Asset owners are less confident of meeting their net-zero targets and more wary of making climate commitments they are unable to keep than asset managers, Responsible Investor’s anonymous net-zero stocktake survey suggests.

A representative of a large North American asset owner ($50-$500 billion AUM) flagged the need for external reporting on net-zero progress. While their fund has introduced policies since undertaking its net-zero pledge, those changes “can be easily ignored when there is money to be made”, they told RI. 

“We need to start reporting (externally) on our compliance (or lack thereof) with those new principles and policies,” they added.  

The submission included hints at internal strife linked to the net-zero commitment, which was undertaken because of the leadership’s desire to be first, according to the respondent. 

Before the commitment was made, “many internal stakeholders expressed concerns about the lack of a clear plan (one not based on ‘future technological developments’)”, they said. 

“We’ve learned that our decision-makers are still willing to make short-term decisions that undermine our progress toward achieving net zero”

Representative from a large North American asset owner 

Asked what lessons had been learned from the process, they responded: “We’ve learned that our decision-makers are still willing to make short-term decisions that undermine our progress toward achieving net zero.” 

They predicted that disclosures around net-zero will be the “next wave in ESG reporting”. “I’d expect there will be a set of new standards around how a company can credibly report on their annual progress toward net zero.” 

Asset owners less certain about interim goals than managers  

RI’s survey also suggested that asset owners are less confident of achieving interim net-zero goals than investment managers. 

Respondents were asked to indicate the likelihood of meeting these targets on a scale of 1-5, with 1 signalling “not at all likely” and 5 “extremely likely”.

The 11 asset owner respondents with net zero pledges averaged 3.4/5, with two UK-based funds opting for 2/5. 

By contrast, the 12 asset managers with net zero commitments averaged 4.1/5, with none selecting below 3/5.  

See the story published on Monday for more details on the survey. 

“Net zero plans will be the next wave in ESG reporting”

Representative from a large North American asset owner 

The larger of the two most pessimistic investors ($50 billion-$500 billion AUM) told RI that its “ability to effect change is much more limited than expected”. It was also the only asset owner to cite “peer pressure” among the factors that drove its decision to make a net-zero pledge.  

The UK-based fund stressed that investors need to be clearer about the role net zero commitments “can realistically play”.  

“Otherwise, other actors will start to believe asset owners’ and asset managers’ overblown rhetoric, leaving it to us to solve the problem when really we can have very little impact without strong intervention from others (including policymakers),” they wrote. 

In a similar vein, two other asset owner respondents suggested tweaks to the language used around net zero.

One told RI categorically that it “will not be making a ‘commitment'”. Instead, the Oceania-based fund said that it would adopt a net-zero “ambition”. 

“We will be clear that we will participate in the transition but net zero cannot be achieved without all stakeholders (governments, companies, consumers etc) playing their part,” they wrote. 

The caution of the fund was also seen in its comment related to net-zero concerns. “Risk-adjusted returns will be prioritised over emissions reductions if a trade-off is required,” they said. “Our mandate is very clearly focused on delivery of best returns.” 

A European asset owner representative said they preferred “net-zero objective” to commitment.  

“Achieving net-zero does not depend directly on financial institutions, but rather on companies we invest in (and regulators, consumers etc),” they wrote. “We should therefore not commit to something we don’t control, but we should definitely strive to achieve this objective.” 

The inevitability of divestment and other challenges  

For one European asset owner, a clear lesson from its net-zero efforts are the implications for fossil fuel investments. “Divestment at some point seems unavoidable for now,” they wrote, given the lack of transition being demonstrated by these firms.  

They added that divestment will unfortunately also extend to other carbon-intensive companies, given the focus on carbon footprints.  

“Putting emphasis on carbon footprint has led to certain divestment or non-investment in carbon-intensive companies that are key to the energy transition – for instance, in the utilities or materials sector,” they wrote. “This is contrary to what we are trying to achieve, namely bringing capital to these companies that need to transform.” 

“Other actors will start to believe asset owners’ and asset managers’ overblown rhetoric, leaving it to us to solve the problem when really we can have very little impact without strong intervention from others (including policymakers)”

Representative from a large UK investor  

The respondent suggested that better education among portfolio managers and financial institutions is needed to ensure greater understanding of the complexity of the climate crisis, which should not be reduced to “simple additional constraints” linked to carbon exposure.  

Another UK fund cited a lack of “valid investment opportunities” as a factor that will make it “very hard to hit net zero”.  

That asset owner also stated that it was “strongly against offsetting” but conceded that it does have a “place where technology is not yet available to replace certain processes”. 

Finally, one European fund stressed that the climate and biodiversity crises should not be thought of independently – something they said the financial sector “largely misses”. 

On Friday, RI will publish a deeper dive into the net zero survey responses of the asset managers.