Equity and the principle of “common but differentiated responsibilities.., in the light of different national circumstances” for developing economies was fundamental to the signing of the Paris Agreement.
Yet, corporate strategies for Paris compliance have not differentiated sufficiently between developed and developing countries. In practice, strategies such as the EU Paris Aligned Benchmarks and Climate Transition Benchmarks (PABs and CTBs) do not distinguish between regions – meaning emerging markets PABs must decarbonise at the same 7 percent p.a. rate as developed market PABs. This can lead to unintended consequences for investors focused on total portfolio decarbonisation and we argue it does not represent genuine Paris aligned investment.
The Paris agreement also calls for “making finance flows consistent with a pathway towards low GHG emissions and climate resilient investment”. A large proportion of the clean technology growth required in net zero scenarios will come from emerging markets; but climate solutions exposure in developed and ACWI based climate index strategies is often limited.
China is leading progress on many transition technologies, such as batteries, it is both dominant and firmly embedded in the global clean tech value chain. However, Chinese companies are under-represented in index based investment strategies due to what we describe as the “China Fudge Factor”.