Asset managers were more susceptible to peer pressure than asset owners when making net-zero commitments, Responsible Investor’s stock-take survey has found, with 40 percent of managers citing it as a factor.
By contrast, only one asset owner respondent selected the influence of peers as a factor in their decision.
Another potentially related point of deviation between the 11 asset owner respondents and 12 managers was around net-zero regret. While no asset owner expressed a change of heart on its pledge with hindsight, three managers did. Interestingly, the trio were also among those that cited “peer pressure”.
One of those managers was a representative of a UK-based fund ($50 billion-$500 billion AUM). On lessons learned, the respondent told RI: “The strength behind a commitment or target depends on how well it lands culturally.” Without internal alignment, they said, “people will find ways to manipulate it”.
On Tuesday, RI reported a similar observation by a representative of a large North American asset owner, who said that decision-makers “are still willing to make short-term decisions that undermine our progress toward achieving net zero”.
Another UK-based manager (<$50 billion), which also identified peer pressure as factor in its decision and expressed regret around its pledge, stressed that its commitment should not be “confused” with an expectation to divest, vote against companies, or engage in activism at any cost.
Despite 83 percent of asset managers with net-zero commitments stating that concerns were raised before making them, only 25 percent took external advice beforehand. By contrast, 72 percent of asset owners took external expertise ahead of making a net-zero pledge.
Sceptics have their say
RI’s survey also drew responses from asset managers without net-zero commitments.
One representative from a North American manager ($50 billion-$500 billion AUM) said the firm had not made a net-zero commitment as they did not believe it was “possible to authentically deliver on it”.
They described such commitments in their current form as a type of PR, pointing out that asset managers “have very little discretionary control” given that they manage capital for others. This, they said, makes net-zero declarations “misleading at best”.
“Fossil fuel vested interests and politicians stoking culture wars can set back investor climate stewardship but cannot change investors’ calculus that a mid-century net-zero economy is the best financial outcome for their beneficiaries and clients”
Representative of a UK asset manager
The issue of fiduciary duty was also raised by the representative. Because performance is measured against traditional benchmarks, they said, net-zero exclusions are “not only ineffective in decarbonising the real economy but counter to the goal of providing the strongest short-term returns for our clients”.
Another representative from an Oceania-based index manager (<$50 billion AUM), also without a net-zero commitment, pointed out that it had “no control over index construction”. Because of this, any net-zero claim would “require the purchase of offsets in the voluntary carbon market”.
They added that their fund views offsets as being “in conflict with the necessary policy and structural economic changes necessary to achieve the substantial emissions reduction”.
Divestment and offsetting were described by the respondent has having “limited real-world impacts and doing little to contribute to a real-zero economy”. Given that those are the two primary means for funds to achieve their individual climate goals, they regarded net-zero claims as “exercises in marketing and brand management”.
It was not all doom and gloom. Many managers saw value and benefit in their net-zero pledges.
One European fund representative told RI that pledges matter “even if they seem unrealistic”. Without an explicit commitment, they said, senior managers would not prioritise action.
A respondent from a UK manager said its commitment to net zero had “deepened” its engagement with companies as well as “sharpening it around clear expectations that we stand behind”.
Touching upon the ESG backlash, they added that while “fossil fuel vested interests and politicians stoking culture wars can set back investor climate stewardship”, it will not “change investors’ calculus that a mid-century net-zero economy is the best financial outcome for their beneficiaries and clients”.
“Net-zero commitments by financial institutions are generally achieved by divestment or the purchase of offsets. Both activities have limited real-world impacts and do little to contribute to a real-zero economy”
Representative of an Oceania asset manager
A larger European investor representative revealed that most of its discretionary assets are now managed in line with its net-zero commitment, which in turn “has an influence on overall asset allocation”.
They also stressed that it is important for investors to consider “feedback loops” when it comes to scenario planning in order to fully understand the importance of limiting warming to 1.5C. “Many companies use linear damage functions, and these are very limited in their approach to climate risks,” they said.
One of the most upbeat responses came from a US asset manager representative, who told RI that it had been “positively surprised at the rate of progress on our target”.
“Our primary concern was the impact of buy/sell decisions on progress… but we’ve seen overall improvement in the investment universe which has meant many new portfolio positions already had credible transition plans in place,” they added.