Against the backdrop of COP26, the 2021 UN Climate Change Conference in Glasgow, Scotland, a number of institutional investors — including prominent endowments at universities such as BU, Cornell, Dartmouth, Harvard, Loyola Chicago, UC Berkeley, and the University of Minnesota — have begun to divest from 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 developing new investment strategy guidance; [creating] target-setting frameworks, portfolio and impact measurement metrics, and tools; and [developing] platforms for ensuring accountability and collectivizing the investor voice that 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 zero”) investment strategy that must be achieved within the next 30 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 net-zero greenhouse gases by 2050 or sooner.
Despite the surge in interest and adoption, however, asset managers continue to face major challenges in achieving environmental, social, and corporate governance-related goals, including a dearth of high-quality data and a lack of goal alignment between asset managers and owners.
For one thing, according to the report, asset managers often lack confidence in their ability to meet their net-zero goals. “They have to serve clients who may not be aligned with the 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] managers’ key roles is to educate their clients to help them try and figure out net-zero investing strategies.”
Despite the hurdles, Cook said that a growing number of managers have begun to recognize their role in influencing the financial industry. “The more asset managers join the net zero movement, the more [an] asset manager [who] hasn’t yet joined [will be at a disadvantage],” she said. “So there’s a race to zero, literally.”
When an asset manager signs an agreement with the NZAM Initiative, he or she is expected to abide by the network’s three core commitments: partner with asset-owner clients to reach decarbonization goals; establish an “interim target” of assets under management that need to be net-zero by 2050; and review those interim targets each year until 100 percent of AUM is invested in net-zero assets.
In the Morningstar report, a survey of 12 asset managers showed that establishing these interim targets — for example, a 50 percent global emissions reduction by 2030 — is the greatest challenge for managers who have committed to NZAM. Cook attributed this to a lack of standardized data and tools for asset managers across the industry.
“Most of the data [that] asset managers are working with is backwards-facing, and the company-level disclosures [on which] they’re based are not standardized,” Cook said. “It’s incredible how quickly the tools have evolved, but they’re still evolving, and asset managers may still feel uncomfortable about setting goals. Everybody’s doing this for the first time.”
Additionally, according to the report, most managers understand that a decarbonized portfolio will not necessarily result in real-economy emission reductions — primarily because there are no industry standards that link a net-zero portfolio to a real-world impact — and this may make it difficult for some of them to justify their commitment to a net-zero portfolio.
“A lot of asset managers recognize that they’re really powerful players in the investment ecosystem, and that they have a lot of leverage [to steer companies toward] low-carbon investment models,” Cook said. “They may feel nervous about being [under] pressure to decarbonize rapidly from fossil fuels, because divestment often puts fossil-fuel assets in the hands of other investors or private owners who may not be committed to net-zero targets.”
Despite the challenges inherent to a movement such as net zero, Cook said she feels that a good percentage of managers recognize that their investment decisions have an impact on the cost of capital, and therefore have an impact on the planet. “They understand that a world that is warmer [by] 1.5 degrees is not investable,” she said.