saw the manifestation of physical risks all over the world in the form of droughts, forest fires and floods. There’s a real sense of urgency amongst climate scientists, not just among those of us who drive policy.

“I believe we need a catalyst – something that gets that $130trn to physically move itself and into the areas it needs to go. A catalyst could be a variety of things. It could be a carbon price, or other forms of regulation, or it could be other forms of legislation.

“Right now, however, most things in the ESG space are still voluntary, so we need this catalyst, and then we need new sustainable investments.”

Sheren said that sustainability should be thought of in terms of “free riding negative externalities”, and that to achieve a net-zero transition, asset managers need to know the exact amount they have invested into every single company by running models.

“Even before there’s a legislated price on carbon in the market, as an asset manager I would want the companies to still run models and find out what their cashflow looks like,” he added.

“There are ways to monitor this. If it's about business model transformation, that costs money. This is where the £130trn becomes really interesting, and milestones will be needed.

“You need to know what companies are doing, monitor it into the spend, and work out where they are putting the money. As asset managers, that will give you a clear view on where you want to put your clients’ money.

“Say yields are the first consideration, and risk is at number two – and as yields start getting adjusted for free riding negative externalities, and your risk starts getting mitigated because of capital expenditure and R&D – you will be delivering on the two things they want. Milestones are essential.”

Looking ahead, Sheren suggested that a carbon tax would be a “price on the free riding negative externalities” in the global economy, meaning yields on investments would go down. However, he added that by pricing climate risks into investments correctly, sustainable investments would start to look “really good”.

“This is the opportunity of a lifetime if you are doing your homework now,” Sheren said. “It’s a job creation opportunity, the biggest since the Industrial Revolution, and if you’re an investor this is the alpha opportunity of your life.

“It’s a huge challenge because we’ve never thrown the whole global economy up in the air at the same time, changing energy, agriculture, mobility and housing, but that’s where we’re at. It means everyone has to work harder but if we do, we deliver a sustainable world with positive externalities.

“It’s in investors’ hands until carbon is legislated in the price. Whoever has the gold makes the rules, and the investment community has the gold.”

Related Articles