Robeco survey highlights growing focus on decarbonisation, but suggests investors lack skills, tools to tackle biodiversity.
Institutional and wholesale investors are increasingly willing to divest oil and gas firms and other carbon-intensive holdings to meet net zero commitments, according to a new global study.
Research conducted for asset managers Robeco also indicates that investors are keen to reduce real-world rather than just portfolio greenhouse gas (GHG) emissions, with many increasing their engagement activities, as well as using impact and thematic investment options.
The findings draw on the responses of 300 institutional and wholesale investors in EMEA (US$9.4 trillion AUM), North America (US$9.8 trillion) and Asia Pacific (US$4.5 trillion). Slightly less than half (45%) have already or are in the process of making net zero commitments, with less than a fifth (19%) having no plans, most from North America.
Both institutional and wholesale investors said they expected to increase their divestment of carbon-intensive assets. Collectively, the former said they expected to divest 10% of their portfolios over the next 12 months in order to minimise exposure to carbon-intensive assets, rising to 19% over a five-year period.
Around a fifth of investors (22%) said they expect to completely divest from oil and gas firms over the next two years. A further 28% said they would continue to be an active owner in existing oil and gas holdings over the same period, encouraging investee firms to move toward renewable energy, but “prepared to divest if there is insufficient progress”.
A number of large asset owners have demonstrated increased willingness to divest from firms, especially those in the oil and gas sector, due to their reluctance to outline low-carbon strategies, including New York’s state pension fund and the Church of England’s national investing bodies.
Three quarters of investors (73%) told Robeco that engagement and active ownership is becoming a significant or central factor in their investment policy, compared with 54% two years ago, with European investors more focused on engagement than those in other regions.
Six in ten survey respondents currently practice active ownership through voting and engagement, with 27% considering doing so in the next two to three years.
Only 11% of investors said engagement efforts are currently very effective, but 61% said it is quite effective, expecting its impact to grow in future. This varies by region with European investors (73%) being more hopeful than their North American (53%) and Asia Pacific (55%) counterparts.
Engagement activities are generally regarded as more likely to be effective if the investor is willing or able to use the sanction of divestment as an escalation tactic if investee firms do not respond positively.
“Engagement is an important driver of change, but it should have timelines, clear requirements and escalation steps. Divestment and engagement go hand in hand, with divestment the ultimate resort, making engagement more effective,” said Lucian Peppelenbos, Climate Strategist at Robeco.
Peppelenbos said Robeco had recently stepped up its climate voting policy and was increasingly likely to vote against director appointments and accounts motions at the AGMs of firms that are not transitioning to net zero emissions fast enough.
Investors’ responses to survey questions about how their incorporate ESG factors into their investment strategies suggested a growing appetite to positively influence real-world outcomes rather than just avoiding ESG risks in their portfolios.
Seventy percent of respondents said they were currently implementing sustainability-focused thematic investment strategies, with a further 22% considering doing so in the next two to three years. A total of 61% said they were currently implementing impact investing strategies, with European investors notably further ahead than other regions.
Almost three quarters of respondents were institutional investors by AUM. Participating organisations included insurance companies, pension funds, private banks, fund-of-funds, advisory firms, wirehouse broker/dealers, endowments and foundations, sovereign wealth funds, and family offices. By size, participants ranged from holding less than US$1 billion to more than US$1 trillion AUM.
The Robeco survey also suggested increasing awareness of biodiversity risks and impacts, with 56% of investors saying it would be a central or significant factor in their investment policy in two years’ time, versus 41% today.
More than half (52%) cited a commitment to reducing systemic risks as their main motivation for incorporating climate change and biodiversity into investment analyses, while stakeholder demands and preserving wildlife and ecosystems were mentioned by more than a third of investors.
But investors said there were many barriers to incorporating biodiversity into their investment decisions, including a lack of awareness of the financial implications of biodiversity loss (79%), difficulties in assessing investment impact on biodiversity (73%), absence of appropriate data, ratings and reporting (50%) and a shortage of investment products and strategies (43%).
Last week’s beta launch by the Taskforce on Nature-related Financial Disclosures aims to address a number of these gaps, by providing a framework for identifying, assessing and reporting on biodiversity risks, impacts and opportunities by corporates and investors.
The Robeco survey suggested investor knowledge was also a major obstacle, with more than two thirds of respondents (68%) admitting to having limited or little knowledge of the financial risks of biodiversity loss and the importance of biodiversity in relation to climate change.
There were similar shortfalls in relation to climate change, including differences between Scope 1, 2 and 3 emissions (54% had limited or little knowledge), and understanding of how the EU’s Sustainable Finance Disclosure Regulation classifies ESG funds.