As climate change rises up the global agenda, the need for investors to play their part in facilitating the transition to net zero is becoming more apparent. Partly as a result, many ESG strategies have a climate overlay, prioritising the “E” factor over “S” and “G”. Historically, this has involved measuring issuers’ current carbon footprints and constructing climate strategies on the basis of that. But in the run-up to the COP26 summit in Glasgow (see A guide to COP26, 7 September 2021), we make the case for corporate bond investors to structure their strategies around climate ambition – i.e. companies’ plans to cut emissions – and propose a framework to do that.  

Why climate ambition? 

There are three key reasons why investors should construct climate strategies on a forward looking basis, rather than past emissions. First, it is likely to have a bigger impact on future carbon emissions. As the IPCC’s sixth assessment report made clear, the bulk of emission cuts still lie ahead of us (see IPCC climate science, 10 August 2021). An investment strategy that rewards firms that are green today or have already shrunk their carbon footprint, is equivalent to losing sight of the forest for a few trees. It denies capital to firms that need it to decarbonise and risks dis-incentivising dirty firms from cutting emissions.