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Science-based targets: commitment and urgency needed

RBS International reports on the need for alternative investment funds (AIFs) to remain committed to science-based climate targets and instil more urgency in overcoming barriers to adoption.

Bradley Davidson

Director and Climate & ESG Lead, RBS International

3 minute read time

Combating climate change and achieving net-zero are reassuringly high on the agenda for the investment community, but the route to success remains fraught with difficulties. While there is almost universal acceptance that adherence to science-based targets (SBTs) is the way to drive meaningful change, adoption is less widespread. 

In March 2022, RBS International surveyed 125 key influencers from AIFs to find out how they were approaching SBTs, and their progress in adopting them. Since that time, the climate finance discussion has intensified, with reports from COP27 underlining the pressing need for investment: specifically, US $6tn per year between now and 2030 for the world to reach net-zero carbon emissions by 2050.

The economic context, however, has shifted dramatically since both our first study and COP27, so earlier this year we went back out to the market to discover how the instability and urgency have affected SBT adoption.

At a webinar introducing our latest report, Stay the Course: Why alternative investment funds should remain committed to SBTs, Anna Layard-Liesching, head of liability sales at RBS International, outlined that while funds are convinced of the long-term value of SBTs, short-term economic concerns have slowed or even derailed implementation. So, where do AIFs currently stand on SBTs?

 

The long view: SBTs have future value for funds

While there is little consensus among AIFs on whether net-zero commitments will make an immediate impact on performance, the vast majority admit they must inevitably target net-zero.

“One of our key findings is that, in the medium to long term, net-zero and SBTs are growing on the agenda for alternative investment funds,” said Bradley Davidson, ESG Lead at RBS International. “Nine out of 10 decision makers at AIFs surveyed this year said SBTs will be important to their funds going forward. This is up from 79% in 2022 – an encouraging sign for the transition to a net-zero economy.”

Emily Hamilton, Head of ESG at Savills Investment Management agreed: “I think for us science-based targets is gaining traction. It may have been distracted a bit by the SFDR regulations over the last few months but now attention is increasingly focused on how we start to verify these pathways because over 300 billion of assets under management in real estate have now set a net zero commitment. We all need to start working to make sure we can deliver that commitment in practice.”

 

Tightening belts: economic turmoil is slowing uptake

Worsening economic conditions rank as a significant barrier to the implementation of SBTs, with 35% of our respondents identifying it as a top-three concern.

“Given the economic turmoil of the last 12 months, it’s easy to understand how funds’ attention has been distracted by more immediate issues,” said Bradley.

Thomas Kansy, Director at Vivid Economics and Partner at McKinsey & Company added: “It's undeniably a turbulent time that we've seen, and I can only echo from my own experience with clients the report's findings that science-based targets were not top of mind over the last 12 to 18 months. It's a vastly different investment environment.”

 

The slow lane: implementation time is the biggest barrier

Despite its negative impact, the economic climate isn’t the top barrier to SBT adoption. The time it takes to implement SBTs was cited as a stumbling block by 37% of those surveyed, outranking internal technical ability, the front runner in 2022.

Thomas elaborated: “In a way it's a circular process in terms of the top of the house agreeing that this is something that we want to do, which takes a bit of time to get consensus on in the first place. It is working through the data. How much can we actually measure? What are the targets? How realistic are these targets? Then it's about the discussion and syndication internally because it requires consensus building.”

“People need to believe that yes, this is actually achievable in the first place, and that it drives performance.”

Thomas  believes that data availability can help drive efficiency, but only when combined with a clear view of where policy and the regulatory environment are heading, and knowledge of the technologies involved.

“It’s about: where do we have influence in our risk framework?”

A lack of in-house skills or expertise – the number one barrier in last year’s survey – fell way down the ranking this time around, noted Bradley. “We believe this has more to do with other barriers coming to the fore than the core skills issue being resolved,” he added.

Indeed, for many organisations, skills – particularly around ESG data gathering, analysis, and management – are still in high demand.

“We’ve had to use external consultancies to help assess our data and make sure it’s as accurate as possible. Unless we can get that data, we have to use estimates,” Emily said. “This is often quite a lengthy process. We’ve done both internal analyses and used external support to help verify what we are doing before submitting that data back up the chain to our parent company.”

 

Inertia rules: adoption of SBTs has stalled

All of the funds surveyed have made some form of commitment to SBTs, but we see a stretched timeframe for adoption among those yet to start the implementation process. Urgency appears to be lacking, with the proportion of AIFs that have set and verified SBTs sitting unchanged since 2022 at 43%. Our results show only a quarter of non-adopters now plan to adopt SBTs within the next one to three years, down from 35% previously. The proportion now planning to adopt in five years or more, or who have no timescale for adoption, has grown from 23% to a third. 

 

Driving force: regulatory pressure is a powerful catalyst

The proportion of AIFs identifying regulation as their chief driver rose to 38% in this year’s survey, and respondents don’t expect the pressure to ease.

“Drivers are largely unchanged, with regulatory pressure taking the top spot, and investor pressure in second place,” said Bradley. “This highlights that for many, ESG is a compliance concern, not a performance driver. This has to change. AIFs should be looking beyond their regulatory obligations and adopting strategies that can help accelerate the transition to net-zero.”

The Science Based Targets initiative (SBTi), he added, provides a solid framework for determining how to achieve that transition. 

Emily agreed: “It's starting to prepare you for the world that we are heading in, which is not about just fiduciary return from a financial perspective, but fiduciary return from both a social and an environmental perspective wrapped into how that's going to lead to better economic conditions.”

“My top tip is really looking at how science-based targets can be a driver for change by initiating greater thinking around what's going to happen in the future for your business. It sets you on a trajectory by making you think longer than a two or three-year time scale. You are having to think 5, 10, 15, 20 years out, and I think that's a really valuable tool for strategic planning.”

 

How funds can pick up the pace on SBTs

Bradley outlined ways in which AIFs can increase the speed of SBT adoption. Vitally, he said, they need to keep the climate conversation going.

“That means discussing SBTs internally, so internal stakeholders are familiar with the roadmap to verification,” he said. “It also means communicating with external stakeholders, such as banks and investors, to understand their expectations and their own paths to net-zero.”

Emily also noted: “I think we see a big part of our role is helping to educate our partners, whether that's the tenants that we're working with or working in partnership with our investors, you need to help them better prepare for what could a science-based target mean for their fund if there hasn't been as much exposure to this in the geography where they’re based. I think it's really about engagement; there isn't anyone who doesn't want to do the right thing, we just need to help people understand what the benefits are of these different tools and frameworks.

Funds should track their competitors to avoid investor challenges if a rival adopts a more advanced approach. And they should engage with industry bodies such as the Net Zero Asset Managers Alliance. 

Equally important is generating and maintaining a sense of urgency. One way of doing so is making a public commitment to adopting SBTs by signing up to the SBTi or a similar framework.

“You have 24 months after signing a commitment to submit your targets with the SBTi,” explained Bradley. “You can then start to assess what resources you have in-house, what external support you might need, and what roadblocks stand in your way.”

Perhaps most crucially, funds need to maintain their focus on the future, rather than being completely side-tracked by more immediate concerns.

“The SBTi mandated timeframe is between five and 10 years, so this will require funds to lay out a multi-year plan of action without losing the necessary urgency,” added Bradley. 

 

Moving forward together

For every fund, a long-term vision will be vital for enduring success in adopting SBTs, concluded Layard-Liesching.

“There’s always going to be that pull across priorities for a fund and what their drivers are. But it’s about understanding that commitment today equals value tomorrow, even if it’s not necessarily in an immediately tangible form,” she said.

To achieve this, the industry needs to work together, rather than in competition, believes Bradley.

“Collaboration is key,” he said. “We know there are challenges. We know there are barriers we have yet to overcome, but as an industry we also recognise no individual can tackle climate change alone. We need to be coming together, highlighting where certain frameworks don’t work, what we need to do to improve them, and making sure that the conversation continues across the industry.”

 

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