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Asset managers face roadblocks on their way to net zero

In the context of COP26, the 2021 United Nations Climate Change Conference in Glasgow, Scotland, a number of institutional investors – including large endowments to universities such as BU, Cornell, Dartmouth, Harvard , Loyola Chicago, UC Berkeley and the University of Minnesota – have started divesting carbon-intensive assets. At the same time, a growing number of asset managers have also joined or explored the possibility of joining the carbon neutral movement.

According to a Morningstar report released Tuesday, “Investor-led initiatives are shaping new directions in investment strategy; [creating] frameworks for setting goals, metrics and tools for portfolio and impact measurement; and [developing] platforms for ensuring accountability and the collectivization of investor voice which all create a new institutional infrastructure for investor action. As a result of this institutional pressure, Morningstar found that 128 asset managers, representing a combined total of $ 43 trillion in assets, have committed to implementing a carbon neutral (or “net”) investment strategy. zero ”) to be achieved over the next 30 years. years. This commitment is made under the banner of the Net Zero Asset Managers Initiative, an international network of asset managers committed to the goal of zero net greenhouse gases by 2050 or before.

Despite increasing interest and adoption, asset managers continue to face major challenges in meeting environmental, social, and corporate governance goals, including a dearth of high-quality data. quality and a lack of alignment of objectives between asset managers and owners.

On the one hand, according to the report, asset managers often lack confidence in their ability to meet their net-zero goals. “They need to serve clients who may not be aligned with net-zero goals, and not all asset managers [and allocators] may be at the same point in their net zero commitments, ”said Jackie Cook, director of investment stewardship research at Morningstar, in an interview with Institutional investor. “One of [the] The key role of managers is to educate their clients to help them try to understand net zero investment strategies.

Despite the hurdles, Cook said a growing number of managers have started to recognize their role in influencing the financial sector. “The more asset managers join the net zero movement, the more [an] asset manager [who] has not joined yet [will be at a disadvantage], “she said.” So there’s a run to zero, literally. ”

When an asset manager signs an agreement with the NZAM Initiative, he or she must respect the three fundamental commitments of the network: partnering with clients who own assets to achieve decarbonisation objectives; establish an “interim target” of assets under management to be net to zero by 2050; and review these interim targets annually until 100% of assets under management are invested in zero net assets.

In the Morningstar Report, a survey of 12 asset managers showed that setting these interim targets – for example, a 50% reduction in global emissions by 2030 – is the biggest challenge for managers. who joined the NZAM. Cook attributed this to a lack of standardized data and tools for asset managers across the industry.

“Most of the data [that] that asset managers work with is backward-facing, and company-level disclosures [on which] they’re based aren’t standardized, ”Cook said. “It’s amazing how quickly the tools have evolved, but they are still evolving, and asset managers can still feel uncomfortable setting goals. Everyone is doing this for the first time.

What’s more, according to the report, most managers understand that a low-carbon portfolio won’t necessarily lead to emissions reductions in the real economy – mainly because there are no industry standards that relate a net zero portfolio to real impact – and this can make it difficult for some of them to justify their commitment to a net-zero portfolio.

“A lot of asset managers recognize that they are really powerful players in the investment ecosystem and that they have a lot of influence. [to steer companies toward] low-carbon investment models, ”Cook said. “They may feel nervous about being [under] pressure to rapidly decarbonize fossil fuels, as divestment often places fossil fuel assets in the hands of other investors or private owners who may not be committed to net zero goals.

Despite the challenges inherent in a movement such as net zero, Cook said she believes a good percentage of managers recognize that their investment decisions impact the cost of capital, and therefore impact the planet. “They understand that a warmer world [by] 1.5 degrees is not investable, ”she said.


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