Range of Manager Approaches to Net Zero Risks Investor Confusion

Morningstar analysis of NZAM signatories’ progress highlights differences in commitment and methodology.

Signatories of the Net Zero Asset Managers initiative (NZAM) are adopting a “wide range of approaches” and producing “varying levels of commitment” on decarbonisation, triggering “investor confusion”, according to a new Morningstar report on the initiative’s progress so far.

The proportion of assets being aligned with net zero goals and targets for interim emission reductions differ markedly between managers, according to Morningstar, with assets committed by some ranging from 4% to 100%.

Within 12 months of signing on to the initiative, managers are required to disclose the proportion of their AUM that will be managed in line with net zero, and announce emission reduction targets on this section of assets.

To date, NZAM is a US$61 trillion alliance of 273 investors operating under the GFANZ umbrella, which coordinates net zero ambitions across the finance sector. It was first launched in December 2020.

As of May, 18 months after launch, NZAMI announced measures taken by 43 managers. More than 80 signatories have published commitments in total.

For the recently released figures, assets committed by those managers ranged from 4% to 100%, with just nine committing 100% of AUM to net zero, and 15 committing to below 50%.

Hortense Bioy, Director of Global Sustainability Research at Morningstar, said the mixed picture reflected the early stage of managers’ approach to implementing net zero strategies. “Net zero is today where ESG was 10 years ago. Asset managers have a crucial role to play in pushing companies to set ambitious and credible net-zero targets,” she said.

“One risk I see for asset owners that have made net-zero pledges is partnering with asset managers that don’t share the same view of the world as them about climate action and the way of integrating climate considerations in strategies.”

Signatories acknowledge there is an urgent need to accelerate the transition toward global net zero emissions and that investment managers have a key role to play in delivering on Paris goals and in ensuring a just transition.

But Morningstar found a high level of divergence among managers, including the net zero committed AUM of the three largest asset managers in the world, namely BlackRock, Vanguard and State Street.

To date, Vanguard has committed just 4% of its sub-advised assets, meaning it had effectively committed none of its in-house managed assets to net zero alignment. BlackRock and State Street committed 77% and 14% respectively.

Less than 20% of managers had set “absolute emissions” reductions targets, considered hardest to achieve by Morningstar, while a third failed to set emissions reduction targets at all, opting instead to allocate a portion of their assets to issuers that had committed to science-based targets.

Investor confusion

With asset owners largely pursuing the decarbonisation of their portfolios through asset managers, the findings of the report suggest institutional investors’ net zero ambitions could be at risk.

According to Morningstar, the range of approaches for target-setting “renders it very difficult” to compare activities and approaches across service providers, “raising questions about the reliability of any of the commitments and decarbonisation targets”. Investors would benefit from standardised approaches, the report added.

Managers are harnessing varying metrics, both in isolation and combination, to set and track progress towards targets.

Out of the aforementioned 43 managers, the most adopted metric was carbon intensity, while more than 14, including State Street and Macquarie Asset Management, reported interim targets using carbon intensity.

Less than 10 used absolute portfolio emissions targets. APG Asset Management, SEB Investment Management, and Royal London Asset Management are three that did.

“The use of different metrics adds to the challenge of making comparison between managers,” said the report.

Despite its criticisms of managers collectively and individually for failing to provide clients with a more ready comparison of their progress toward net zero, Morningstar acknowledged the continued challenges in setting targets and fulfilling commitments.

These include the nascent stage of methodologies and data availability, managers’ dependence on clients’ commitments, the need to prioritize the achievement of real-economy emissions reductions and the increased variation in the regulatory and policy environments.

Bioy said the initiative had made encouraging progress since its formation and predicted that commitment levels would grow in the next 12-18 months, but cautioned asset owners to maintain high levels of due diligence over their managers’ climate strategies.

“We hope to see a higher overall commitment from the next wave of managers who will publish their targets around the time of COP27, in November. Ultimately, climate-focused investors will want to partner with the most committed managers,” she said.

“Ultimately, climate-focused investors will want to partner with the most committed managers. Asset owners need to be aware that the wide range of commitments made by asset managers may be down to the methodologies they choose (which may be partly due to their level of progress on data and tools) and that some methodologies may better align with their own methodologies and ambitions than others.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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