Scaling-up climate risk management in investment portfolios: roadmap for financial net-zero governance

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Climate change poses material risks and simultaneously provides asset owners with opportunities to scale-up green innovations and business development through reducing emissions with a real transition towards net-zero governance and sustainable profitability. To fully seize the opportunities, it is time for the financial institutions to set-up low-carbon investment stewardship and look into the delivery of green buy-and-maintain portfolios.


The concept of net-zero takes into account the effective lowcarbon commitment associated with the development of science-based sustainability pathways. Actively managing low-carbon portfolios is therefore essential for asset owners to successfully navigate climate risks, technological disruption, public policy changes, as well as mitigate the impacts on business performance. However, the coverage, quality and transparency of data are persistent obstacles over the process. Despite significant strides from the financial industry and scientific community in outlining theoretical frameworks for net-zero investing, quality reporting on low-carbon and netzero planning remains a critical challenge.


Concretely, from a transitional standpoint, scaling-up climate risk management with a clear roadmap for financial netzero governance consists of setting priorities based on Paris Agreement; establishing science-based targets across corporate carbon transition readiness (avoiding worst offenders; targeting specific impact on portfolios and engaging in specific green solutions); elucidating risk/return; evaluating (seizing opportunities to fine-tune the priorities and strategy of regular investment cycle to create an integrated sustainability approach); constructing portfolios based on forward-looking commitment; and engaging with stakeholders in appropriate climate governance.


Forward-looking low-carbon commitment is ultimately one of the most important factors over the roadmap. It requires assessing the strength of corporate transitional low-carbon commitment as “very strong”, “strong”, “weak” or “very weak” based on both quantitative (setting corporate lowcarbon readiness based on data validators’ standards and requirements from global transition pathways initiative and scoring system) and qualitative aspects (capex commitment and quality corporate governance track-record). Such assessment qualification is considered as a key input that adds the greatest value to low-carbon portfolios in line with governmental policy targets of net-zero by 2050.


In other words, sustainability-constrained regulations in the financial sector should, not only provide great opportunities for expanding the bi-direction flow of climate resilience information between financial institutions and policymakers, but also assure the co-existence of a robust science-based net-zero governance and economy competitiveness.


This article is contributed by Ir Dr Alex Gbaguidi with the coordination of the Environmental Division.

Explore Hong Kong Engineer