From climate pledge to portfolio: key net-zero policies

Climate pledge

In July 2021, the European Commission (EC) published plans to cut greenhouse gas (GHG) emissions by 55% from 1990 levels by 2030, with the goal of reaching net zero by 2050.

 

Industrial policy

The EC’s Green Deal Industrial Plan (GDIP) provides a framework for the transformation of the EU's industry. It is based on four pillars:

• A predictable and simplified regulatory environment
• Faster access to funding
• Enhancing skills
• Open trade for resilient supply chains
  
   

Corporate regulations

The Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose the social and environmental impact of their business and how climate change affects them.

The EU Emissions Trading System (EU ETS) is the largest compliance carbon pricing scheme in the world by market value. It affects companies based in the EU across key emitting sectors, increasing their cost of business.

The Carbon Border Adjustment Mechanism (CBAM) is effectively a carbon border tax. It is expected to come into force in 2026 with reporting having started in 2023, impacting non-EU companies intending to export to the bloc.
 

Investor disclosures

The Sustainable Finance Disclosure Regulation (SFDR) sets sustainability disclosure rules for asset managers and other financial market participants. The SFDR organises financial products in three categories:

Article 6: no sustainable objectives, or environmental or social characteristics

Article 8: promotes environmental or social characteristics

Article 9: has sustainable investment as the objective

SFDR regulation also embeds PAI (Principle Adverse Impact) indicators, a significant portion of which aim to measure climate impact.

Climate pledge

In January 2021, the US officially rejoined the Paris Agreement. The Biden administration is committed to cutting emissions to 50-52% below 2005 levels by 2030. It set goals to create a carbon pollution-free power sector by 2035 and net-zero emissions economy by 2050.

 

Industrial policy

The Inflation Reduction Act of 2022 (IRA) includes numerous investments in climate protection, such as tax credits for households to offset energy costs, investments in clean energy production and tax credits aimed at reducing carbon emissions. This is the third piece of legislation since late 2021 that seeks to improve US economic competitiveness and productivity. The Bipartisan Infrastructure Law (BIL), the CHIPS & Science Act and IRA together introduced USD2 trillion in federal spending over the next decade.

The Infrastructure Investment and Jobs Act (Bipartisan Infrastructure Deal) earmarks funding to improve sustainability, including building EV charging stations, deploying clean energy and environmental remediation.

The US Environmental Protection Agency (EPA) proposed new standards for coal and new natural gas fired power plants that aim to avoid 600 Mt CO2 emissions and 1,300 premature deaths by 2030. 

The US Department of Energy (DOE) released an Industrial Decarbonization Roadmap that  identifies key technological pillars (e.g. energy efficiency, industrial electrification, low-carbon fuels, and CCUS) for reducing emissions in various industrial subsectors. 

 

Corporate regulations

In 2022, the Securities and Exchange Commission (SEC) proposed rules requiring certain corporate climate-related disclosures in initial filings and annual financial reports. The proposal is similar to International Financial Reporting Standards Foundation corporate reporting standards (IFRS) for sustainability and climate risk. The SEC is expected to release final disclosure requirements in April 2024 (extended from October 2023).
 

Investor or financial disclosures

• In October 2023, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) jointly finalised principles for climate-related financial risk management for large financial institutions.
• Biden’s Executive Order 14030 directs federal agencies to adopt a “comprehensive, government-wide strategy regarding: the measurement, assessment, mitigation and disclosure of climate-related financial risk to the federal government programs, assets, and liabilities”
• The SEC released two ESG-related rule proposals in May 2022 that apply to investment advisers and investment companies. The final rules are expected in early 2024.

Climate pledge

‘30-60’ goal

• Peak CO₂ emissions before 2030
• Achieve carbon neutrality before 2060, including methane and hydrofluorocarbons 
   

The government plans to source 25% of its energy from non-fossil fuel sources by 2030, with the goal of reaching net zero by 2060.

 

Industrial policy

The 14th Five-Year Plan outlines China’s vision to build a ‘modern energy system’. Focus areas include:

• Accelerating development of non-fossil fuel energy 
• Maintaining centralised and distributed power systems 
• Developing offshore wind capacity 
• Accelerating construction of a hydro power base in the southwest 
• Safely promoting coastal nuclear power stations 
• Constructing multipurpose and complementary clean energy bases

Additional policies and targets that support the five-year plan include: 

Mobility

• New energy vehicle (NEV) production quotas 
• NEV subsidies 
• Extending consumption and sales tax breaks for NEVs to 2027 – the fourth extension since 2014

Industry

• Reduce energy intensity by 13.5% below 2020 levels by 2025
• Steel, cement, chemicals and aluminium smelting must meet minimum standards set by the National Development and Reform Commission by 2025
• Aim to reach peak cement- related emissions by 2023 and building materials in general by 2025
  
   

Corporate regulations

The national emissions trading system (ETS) came into operation in 2021 and introduced a carbon price in China. To date, the ETS has had little impact on emissions. The intention is to ratchet up the regulation over time. Currently regulators appear to be focused on improving data collection and familiarising regulated entities with details of the system. (Guide to Chinese Climate Policy 2022, the Oxford Institute for Energy Studies)  

 

Investor disclosures

China has focused on promoting green finance through instruments like green bonds and the Carbon Emission Reduction Facility. 

The country is also exploring mechanisms for financial institutions to disclose climate impacts: currently almost all disclosure is on a voluntary basis but this is improving. 

Some initiatives are attempting to build frameworks to encourage environmental disclosure, even if no concrete development is in place. 

 

Climate pledge

The Climate and Innovation Act codifies a net-zero by 2050 target as a binding obligation. 
Intermediate targets call for a reduction in GHG emissions of at least an average 64% for the years 2031–2040, 75% by 2040, and 89% for the years 2041–2050.

 

Industrial policy

The new Swiss legislation provides financial support and incentives for homeowners and businesses to adopt climate-friendly systems and encourages investment in green technologies. 

 

Corporate regulations

Under the Ordinance on Climate Disclosures, large Swiss companies and financial institutions will be required to disclose climate issues starting in 2024, based on the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD).

 

Investor disclosures

The Federal Council has launched the voluntary Swiss Climate Scores to promote best-practice disclosures on portfolio alignment with the Paris Agreement. They gauge a portfolio’s:

1. GHG emissions intensity and portfolio footprint
2. Exposure to fossil-fuel activities 
3. Proportion of companies with verified commitments to net zero 
4. Verified commitment to reducing exposure to emissions
5. Engagement and voting activity on climate issues
6. Global warming potential, expressed as implied temperature rise (ITR) 

Further enhancements to the Swiss Climate Score are expected in 2024, to be implemented in 2025.

Some Swiss financial institutions are now testing a centralised repository for climate-transition data. The Net-Zero Data Public Utility (NZDPU) was announced in June 2023, marking the first public-private initiative to test a climate data platform on a national scale.

Published in December 2022 by ASIP (Swiss Pension Funds Association), the ESG reporting standard encourages Swiss pension funds to perform a first reporting for FY 2023. This set of guidelines aims to improve transparency for pension fund members on the integration and impact of extra-financial criteria in their investments.

Climate pledge

Aims to cut emissions by 78% (from 1990 levels) by 2035 and to reach net zero by 2050.

 

Industrial policy

The Net Zero Strategy (Build Back Greener) sets out policies and proposals for decarbonising the economy. These were updated in March 2023 under the paper Powering Up Britain, which included the Net Zero Growth Plan. 

In September 2023, British Prime Minister Rishi Sunak announced a series of U-turns on net zero policies, including delaying a ban on sales of new petrol and diesel cars to 2035 from 2030. Sunak also relaxed a target for phasing out the installation of new gas boilers and scrapped tougher energy efficiency rules for rental properties. He ruled out other policies, such as forcing people to share cars, fly less, and eat less meat and dairy. 

The opposition Labour Party has pledged to restore green policies if it wins the next general election, likely to be held in 2024. 

 

Corporate regulations

The largest companies and financial institutions are required to disclose climate-related risks and opportunities in line with the TCFD as of April 2022.

 

Investor disclosures

Under the Sustainability Disclosure Requirements  introduced by the Financial Conduct Authority (FCA), asset managers will be able to choose to use one of the four investment labels (Sustainability Focus, Sustainability Improvers, Sustainability Impact, Sustainability Mixed Goals), in conjunction with the relevant disclosures from 31 July 2024. SDR also introduces an entity-level reporting requirement for the larger asset managers, which will have to disclose their approach to sustainability related risks and opportunities.

English and Welsh local government pension schemes will be required to report their work within the TCFD recommendations, expected from April 2024 with first reports due in late 2025.

Large UK corporate schemes (above GBP 1 billion) are already required to start implementing and documenting their work to meet the TCFD guidelines, including publishing climate-change governance changes.

Large UK asset managers and asset owners with assets under management above GBP 5 bn will be required to publish TCFD-aligned disclosures by Q2 2024.