The exact path to a net zero world is unknown but the direction of travel is clear, argues Amin Rajan

Key Points

  • The more nuanced view of COP26 is that it delivered more than expected and less than needed
  • Pension sector is still in the foothills of climate action that can deliver the net-zero goal
  • Europe will double down on renewable energy due to the Russian invasion of Ukraine

The science is unequivocal: human activity is and will continue to warm our planet. Fighting climate change by achieving ‘net-zero’ CO2 emissions is therefore one of the most urgent tasks of our time. Indeed, a new industrial revolution has already arrived, as investors are rechannelling capital towards companies that are pioneering this green industrialisation.

No wonder, then, COP26 was billed as a defining moment. But it turned out to be a mixed blessing. 

This UN-convened intergovernmental event in Glasgow in November 2021 strengthened the 2015 Paris Agreement by attracting new pledges, ensuring that 87% of the world’s greenhouse gas (GHG) emissions and 89% of its economy are now covered by net-zero targets. More than 80 key countries also signed the Global Methane Pledge to cut emissions of this potent GHG by 30% by 2030. Governments also agreed to review their emissions pledges by the end of 2023, instead of every five years.

Yet, many felt an air of deflation, as the world’s two largest coal-burning countries – China and India – refused to sign up to phasing out the dirtiest of fuels. Indeed, in these and other key areas like project finance and innovation, governments seem to have passed on the climate baton to the finance sector. This is because of the complexity of trying to persuade scores of countries – each with its own economic and political agenda – to act in unison for the greater good. Inevitably, the event turned into a ‘finance COP’, with the launch of the Glasgow Finance Alliance for Net Zero (GFANZ).


It involves 450 key financial institutions in a private sector plan to steer the planet towards net-zero GHG emissions by 2050, where the quantity emitted is matched by the amount removed from the atmosphere. 

Money talks, and the power of capital markets is immense. Hence, there is also a more nuanced view of COP26; it delivered more than expected but less than needed.

For their part, pension plans worldwide have embarked on their net-zero journey in the belief that climate change is Janus-faced – it carries opportunities as well as risks, according to the 2022 pension survey from DWS and CREATE-Research, titled ‘Net zero; going beyond the hype.’

A twin-track approach

Since the 2015 Paris Agreement – aimed to limit global warming to 2°C above the preindustrial level, or preferably 1.5°C by 2050 – pension plans have come a long way. But the real journey towards net zero is only just beginning.

Amin Rajan

Amin Rajan

This much is clear from the current state of their adoption cycle (figure 1). Some 16% have already embedded the goal into their investment portfolio; a further 42% are in the process of implementing it; 22% are close to decision making and the remaining 20% are at the awareness-raising stage. Thus, the goal is being pursued by three in five respondents. But the pension sector is still in the foothills of net-zero action. Only 28% have set interim goals and milestones that emphasise the urgency of climate action by showing how they will get there.

Overall, there is widespread belief that net zero is a highly capital-intensive venture. Annual physical investments need to be three times higher in 2030 than they were during the period 2016-20, according to UN estimates. They will require substantial capital from the private sector.

Hence, pension portfolios are now seeking to reduce carbon emissions while actively ensuring that residual emissions are fully offset via natural carbon sinks, such as forests and oceans, or via technologies like carbon capture, storage and utilisation, or both.

Overall, acting on climate change is less about altruism and more about hard-nosed bottom-line benefits. These now sit at the heart of the investment policy benchmark, which provides a clear reference point for the net-zero journey.

Active stewardship is another aspect of this evolution. It seeks to hardwire the Paris targets into corporate strategy and its implementation on the ground in ways that lend themselves to meaningful dialogue on corporate climate action and its outcomes. Thus, the net-zero target is set to promote finance at the heart of concerted action to curb global warming. 

Net zero climbs Everest 

Yet, on current reckoning, only 16% of our respondents believe it is ‘very likely’ that the net-zero target will be met and a further 24% say ‘somewhat likely’, leaving the remaining 60% saying ‘not likely’ (figure 2). That doesn’t mean the COP26 pledges are useless. It means they are the start, not the end, of efforts to get the world on track for net zero.

The key obstacle is that capital markets are not currently pricing in climate risks on a scale necessary to redirect capital towards the net-zero goal. They need advance signals on sanctions and incentives that can assist the essential reallocation of capital.

In the meanwhile, many companies are pledging to hit their net-zero targets in almost three decades’ time without committing to concrete action that can be monitored and for which they will be held accountable. It is unclear if these targets are in line with what climate scientists are saying – that the world needs to cut human-caused CO2 emissions by 45% from 2010 levels by 2030, and reach net zero around 2050 to keep global warming below 1.5° C.

There is no check on whether or not companies follow the GHG Protocol to disclose their emissions under Scope 1 (emissions from own operations), Scope 2 (emissions created in the supply chain) and Scope 3 (emissions created by their customers’ products). Nor is it clear if companies aim to put more emphasis on reducing emissions than on the softer offsetting mechanisms like tree planting or carbon sequester technologies.

In addition, not all companies are presented by their regulators with reporting standards and definitions that can be used to provide audited climate-related information. So far, standards remain mixed, politicised and voluntary. 

Worse still, available carbon footprint data is backward looking, with an average time lapse of around two years, and data reveal little about the climate readiness of a company. To date, companies have demonstrated a poor track record in meeting self-declared emission-reduction goals.

CREATE-Research Survey 2022

Market failure and market efficiency

The net-zero aspiration goes beyond the massive accounting effort involved in calculating the carbon emitted, avoided or removed from investment portfolios. It is also about rewiring the global economy and society. Left to themselves, capital markets cannot do that, constrained as they are by market failure and market inefficiency.

Failure occurs when governments do not penalise unsustainable business practices that don’t hit a company’s profits. Inefficiency occurs when markets fail to reward a sustainable company unless it delivers tangible bottom-line benefits on its net-zero journey, based on the current accounting rules. Thus, the ecosystem of capital markets remains centred on short-term financial goals no matter the uncompensated damage they inflict on the wider society.

The real problem here is that climate change is a slow-burn issue with indiscernible impacts on a year-to-year basis but with the potential for exponential growth once tipping points are reached. Most markets simply ignore mounting risks until suddenly they are forced into an abrupt repricing as irreversible effects kick in. To counter that, four sets of actions are vital.

First, those pricing devices for curbing carbon emissions and promoting alternative energy need to be implemented or extended to large swathes of national economies. Early experiences of devices such as carbon taxes and emission trading systems – in France, Germany, Sweden and the UK – have shown them to be powerful levers on the net-zero journey.

Source- CREATE-Research Survey 2022

Second, financial regulators in banking, insurance and investment need to ensure that key players in their sectors have future-proofed their portfolios from systemic risks from global warming. Progress is more evident in Europe than in North America and Asia-Pacific.

Third, financial regulators also need to deliver a green taxonomy that provides a robust template, consistent definitions and reliable data on corporate climate footprint, all backed by mandatory carbon disclosure. Again, early progress in Europe needs to be emulated in North America and Asia-Pacific.

Finally, governments need to ensure that their net-zero agenda has a social dimension that delivers a just transition. The massive transformations that the climate transition envisages will definitely have significant social impacts on job security and quality, on health, and on sustainable housing and transportation. It also means governments of rich countries finally honouring their pledges on transition finance to developing countries, first made at the 2015 Paris conference and again at COP26. The climate challenge is existential. Much is riding on the pledges made at COP26. Since then, however, the expectation is that progress is likely to be marked by small steps, not giant leaps because of two sets of new challenges.

Solvency challenges 

If capital markets do not price in climate risks on a significant scale in the foreseeable future, while pension plans are making allocations in line with their policy benchmarks, they may come under pressure from their sponsors to change their climate approach – especially if the stocks of oil companies continue to rebound massively, after tanking in 2020. At a time when many pension plans continue to have funding deficits, they may well be forced to shift their climate strategy down a gear when faced with three sets of challenges – financial, reputational and societal.

First, if climate risk is not duly rewarded by capital markets, 70% of our respondents believe that this could impair their own finances, as the opportunity cost of climate investing increases further while markets continue to reward GHG polluters (figure 3). Some 62% believe that bubbles may form in climate-related assets due to continuing investor inflows, which could eventually end in tears, as happened with the bubble in 2000. As John Maynard Keynes famously remarked: “Markets can remain irrational longer than you can remain solvent.” Investors too far in front of discounting climate change might find they miss out on years of strong returns before any repricing occurs. Hence, 58% worry about the resulting mis-selling scandal.

Second, 56% pension plans believe that they and their asset managers might suffer reputational damage if their climate investments fail to deliver the targeted returns. As a result, 50% fear a weakened sponsor covenant.

Finally, 62% worry about the loss of valuable time in tackling global warming by relying on capital markets. Furthermore, 66% worry that the climate ball will be passed back to governments, as a result.

Geopolitical challenges

Barely three months on from COP26, there has been a discernable backsliding by governments, in the face of sky-rocketing fuel prices, with their disproportionate impact on lower income families. Energy security has thus shot up the political agenda in ways previously unimaginable.

This was even before the tragic Russian invasion of Ukraine. It is already seen as a major potential setback for the net-zero movement – in the short term at least. This is because countries that are leading the charge on net zero – like France, Germany, Italy and the UK – also significantly depend on Russia for their energy needs. Their search for alternative sources of energy is bound to boost investments in fossil fuel elsewhere in the world. Thus, national interests are colliding with the positive actions required by the Paris target.

Indeed, if the sanctions and the war lead to a worldwide recession, as seems likely, progress on the net-zero journey could be delayed yet again, as was the case after the 2008 global financial crisis, which diverted governments’ attention while averting a 1929-style global depression. Investment in new infrastructure, R&D  and new business models – as required by the net-zero scenario – now has to compete even more fiercely against governments’ immediate humanitarian, economic and  social priorities forced by the invasion.

There is, however, a silver lining. The invasion is also likely to galvanise the drive towards strategic energy autonomy as a top priority in Europe. The war is a tragedy, but it is also a moment of clarity. Once it is over, our survey respondents envisage a renewed drive towards developing solar, wind, hydro and thermal energy in their domestic economies. Nuclear energy is likely to be reclassified from ‘dirty’ to ‘green’.


“We can’t get to net zero by flipping a green switch. We need to rewire our entire economies.” Our survey results endorse what Mark Carney, co-chair of GFANZ said at COP26. 

Great collective human endeavours in pursuit of a noble cause have rarely run smoothly. The net-zero journey is no exception.

That does not detract from our respondents’ fundamental belief that the climate challenge is also a disguised opportunity for long-term investors to earn good risk-adjusted returns. 

If anything, the Russian invasion vividly underscores the importance of doubling down on renewable energy.

Amin Rajan is CEO of CREATE-Research and a member of The 300 Club