The Intergovernmental Panel on Climate Change estimates that the economy needs three to six times more investment to finance its transition to net zero. Photo: Shutterstock

The Intergovernmental Panel on Climate Change estimates that the economy needs three to six times more investment to finance its transition to net zero. Photo: Shutterstock

ESG funds tend to outperform conventional instruments, according to the European Securities and Markets Authority. However, the Intergovernmental Panel on Climate Change sees investment gaps in the shift to a net zero economy. This view is shared by the UN secretary general, who advocates mixed investments and a framework for benchmarks.

ESG funds provided better returns for European investors between 2010 and 2020, according to the European Securities and Markets Authority. Its fourth annual statistical report on the cost and performance of retail investment products, published on 5 April, said that Ucits retail funds with an ESG strategy, including equity, bond and mixed funds, have outperformed non-ESG funds.

In particular, Esma noted that impact funds have outperformed other ESG strategies. The figures analysed by Esma also revealed that the cost of ESG funds was lower than others.

Esma’s report highlighted incentives for retail investors to move even further into ESG financial instruments. However, already under pressure from changes in client behaviour and ESG regulations, the financial industry is now being challenged by the Intergovernmental Panel on Climate Change. On 3 April, the IPCC published the third part of its sixth assessment report. The IPCC warned that without an immediate and deep reduction in greenhouse gas emissions in all sectors, it will be impossible to limit global warming to 1.5°C.

Between 2010 and 2020, average global emissions reached their highest peak in human history, although the rate of growth has slowed. The latest IPCC report concluded that we can still halve emissions by 2030, but that we are “at a crossroads”.

Financial flows three to six times too small

Among the specific options for reducing the volume of emissions, the IPCC called for major transitions in the energy sector, more efficient use of materials in industry, and zero-energy or carbon-free buildings. “Where necessary”, the IPCC considered the use of carbon capture and storage techniques.

Where the latest IPCC report is particularly relevant to the world of finance is that the whole transition of the economy suffers from investment gaps that need to be filled. According to the IPCC, “financial flows are three to six times lower than what is needed by 2030 to limit global warming to below 2°C”. Despite this rhetoric, the IPCC said that “there is enough capital and liquidity globally to fill the investment gap.” All this depends on “a clear signal from governments and the international community.”

The IPCC’s recent findings come on the heels of UN secretary general António Guterres’s statement on 21 March urging the richest countries to meet their 2022 climate finance commitment of $100bn to developing countries. He insisted on the need to achieve this goal through blended financing, in association with the private sector. Thus, the UN boss believes that private finance must invest “much more” in net zero transitions for emerging economies.

Initiatives awaiting a framework

Despite the recent statements by Guterres, it is clear that private finance has been at the forefront of a growing number of net zero commitments, such as the Net Zero Asset Managers initiative, launched following Cop25 and bringing together 256 asset managers with a total of $57.5bn in assets under management. They have committed to supporting emission reductions by 2050, in line with the limit of 1.5°C global warming, and therefore to supporting investments in this direction.

In response to the growth in such commitments, accompanied by the emergence of ESG criteria and benchmarks, the United Nations launched an expert group on 31 March, called Net-Zero, to “develop more credible and robust standards and criteria for measuring, analysing and reporting on the net zero commitments of non-state entities.”

The UN expert group will be expected to make recommendations on the credibility criteria used to assess targets, the processes for verifying and accounting for progress, and a roadmap for translating these standards into national and international regulations.

Financial professionals, particularly asset managers, currently facing the could well benefit from such recommendations to accelerate the decarbonisation of their portfolios.

This article was originally published in French by and has been translated for Delano