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Fund managers have a vital role to play in the decarbonisation of the global economy. But while long-term net-zero targets are important, there needs to be greater focus on action in the current decade.
A summer of extreme weather events in the northern hemisphere and the imminent United Nations COP26 summit in Glasgow are just two of the factors that have pushed climate change to the top of the agenda across all sectors of the global economy.
For the fund management industry, decarbonisation presents significant opportunities as well as challenges: asset managers who can blaze a trail in terms of their journey to net zero may be able to mitigate portfolio risk while simultaneously meeting evolving customer demands to reduce the environmental impact of their investments.
But there are significant logistical issues involved in setting and then making progress towards net-zero targets. These range from introducing new forms of company analysis and data collection to the challenges that can arise from changing investment mandates – and communicating those changes to customers.
Already, however, asset managers in Britain are leading the way. According to The Investment Association, firms with more than £5.6trn of assets under management – two thirds of the UK total – have made some form of long-term net-zero commitment.
But there is an increasing sense of urgency around decarbonisation targets: while industry groups such as the Net Zero Asset Managers (NZAM) initiative talk about becoming carbon neutral by 2050, for example, there is growing stakeholder pressure to take more immediate action.
“Today, it’s difficult to set out a clear path to 2050, but it is important that we see a tangible roadmap to 2025 or 2030,” says Leslie Gent, head of Responsible Investing at Coutts. “Asset managers can make that 2050 net-zero commitment, but they have to ask themselves, what are we doing over the next 12 months or five years to make that a reality?
“It is easy to commit to decarbonisation because we can see how important it is. But the difficult bit is putting a framework in place that will allow you to achieve it in a way that is consistent with your investment philosophy.”
Points of difference
Bradley Davidson, ESG lead at RBS International, says: “The standard used to be just having a decarbonisation target and working towards it. Now, practically everyone has a target, so for funds it is more about how they differentiate themselves and have that more strategic angle.”
Davidson points to the various frameworks that asset managers can use to inform their strategic approach. These include PCAF (Partnership for Carbon Accounting Financials), a group of global financial companies working on a standardised approach to measuring and disclosing greenhouse gas (GHG) emissions, and SBTi (Science-Based Targets initiative), which helps funds prioritise action in line with the latest environmental research.
“It is important across financial institutions to recognise we aren’t scientists, so we need to follow the experts – and that is what those frameworks offer,” explains Davidson. “They also create a common language: if you are trying to implement a decarbonisation strategy as a fund, you need to be able to communicate that to your stakeholders – and you want it to be comparable to other firms in your sector.”
“Asset managers can make that 2050 net-zero commitment, but they have to ask themselves, what are we doing over the next 12 months or five years to make that a reality?”
Leslie Gent, Head, Responsible Investing, Coutts
He adds: “If you look at SBTi, there are certain sectors that are classed as having a heightened climate risk. For asset managers, this is often about prioritising; you can’t do everything at once. You need to say, where are my blind spots, where do I need more information, and where might climate risk impact my business? Those frameworks will help you do that.”
Gent says that partnerships such as NZAM are an excellent way for asset managers to share insights and best practice. “This network of other investors is great: learning how others are doing this, seeing if there are other things we could incorporate in our approach,” she says. “For me, best practice is having short-term targets in place. We have a 2021 target on carbon reduction, as well as a 2030 target and the 2050 net-zero target.”
There will inevitably be an extra cost in the short term as a result of introducing a decarbonisation strategy, Gent points out. “We have had to hire people, and buy new, more robust ESG [environmental, social and governance] data. Deciding to have our data audited externally also adds another layer of expense.
“These are all things that will add to the operating costs. But I think that these are costs the business needs to bear in the short term as we build our competence in this area, and over time these will come down or be absorbed.”
Committed on commitments
Chris Day, assistant director for Funds Regulation and Governance at NatWest Trustee and Depositary Services, says that a key challenge for asset managers is how to marry their overall net-zero commitment with individual fund mandates. “If there are changes in terms of the objectives or policies of the funds, those changes would have to go through a change-classification process and potentially require firms to seek investor and regulator approval.”
Fund managers may need to be aware of the EU’s Sustainable Finance Disclosure Regulation, which came into force earlier this year, while Day points out that the Financial Conduct Authority (FCA) in the UK has recently published guidance on disclosure for ESG funds. “This is to ensure that with a sustainable or responsible investment mandates are clear and not misleading to investors. The FCA is particularly concerned about the impact on retail investors, and they are doing a lot of work to ensure there is clarity in terms of the approach the funds are taking.”
Asset managers also need to think about what their strategic approach should be towards reducing the environmental impact of their holdings. “Our engagement with investee companies is the most important lever we can pull to drive real-world change,” explains Gent. She says that Coutts is more focused on supporting the transition to a low-carbon economy than selling assets that are deemed environmentally unfriendly.
Davidson adds: “Private markets need to think about not creating a black or white approach. Instead, we should look at the nuance and make sure we are supporting existing assets and companies to get them where we need them to be.
“We can’t simply walk away [from carbon intensive assets] – I think that would exacerbate the problem rather than anything else.”
Bill Gilbert, Innovation Delivery at NatWest Markets says that fund managers can also use the voluntary carbon market to offset emissions from their own operations or those in their investment portfolios. Gilbert is involved with Project Carbon, a consortium of banks working to develop a more transparent carbon-offsetting market. “What Project Carbon aims to do is give customers greater transparency – not only in terms of the carbon credit but in terms of the project itself,” he explains.
“Simply removing carbon from the air is not considered good enough – there also needs to be a biodiversity aspect to it. A lot of these projects are in developing countries and people want to make sure they are not adversely impacting local communities in any way, and are in fact helping them.”