Institutions around the world are adopting environment, social and governance (ESG) standards), and have identified fighting climate change and the reduction of carbon emissions as their top priorities, according to a new report from Coalition Greenwich – Investment Managers Take Action on Carbon Emissions.
Institutions around the world are adopting environment, social and governance (ESG) standards), and have identified fighting climate change and the reduction of carbon emissions as their top priorities, according to a new report from Coalition Greenwich – Investment Managers Take Action on Carbon Emissions.The report showed that in an attempt to mitigate concerns about “greenwashing.” asset owners and investment managers are committing to specific “net-zero” targets advanced by organisations dedicated to addressing climate change.
It found that over 80 asset owners with nearly $14 trillion in combined assets under management have committed to achieve net-zero portfolios by 2050, in keeping with standards created by the UN-convened Net Zero Asset Owner Alliance.
Around 220 asset managers with a combined $57 trillion in AUM have signed up, with members being tasked with setting asset-class-level targets for net zero along with providing robust methodologies for overall portfolios. Forty-three of those signatories have set targets to achieve net-zero portfolios by 2050.
There are geographic disparities in the current commitments toward net zero, which broadly follow the same trends as ESG adoption.
The report showed that in Europe, a quarter of all institutional investors have set explicit net-zero targets, with Asia and North America still assessing the appetite for such commitments.
These targets largely attach to future portfolio allocations, but it seems only a matter of time before they extend to existing allocations
The report noted that early in their ESG journeys, many institutional investors embraced “offsetting,” or the practice of investing in environmental projects or products around the world to balance out carbon emissions.
“Offsetting is facing greater scrutiny as a means of reducing the environmental impact of an investment portfolio,” says Sophie Emler, senior relationship manager at Coalition Greenwich and author of the report. “In fact, increasing numbers of investors view the practice of offsetting as a form of greenwashing.”
There are of course challenges. As the report notes, “Targets and methodologies are all very well, but for meaningful change to take place, these have real impacts on portfolios. “
It noted that shifting the global economy to function on a net-zero basis requires an enormous reallocation of capital. Ideally, return incentives for institutional investors would be aligned with the goal of lowering carbon emissions.
The positive is that change is happening. The S&P Global Clean Energy Index has generated annualised total returns of over 40% over the past three years, more than double those of the benchmark S&P 500.
The downside is that there are glitches in product availability, particularly in the equities and fixed-income spaces.
Only 36.8% of 5,300 companies reviewed in the S&P Global Corporate Sustainability Assessment 2021 have announced plans to curb emissions—and even fewer have explicit net-zero targets.
Targets are also skewed by industry. Unsurprisingly, the utilities and energy sectors represent the highest proportion of firms with stated net-zero targets.
However, under the banner of their ESG policies, many investors have restrictions or indeed, outright bans on investing in subcategories such as fossil fuels.
Although there are many obstacles to achieving net zero in the asset management world, the report notes that “they are not insurmountable and are unlikely to alter the direction of travel.”
Developments in regulation and internationally aligned standards, such as the European Union’s guidance on net-zero cooperation, are due in the coming months.
Coalition Greenwich believes that this will help managers and investors alike set measurable targets on net zero against which they can provide comparable reporting.
“New disclosure rules, combined with the growing availability of sustainable products across all asset classes, will help investors sort real carbon-emissions objectives from those that are net zero in name only,” says Emler.
©Markets Media Europe 2022
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