Less than half of investors (48 percent) sought outside expertise before making a net-zero commitment, Responsible Investor’s net zero stocktake survey has found.
This is despite 91 percent stating that concerns had been raised internally about the potential implication or feasibility of such a pledge before undertaking it.
Major investor net-zero groups emerged in 2019 with the launches of the Net-Zero Asset Owner Alliance (NZAOA) and the Paris Aligned Asset Owners initiative, followed by the creation of the Net Zero Asset Management initiative in late 2020.
Signatories piled into these groups in 2021 ahead of COP26 in Glasgow, as the various net-zero alliances united under the umbrella of Mark Carney’s Glasgow Financial Alliance for Net Zero.
But as interim net-zero targets loom and the global economy remains stubbornly carbon-intensive, questions about the credibility of net-zero commitments have been raised by critics, including voices inside the responsible investment world.
Some signatories to net-zero groups have also slipped away, citing legal and compliance concerns and resource constraints.
This prompted RI’s poll, which attracted in-depth responses from 26 institutional investors, comprising 12 asset owners and 14 asset managers.
Close to two-thirds of respondents were based in the UK and Europe, with 27 percent in the US and the remainder in Oceania and South America.
The survey revealed that just two funds – a European manager ($50 billion-$500 billion AUM) and a North American asset owner (less than $50 billion AUM) – had taken specific legal advice from external providers in relation to their net-zero commitments.
Four said they had hired consultants, with South Pole named by one investor.
The North American fund that had its commitment reviewed by lawyers also sought outside expertise to provide “limited assurance of our approach to calculating carbon metrics for a larger portion of our investments.”
Asset owners were much more likely to seek external advice, at 72 percent compared with 25 percent among managers.
As to the motivation for making net-zero pledges, two-thirds (62 percent) cited stakeholder/client pressure as a factor, making it the most common reason.
This was followed by “values” (54 percent), “fiduciary duty” (31 percent), concerns around financial risk (27 percent) and “peer pressure” (23 percent).
One Oceania-based fund, which is in the process of signing off a net-zero ambition, added “government policy” as a factor in its decision.
Unsurprisingly, the head of ESG or sustainability was the person most cited as driving funds to make a commitment (35 percent). The signing off on the pledge was usually left to the CEO, board or the executive/management committee (66 percent).
However, three funds revealed that their commitment had been signed off by their sustainability or ESG head. This included two asset owners, one in North America and the other in South America. The third was a medium-sized European asset manager.
The signing off of a net-zero commitment being left to a head of ESG or sustainability is notable given the potential implications of such a pledge for a fund.
Earlier this month, RI quoted an asset owner who questioned the legal implications that net-zero commitments may entail in terms of holdings.
Revealingly, one UK asset manager said it was “client-facing teams” that pushed internally for a net-zero commitment by the fund, potentially hinting at the commercial dimensions of some pledges.
Concerns about taking the plunge
Concerns about making a net-zero commitment focused on issues such as investment constraints, lack of progress in the real economy, fears of being accused of greenwashing and a lack of frameworks and tools.
One European asset owner told RI that its pledge was made in 2020 as part of joining the NZAOA. “At that time, frameworks were not developed and concrete implications for the portfolios were not fully measured,” they wrote.
Another investor cited “greenwashing” fears, given the lack of ability for a fund to meet the target on its own.
One large asset manager ($50 billion-500 billion AUM) said that recommendations by its consultant were “initially too aggressive”. “We are primarily passive investors and thus our possibilities for divesting are limited while also having to engage too large of a universe,” they wrote.
Most respondents were relatively confident that they will meet interim net-zero goals. None selected “not at all likely”, while 74 percent opted for 3 and 4 on a scale of 1-5, where 5 meant “extremely likely”.
Asked whether net-zero goals would be feasible without divestment, 48 percent said no.
Surprisingly, three respondents to the survey told RI that making a net-zero pledge has not changed their approach as fund. Another described the impact to date as “minimal”.
When it came to lessons learned, a litany of challenges were listed.
One large European asset manager told RI it had discovered that many companies – “even those with net-zero commitments” – are unwilling to align with net zero, “implying that we may have to massively divest in a few years”.
The manager added that, while many firms were working hard on their commitments, “a lot of companies rely excessively on politically difficult policies, carbon offsets and technological breakthroughs yet to be achieved”.
Several investors highlighted their lack of power to change the real economy on their own. One large UK asset owner candidly stated that its “ability to effect change is much more limited than expected”. The need for the right policy environment is often cited by net-zero pledge sceptics.
Another large European manager raised issues with the emphasis on portfolio decarbonisation.
“A focus on portfolio CO2 reduction will not help a single bit,” they wrote. “It will only make your portfolio look greener but will change nothing in the real world.”
They added: “There are parts of our portfolio that we cannot alter due to financial reasons… and due to the nature of these investments we do not have any say or influence on the emission profile of that part of the portfolio.”
In 2021, Magnus Billing, then CEO of Swedish pension fund Alecta, told RI that unless governments step up on their climate efforts, he did not believe the fund could meet its net-zero ambitions, given the requirement to hold substantial amounts of sovereign debt.
One UK asset owner respondent to RI‘s survey said it would be “very hard to hit net zero because of a lack of valid investment opportunities”.
Lack of standardisation when it comes to calculating and setting net-zero goals was also raised as an issue by investors, as well as the poor quality of data.
Despite these challenges and difficulties, 90 percent of investors polled said, with hindsight, they would still make a net-zero commitment.
Look out for our deeper dive into the responses of asset owners and managers, coming out later this week.