Asset owners uncertain over effectiveness of target-setting frameworks

Ninety One research finds global asset owners are unsure if established frameworks contribute to real world impact and want more standardisation.

A significant proportion of asset owners are uncertain their target-setting frameworks lead to real world impact, particularly in emerging markets, according to new research carried out by Ninety One.

The asset manager commissioned a poll of 300 asset owners across a series of developed market economies and its home market of South Africa, looking at climate targets and target setting.

The poll found nearly half of asset owners have an emissions reduction target in place, while 43 percent use a Climate Value-at-Risk model. Some 40 percent of North American asset owners use a portfolio coverage/asset level alignment approach, while 44 percent of European asset owners use Implied Temperature Rise metrics.

However, around a third of respondents said that using established frameworks for target setting actively prevents their investments from making a real world impact. This rose to 44 percent when it comes to impact in emerging markets.

Nazmeera Moola, chief sustainability officer at Ninety One, told Responsible Investor that the strong focus for some target setting frameworks has been on portfolio decarbonisation through divestment and exclusions. This means that the pathway for asset owners has been to sell their highest emitters, particularly those in emerging markets.

Those asset owners who were most likely to believe in the effectiveness of established frameworks had followed the guidance of the Science-based targets initiative (SBTi). Moola suggested this was because the framework offered more options to financial institutions which allow them to work with portfolio companies to decarbonise.

Mhairi Gooch, senior responsible investment consultant and net-zero lead at pensions consultancy Hymans Robertson, said that its approach looked at sector and region-specific decarbonisation pathways based on carbon budgets. However, she noted that this approach was much more challenging than a broad emissions target.

“Over simplification of decarbonisation pathways and targets is a concern and can lead to decisions to look at portfolio, or ‘paper’, decarbonisation as opposed to actions that drive real world change, for example staying invested in the transition instead of divesting from high-emitting sectors or regions like emerging markets.”

However, Leanne Clements, head of responsible investment at £22 billion pension provider People’s Partnership, warned that pitting portfolio decarbonisation against real world outcomes is an “unhelpful framing of the issue”.

“Much like divestment ‘versus’ engagement, it is not an either/or discussion,” she said, “but rather the two need to be interlinked as part of a robust climate strategy to deliver better member outcomes.”

Clements also pointed to a recent study on asset owner and manager alignment on stewardship issues, which she said “demonstrates that there is much more work to do for investors in this area to drive effective change in companies on climate”.

Many asset owners are turning to bespoke approaches, with almost half having turned to a proprietary framework or bringing in a consultancy to assist. However, a similar proportion said that there is too much discretion permitted in the selection of climate-related targets and the metrics that underpin them.

Asked whether there was a regulatory solution to this issue, Moola said it is difficult to regulate targets when we are still in the early phases of understanding the levers that financial institutions have to catalyse real world emissions reduction.

“For example, a few years ago, the concept of portfolio emissions reduction mirroring the global target reduction of 50 percent by 2030 seemed sensible. With the passage of time, we have seen that this approach can actually be counter-productive – because it incentivises divestment and exclusion.”

This was echoed by Clements, who said that “the complexities that asset owners face in embedding climate risks and opportunities into their portfolios should not be underestimated – the goalpost is constantly changing on how to appropriately address transition risks and opportunities”.

“Therefore, asset owners need to be comfortable with a ‘living’ framework to assess risks and opportunities, that is allowed to reasonably evolve over time with industry developments,” she added.

“Standardisation of company disclosures, as referenced in this report, will help to smooth this evolution process, as will greater industry consensus on top level frameworks that asset owners can get behind to avoid the danger of a proliferation of initiatives and re-inventing the wheel.”

Gooch also agreed, arguing that measurement of real economy effects and impact needs more clarity and guidance. What asset owners really need, she said, is a more holistic measure of how capital supports the transition to a low-carbon economy.