Ready? Willing? Able? Asset owners have their work cut out aligning portfolios to COP26’s new realities.
As we digest the policy-level and strategic changes being enacted in the aftermath of COP26, where are asset owners on the path to net zero and what do they expect from managers and investee companies? A global survey of insurers and pension funds worth €2 trillion AUM conducted for Aviva Investors says more than half are targeting net zero portfolios by 2050 – 12 percentage points higher than 2020.
Delivery on these goals is shaping their expectations of asset managers: 55% of pension funds view their ability to integrate ESG factors into the investment process as critical, with half of insurers citing ability to quantify ESG risk and impact.
But asset owners seem uncertain about their options, notably in real assets. Almost half told Aviva they expect to increase investment in real assets in 2022, but 80% said environmental pressures were “discouraging”. No wonder we’ve seen a plethora of initiatives aimed at decarbonising the built environment both at COP26 and since.
A more diverse array of institutional real asset investors with US$21 trillion AUM told Macquarie Asset Management net zero investing is still a work in progress. Despite climate change being the biggest sustainable investing priority for 55% of investors, less than half (47%) track some or all of their portfolio emissions, with 46% not yet addressing physical and transition climate risks in their investment portfolios.
But the direction of travel seems clear: 82% intend to increase commitments to strategies that integrate sustainability and 77% expect to favour products or managers targeting specific ESG outcomes. Almost half expect to divest more assets with high ESG risks in the next two years.
With the top 20 asset owners globally now accounting for US$13 trillion AUM, according to the Thinking Ahead Institute, only a handful need to focus on net zero investing to make a big impact on transition efforts across the worldwide economy. But only three of these leviathans have joined the Glasgow Financial Alliance for Net Zero (and only 14 of the top 100), suggesting ongoing challenges in efforts to “use systems leadership and universal ownership to align companies with a net zero pathway”.
There’s no shortage of options as asset owners align their portfolios with the Paris Agreement (and indeed the Glasgow Climate Pact), but plenty of scope for differentiation and confusion. A recent review of 2,500 funds said European and global equity funds outrank UK-focused and emerging markets offerings on environmental objectives. But attempts to provide fund selection guidance to investors, both mandatory and voluntary, are still nascent, placing the market “in flux” as managers reposition their offerings, often at a discount.
Asset owners are not alone in facing up to post-COP26 realities. Policymakers now start the work of implementing domestic policies in line with international agreements. Having blazed a trail, in terms of sustainability regulation, Europe will be closely watched in December as it debates its 8th Environment Action Programme, brings forward new supply chain due diligence legislation and rules on inclusion of gas and nuclear in its green taxonomy.
The dust may be settling on the Glasgow climate summit, but the pace of change will only accelerate. The framework for sustainable investing is still only partially built, with data, ratings, disclosure rules, executive incentives, methodologies and measurement platforms all needing further attention. That’s no excuse for inaction, especially as it’s already clear governments and investors must apply most pressure to the carbon-intensive sectors that need to cut emissions the quickest.