Global investors have committed to net zero, but implementation around those commitments is slow with little action on the ground.
“We are seeing lots of commitments but not much implementation,” said Carola van Lamoen, head of sustainable investing at asset manager Robeco, opening Sustainability in Practice at the University of Oxford where attendees have collective assets under management of $8.5 trillion and include some 64 global asset owners.
“Around 50 per cent of our total assets under management are under net zero commitments. But that doesn’t mean these investors have introduced targets on a mandate level.”
Implementations and action on the ground include engagement and voting; working with partners and clients to identify companies with the biggest carbon emissions, and accelerating real world transition. Van Lameon added that joining forces with other asset owners through organizations like Climate Action 100+ as well as sovereign engagement is another way to act on net zero promises.
Sustainable strategy at £60 billion Border to Coast, the LGPS pool managing assets on behalf of 11 partner funds, has come under particular scrutiny because it manages money for public sector employees. Positively, being in the public eye has helped accelerate integration of sustainability – visible in new targets and the investor’s focus on investing in “well managed companies for better long-term outcomes.”
However, it has also bought the fund in contact with politics, including picket lines outside the investment office and press coverage of its investment process. “The emotion that comes with this is challenging and we have to remind ourselves why we do it,” said Rachel Elwell, chief executive of Border to Coast, reiterating: “We believe climate change will have a material financial impact on the portfolio so we must understand the risks.”
She added that integrating sustainability is challenging because it’s difficult for investors to gage what is within their control. “There is a risk that asset owners have oversold what they can deliver,” she warned. She said all progress depends on being in conjunction with policy makers. “We are seeing some splitting of strong coalitions in financial services because the government hasn’t kept up with leadership. There is a need for investors to engage with governments to help them understand their role.”
In a step change in its sustainability strategy, PSP Investments, which invests C$230.5 billion on behalf of Canadian public sector pension plans, has introduced a climate strategy set around short-term targets. This includes goals around investing in green and transition investments, and reducing carbon in the portfolio. The strategy involves mapping investments, data gathering, looking at the carbon intensity of investments and companies’ transition readiness. “Do portfolio companies have a plan and is it science-based?” asked Herman Bril, PSP’s managing director and head of sustainability.
Green asset mapping
Brill advised attendees to map their green assets to understand “where they are today, and where they will be in the future.” Moving forward, this should take into account regulation, changes in accounting methodologies, and the fact data will improve. “Every five years refresh and update strategy,” he advised. “Realise what you have learnt and how to move forward; move forward step-by-step.”
These moving pieces make hard targets difficult. Governments, companies, consumers and the accounting world need to align to long-term net zero targets, he said. “In reality we need all the levers to change,” he said.
Moveover, it is difficult for universal owners to effect change if the world is not decarbonizing. A short-term focus helps ensure delivering on actions rather than simply making false promises. In another approach, PSP Investments also changed its narrative around ESG, swapping talk of responsible investment to framing all discussions in the context of sustainability and climate innovation. This allowed the institution to move away from ESG and compliance. “The investment opportunity is massive. We are not an impact investor, but an investor with impact.”
Brill noted that it is easier to integrate sustainability in private investments because of the ability to steer corporate strategy via a board seat and direct engagement. PSP splits its portfolio 50:50 between public and private assets.
PSP prides itself on being strong and smart, staying on course and working with its board rather than try to influence the vicissitudes of short-term politics – something he said was unmanageable. “We invest 50-years forward,” he said.
Chris Mansi, global delegated CIO of Willis Towers Watson, a delegated asset manager for institutional funds, said that integrating sustainability is a multi-year process and progress will have challenges to be addressed on the way. WTW regularly reviews sustainability targets for client funds, breaking these goals down into short-term actions. He flagged that integrating sustainability requires a “financial underpinning” alongside assessment of impact and said that in most circumstances WTW did not support divestment as a means of achieving sustainability goals. “[Sustainable investment] requires ongoing review of where we are and how we make decisions.”
Indeed, many pension fund have set targets that they hope to achieve, but the reality is they may not. Panellists agreed that fiduciary duty in the context of net zero “needs consideration” particularly since the world “is off track,” the politicization of ESG is also slowing progress and integrating sustainability appears to be in decline. Some managers (particularly those based in the US) are reneging on commitments and trustees that used to commit to energy transition are now more reluctant because the political and social landscape has changed.
The conversation also focused on how divestment is no longer the right strategy – and that it is not possible to divest your way to net zero emissions. In fact, asset owners are finding themselves increasingly central to the debate on how to finance emission reductions.
Van Lamoen concluded that investors are allocating to transition assets, rewriting their strategic ambitions, beefing up stewardship and engagement. Despite the challenges, she stressed the important progress that has been made towards decarbonization, the introduction of more forward analytics and the role of engagement whilst signs of government inaction include the Inflation Reduction Act in the US and Europe regulation that is also driving change.
