Asset managers have an important role to play in tackling climate change, through both their investments and the pressure they can put on companies and policymakers to commit to net-zero promises.
Three recent reports highlight the achievements of this community, and the challenges asset managers face in making and keeping their own net-zero pledges.
A report by Rumi Mahmood, head of ESG and climate fund research at MSCI, highlights where large asset managers stand in making and keeping net-zero commitments. "Footprinting the World’s Largest Asset Managers" takes a snapshot of where the 10 largest asset managers are in assessing and addressing the carbon footprint of their portfolios.
The results are mixed. Here are some interesting data points:
- Big European players were marginally less carbon-intensive than their U.S. peers.
- Assets under management (AUM) were proportional to larger financed emissions. This was particularly true at U.S. fund managers, where each $1 trillion invested led to an extra 10-20 tons of CO2.
- Asset managers with net-zero commitments should assess their entire book of assets to have a baseline for target setting and to be able to monitor alignment progress, alongside engagement and decarbonization efforts.
For its report, MSCI looked at exchange-traded fund (ETF) and mutual fund assets of the 10 largest asset managers globally by AUM, using data from MSCI’s Climate Lab Enterprise. These 10 asset managers hold $25 trillion in assets and represent almost 25 percent of the approximately $110 trillion invested in funds globally. Nine of the 10 are signatories to the Net Zero Asset Managers (NZAM) initiative, which represents asset managers committed to net zero by 2050 or sooner. MSCI calculated emissions metrics for equity and debt holdings across funds of these asset managers and aggregated the results to represent firm-level metrics.
According to the findings, U.S. firms accounted for seven of the 10 largest asset managers, with the remaining three domiciled in Europe. On carbon intensity (Scope 1 and 2), the European fund managers were clustered below or around 150 tons CO2/$1 million sales, while U.S. asset managers were closer to 200 tons CO2/$1 million. Carbon intensity measures are used to understand the efficiency of a system, how carbon heavy or carbon light it is. In this case we are evaluating the carbon intensity of portfolios, with a lower carbon intensity ultimately more desirable. Companies with higher carbon intensity are more likely to face more carbon-based risks and regulatory risks.
European asset managers within this sample generally had a higher initial percentage of their AUM committed to be managed in line with net zero (ranging between 20-35 percent) relative to their U.S. counterparts (ranging between 10-25 percent).
The asset manager with the highest carbon intensity and financed emissions was a global bond fund manager with significant exposure to emerging markets and high yield debt. Not surprisingly, MSCI found asset managers with more carbon-intensive equity assets were likely to have more carbon-intensive fixed-income assets.
Measuring is the first step in managing. This study by MSCI gives us a snapshot, or a "balance-sheet" if you will, of the carbon intensity of some of the world’s largest asset managers. Such a snapshot is only the first step in a long journey to net zero by 2050 for asset managers.
Next up, NZAM
NZAM recently revealed initial targets for the 291 investors in its network. About $21.8 trillion — out of a possible $55.3 trillion managed by the asset managers who have set targets to date — is committed to be managed in line with achieving net zero by 2050 or sooner, the initiative said.
Collectively, signatories have committed on average 39 percent of their portfolio to net-zero status by 2050. Achieving this, however, is dependent on mandates agreed to with clients, the regulatory environments in different markets and supportive policy developments. In short, achieving these targets is not solely under the control of asset managers alone.
Most targets set to date cover listed equity and fixed income due to available target-setting methodologies for both asset classes. NZAM’s intention is to cover other asset classes, such as private equity and infrastructure, in order to assess a broader universe of assets under management.
The Glasgow Financial Alliance for Net Zero (GFANZ) recently released its second annual progress report. The report estimates that by the end of the decade an additional $1 trillion per annum will be required for clean energy investment globally to put the world on track to reach net zero by 2050. This reflects a sevenfold increase from today’s levels, even before considering climate finance needs.
This begs the question of whether asset managers believe this gap will be filled. Are they investing assuming that the world will drastically increase climate financing to get in line with net-zero 2050 goals or are they investing assuming that we will fall short of this mark?
The evidence seems to suggest we will fall short.
Soon after the release of the GFANZ report, Mark Carney, co-chair of GFANZ, spoke at an evidence session to highlight the results of the report and the challenges that lie ahead. According to reporting by Carbon Tracker, Carney stated that there may be a need for a mandatory approach to reporting requirements once voluntary initiatives have done all they can.
Carney noted that the ratio of clean to conventional energy produced needs to rise to an average of 4:1 by 2030 versus 1:5 at the beginning of this decade. Carney said that only 40 percent of the global financial system has made a net-zero commitment, leaving 60 percent — about $150 trillion of balance sheets — outside of the GFANZ sphere.
You can’t get there from here — on your own
The next step these asset managers, asset owners and financial institution need to take is to articulate how they get to net zero. What are their targets? What is the strategy to achieve those net-zero goals? What incentives do asset managers and their staff have to achieve those goals? Most firms are in the early stages of this process, but getting that right is critical. Our civilization kind of depends on getting it right. But no pressure.
It is also important to remember that asset managers are only one small part of solution to our climate problem. Asset managers, in particular, and the financial industry more broadly must do all they can to analyze, measure and manage the carbon (and methane) footprint of their portfolios. But they are not the only actors in this game.
Net-zero commitments also include engagement with civil society, companies and policymakers. Asset managers need to put pressure on all of these groups — as well as set incentives for themselves - to make net zero by 2050 a reality. Companies (both public and private) and policymakers also need support or political cover from asset managers — assuring companies and policymakers that their capital is "patient" enough to see through the changes that need to be made to get to a net-zero world.