Posted inAsset managers

Are asset managers dropping the ball on ESG?

By not aligning portfolios with a net zero objective, managers risk getting out of step with policy makers.
Bamboo pedestrian hanging bridge over river in tropical forest, Bohol, Philippines, Southeast Asia

Carbon emissions have become a predominant topic for the biggest asset managers. Since last year, 24% have set a target for how much of their portfolio will be managed with the goal of achieving net zero emissions by 2050. 

This is according to the Innovation and Responsible Investment teams at NN Investment Partners, who also found that the world’s 500 largest asset managers had almost doubled the amount of responsible investing publications prior to COP26, to 5,062 this year from 2,848 last year.

But should we be encouraged by these findings and the 24% of asset managers setting net zero targets? Does 24% represent progress and a figure to be proud of? Are asset managers walking the walk, as well as talking the talk?

Undoubtedly, the industry is aware of its responsibilities even if countries and governments are still clarifying firm (or not so firm) climate commitments.

Low carbon economy

As Adrie Heinsbroek, chief sustainability officer at NN Investment Partners told our sister publication, Expert Investor: “We have a key role to play in financing the transition to a low carbon economy and in combatting global warming. We will shortly announce how much of our assets under management will be aligned with the goal of achieving net zero emissions by 2050 as part of the Net Zero Asset Manager Initiative.” 

He adds: “We hope COP26 will lead to breakthroughs and new commitments on finance goals on climate, higher ambitions from major economies in line with the Paris Agreement and stronger contributions of countries that lag behind. Whatever the outcome, we will remain steadfast in our climate commitments and continue to team up with other market participants.” 

Alix Chosson, senior ESG analyst at Candriam, points out that an ever-increasing number of corporates and investors have made a net zero pledge – that is committing to become net zero by 2050, in line with the IPCC recommendation.

However, she stresses that a 2050 pledge is utterly insufficient to trigger the necessary change if it is not supported by short and mid-term action. “Indeed, the trajectory, especially the need to have emissions peak as soon as possible, is as important as the end results, – being net zero- if we don’t want to overshoot the carbon budget that is left,” she explains.

Chosson says the 24% of asset managers signed up to net zero is a good start – but warns that this 24% is very heterogeneous in terms of ambition, especially when it comes to short to mid-term objectives.

“These objectives have to go beyond reducing investment carbon footprint, as this metric can be easily tricked and as investing in the transition means that we need to invest in sectors that tend to have higher carbon intensity.

“What we don’t want, because it will do little to solve the climate challenge, is investors divesting from hard to abate sectors and activities (utilities, transport, industry) and redirecting investments towards ICT sectors and pharmaceuticals, because these activities have, by nature, a low carbon footprint”.

Ecological solutions

Investing in the energy transition does not mean or entail reducing your carbon footprint, Chossen argues, it means investing in the companies and technologies that will bring the necessary climate and ecological solutions to transition away from an energy intensive fossil-fuel based economy.

Frédéric Samama, chief responsible investment officer at CPR Asset Management, says the industry plays two possible roles; as agent (the asset manager implements the strategy that the end client asks for) or the principal (the asset manager launches specific climate funds) so the responsibility is shared with asset owners.

Samama insists net-zero emissions must become the new normal for investors for very simple reasons. Firstly, most countries are now committed. Even before COP26, 113 countries had taken such commitments – representing more than 50% of the world GDP.

“By not aligning your portfolios with a net-zero objective you are taking the risk of being misaligned with the situation implemented by policy makers.”

He adds: ”And policymakers are already walking the walk: in Europe, the EU Emissions Trading System (ETS) market has shifted from €4 per ton to more than €60.”

COP26 opportunities

Will COP26 create more (new) opportunities for companies actively positioned on sustainability themes?

It will depend, Chosson says, on the outcomes of the conference, and more importantly on what is being implemented; that is, to what extent and in what form political statements are translated into policies and laws.

“In Europe, for example, the announcement of the Fit for 55 package has sent a very strong signal to companies and their investors. It is actual policies, rather than words, that will bring the necessary changes and create more opportunities to companies best positioned on sustainability themes.”

In general, while Chossen is encouraged by progress in some quarters, she believes there remains an urgent need for greater clarity within the investment sector.

“Unfortunately, many net zero commitments from investors are still not supported by a clear climate roadmap and strategy, including mid-term objectives. So, it remains hard to judge if we have reached a tipping point.”

She concludes: “We need climate to be integrated, no longer as a reporting requirement, but as an investment objective. We talk about ‘risk budget’ when making investments, we need to also start talking about ‘carbon budget’ with the same level of rigour. Meeting the Paris Agreement objectives requires ‘drastic’ economic and social changes, so the times for business-as-usual marketing-oriented solutions has long passed”.

Part of the Mark Allen Group.