Legal & General Investment Management is calling for carbon pricing on all global emissions to accelerate the transition to net zero as it believes that financial markets and investors are significantly underestimating the impact of “climate procrastination”.
LGIM said in a report that an effective, transparent and significant price on emissions that is consistently applied would allow price signals to drive a market-led solution to the climate crisis.
“We believe the single most effective policy measure that the world could take to drive global emissions down is to put an effective price on them,” said Nick Stansbury, head of climate solutions at LGIM.
“You shouldn’t be using a US$50 per tonne carbon price. US$50 doesn’t cut it – it needs to be at least three figures,” he said.
UK-based LGIM was ranked fourth in a March survey of major asset managers’ ESG investment policies by responsible investment group ShareAction, behind Robeco in first place, BNP Paribas Asset Management and Aviva Investors. They were the only four firms out of 77 surveyed to get at least an A rating.
The firm is one of Europe’s largest asset managers and a major global investor with £1.2trn of assets under management.
Updated scenarios
LGIM’s unusually forthright call for carbon pricing follows work that the firm has been doing on scenario modelling and analysis, which use climate risk and temperature alignment analysis to identify a range of possible climate outcomes.
In the scenario pathway that LGIM has modelled, transitioning to a below two degrees Celsius climate outcome would probably lower global GDP by a "statistically insignificant" amount of 1bp per month over the next 25 years.
However the modelling suggests that it is the speed at which capital can be deployed in low-carbon energy systems that is now the most important driver and most pressing challenge, rather than the cost.
“The cost of transitioning is statistically insignificant if we start now, but if we don’t bother spending anything for another 10 years and try and do it in a heck of a hurry in the 2030s, the financial consequences are really serious and quite scary for financial markets and investors,” Stansbury said.
Financial markets and investors are underestimating the long-term impact of the delay of transitioning to net zero. “Investors need to start to prepare for the volatility, uncertainty, inflationary pressure and potentially a drag on long-term investment returns that will result from this very significant burden of a delayed transition starting to play out,” Stansbury said.
The firm is focusing on renewable energy and energy efficiency and estimates that average annual gigawatt capacity additions to 2050 will have to triple for solar and double for wind.