The World Economic Forum estimates a $2.4trn annual global investment gap for mitigating climate change, as well as $1.7trn for the required technological evolution and $1.5trn to manage demographic shifts.
Bridging that gap is only feasible if the international investment sector recognises the urgent need to accelerate the transition towards global net-zero emissions, pivots strategy in such a way that prioritises emissions reductions within the sectors and companies in which it invests; facilitates increased investment in climate solutions; and works together to develop and share common metrics, obligations and best practices.
With trillions of dollars under stewardship within the asset management industry, how assets are managed and where investments are targeted will go a long way towards determining whether global warming can be limited to the required extent in an ever-shortening time frame.
The Net Zero Asset Managers Initiative (NZAM) is arguably one of the most significant, formalised recognitions of this responsibility thus far. Launched in December 2020 as an effort “to galvanise asset managers to commit to a goal of net-zero emissions by 2050 or sooner”, it now counts more than 300 signatories, representing approximately $59trn in assets under management (AuM).
Members make three overarching commitments: to work in partnership with asset-owner clients on decarbonisation goals that reflect that 2050 deadline; to set decarbonisation interim targets for the proportion of assets to be managed that also aligns with that timeline; and to review that interim targets at least every five years with a view to ultimately reaching 100% of AuM committed to net zero.
Ever since the Paris Agreement was signed in 2015, the discussion of the role of both the asset management industry and the finance sector as a whole has progressed considerably. Corinna Orbach, responsible for sustainability strategy at the German asset manager DWS, has watched this evolution gather significant pace since joining the company in 2019. DWS was one of NZAM’s 30 founding signatories, with Orbach navigating the translation of this overarching commitment into a concrete interim target framework.
Orbach acknowledges asset managers wield a different type and degree of influence to that of banks when financing specific activities. Asset managers act as fiduciaries of their clients and hence are entrusted to create long-term value in appropriate consideration of investment risks and opportunities.
This includes the risks of climate change and the chances attached to mitigating it. Here, asset managers have a vital role in engaging with and educating clients and investee companies to transform their business models towards decarbonisation and launch new investment solutions in line with net-zero pathways.
These considerations are also reflected in the NZAM commitment: to work in partnership with clients on a scientific approach to real economy reductions, create new investment products aligned with net-zero goals, and continue engaging with issuers, regulators and other stakeholders including rating agencies, auditors, stock exchanges and data providers.
“As one of the largest asset managers in Europe, we recognise our role in this transformation. As such, we aim to exert our market position and influence to engage with our main stakeholders, specifically our clients, investee firms as well as index providers,” says Orbach.
Setting targets
Such an integrated net-zero approach touches every single aspect of operations, requiring what Orbach calls “a cross-divisional effort”, with asset managers needing to seek input from both the operational and portfolio side. Before setting targets, it is important to ascertain the institution’s carbon footprint, understand various target-setting methodologies and determine the potential scope of assets and operational activities,
“In an ideal world we’d be looking at scopes 1, 2 and 3 for our investee companies,” says Orbach. "However, right now the quality and availability of the data are not there to allow for full inclusion of Scope 3 emissions."
Decarbonisation targets and frameworks need to be constantly refined as data and methodologies evolve – clearly recognising the dynamic and long-term nature of the challenge ahead.
“Baselines will not be static – they need to be regularly updated as new data and new methodologies become available,” says Orbach. “It is a highly dynamic process where we need to ensure a high level of transparency about where things have changed from year to year. It’s important to disclose how new information is being captured constantly.
As transformation will be key to succeed in climate risk mitigation, says Orbach, we aim to continuously evolve our engagement approach with clients, investee firms and index providers as well as other industry groups.
Approaching each other for real-word change
Asset managers must also adapt how they work with their client base. Client engagement differs considerably depending on the experience and ambition of the client in question. Some might be far along on their own journey, having set net-zero targets, and looking for advice from their asset manager to accelerate their decarbonisation efforts. For this institutional client, the conversation focuses on policy, data sources, thresholds and filters.
Then there might be other clients whose primary focus is to raise the overall share of ESG investments. Here, the advisory approach will initially focus on increasing the share of article eight or nine investments under the EU’s Sustainable Finance Disclosure Regulation (SFDR).
In favour of transformation
SFDR currently favours divestments over transition or transformation, says Orbach, citing the need to have regulations and frameworks in place that ensure active ownership and a move away from assets that do not meet required standards.
“Today, if we focus on divesting from high emitting portfolio companies because they have not yet set net-zero targets, there is likely to be a new investor ready to take our place at the table,” she says.
“So, we’ve reduced our portfolio emissions, but have we done something for real-world change? Not if other economic actors are providing the capital instead. Some investments may fall into private hands with little scrutiny and disclosure requirements. An open dialogue with portfolio companies is central in this transformation.”
As part of DWS’s fiduciary role, and that of the asset management community in general, Orbach foresees considerable opportunities. “On the one hand, we need to consider the risks associated with climate change. But new technologies and solutions that will be critical in delivering the necessary transformation to mitigate climate change can also offer new investment opportunities, realising sustainable economic growth.”
The scale of the challenge is staggering, but so too is the scale of that opportunity for those who get net-zero investment strategy right. Asset managers can play a significant role in this transformation through accountability, transparency, innovation and collaboration.
Disclaimer: This editorial contribution has been prepared in partnership with a third party. Despite the careful selection of sources, no liability is assumed for the correctness of the contents. All statements and performance data do not constitute financial analysis. They are for information purposes only and in no way encourage the purchase or sale of financial instruments or securities. Historical performance and any awards for it are not guarantees of current or future performance.
