AIGCC study finds international frameworks more widely adopted as institutions set interim decarbonisation targets.
Portfolio-wide commitments to net zero emissions have surged among Asian investors, according to a new study from The Asia Investor Group on Climate Change (AIGCC). A total of 40% of survey respondents had committed to net zero emissions, compared with none the previous year.
AIGCC surveyed a mix of asset owners and managers active in Asia, collectively representing more than US$6 trillion of global assets under management (AUM).
Investors are identifying interim targets as a key component of these net zero commitments, with 25% setting a portfolio-wide interim target and 55% considering it. “Portfolio-wide interim emission reduction targets may be easier to set than interim targets for specific asset classes and provide more flexibility in reaching a decarbonisation pathway,” said the study.
The move towards net zero commitments has been facilitated by a “definite shift” by institutional investors in Asia toward use of international frameworks that provide a pathway to implementing commitments across portfolios. In previous years, AIGCC found that investors were relying on third-party ESG data service providers and other globally available standards such as the EU Taxonomy to define net zero, low carbon or climate aligned investments.
In 2021, the majority of investors (60%) opted for the Net Zero Asset Managers Initiative as their methodology for determining climate aligned investment solutions for portfolios. Another 35% of respondents were using third-party ESG data service providers, while 30% chose the Paris Aligned Investment Initiative (PAII).
Reporting and disclosures
The majority of investors surveyed by the AIGCC (74%) use the recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD) to measure and report targets, compared to 55% in 2020. The shift from internally-defined targets to frameworks is attributed to increasing information flow and knowledge-sharing among investors about best practice and the recent updates to the TCFD’s recommendations.
Seventy per cent of Asian investors report against the TCFD recommendations, while the remainder say they are considering it. “It is pleasing to see such a relatively high proportion of investors in the region reporting against TCFD recommendations. While several climate risk reporting frameworks exist, the one that most policymakers have endorsed is the TCFD,” said the report. Several countries in Asia have set a timeline to adopt mandatory TCFD reporting, such as Singapore in 2023 and Hong Kong in 2025.
Barriers to investment
Despite the increased use of international standards for measuring climate risks and setting decarbonisation targets, the AIGCC survey nevertheless found a relatively low level of demand for climate-specific mandates.
“We have yet to see a shift in asset owners with clear investment mandates to include expectations on climate compared to 2020,” said the report, noting that respondents reported challenges in finding external managers with an established track record in successful climate-related investing, while also expressing concerns about greenwashing.
A lack of tools to measure and report on green impact also remains a primary concern for Asian investors across 2020 and 2021, the result of “imperfect market information and lack of alignment in green taxonomies” across Asian countries and internationally, said the study. The situation looks to be improving as it was cited by 56% of respondents in 2020, falling to 45% in 2021. More tools and guidance over the past year look to be ameliorating the issue.
Most of the perceived barriers cited by respondents in 2020 had declined, except for client demand, which entered the top three concerns, cited by 30% of respondents.
In 2020, one third of correspondents identified the lack of clear definitions for low carbon or green investment as a top barrier; in 2021 this had fallen to 20%. Increasing collaboration and discussions on the subject, including through international forums such as the PAII, have given more clarity to Asian investors.
Opportunities and resources
A lack of opportunities with risk return objectives was identified by 25% of respondents. Although the increasing launch of climate funds would help address this issue in the future, an emphasis on identifying investable opportunities is still necessary, the report said.
There was an increase in the number of investors who identified a lack of internal resources to identify new opportunities as a barrier to investment – 20% in 2021 compared to only 6% in 2020. More resources are required to address this, particularly given the proliferation of standards and frameworks.
Fewer respondents identified policy or regulatory uncertainty as a barrier, which reflects the increased regulatory attention net zero is receiving in the region, said the study.