How can investors trust pledges made by fund firms to reach net zero? Here’s some tips from an ethical expert.
The past couple of years have seen sustainability and environmental, social and governance (ESG) issues catapulted to the top of the investment agenda for consumers and fund managers alike. It’s hardly surprising: headline-grabbing catastrophic fires, floods and storms plus 18 months of pandemic have powerfully highlighted the fragility of the world as we know it.
Private investors have jumped on board the sustainability bandwagon. According to the latest Investment Association (IA) , although responsible investment (RI) funds accounted for just 3.9% of industry funds under management in the year to September 2021, they contributed 38% of total net sales to retail investors.
Asset managers, too, have recognised the need to be seen to be doing something. The international (NZAMI), launched in December 2020, already has 128 signatories committed to ensuring net-zero greenhouse gas emissions from their portfolio companies by 2050. The initiative is less than a year old and already accounts for $43 trillion assets under management – almost half the total assets of the global asset management sector.
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Signatories commit to “work with clients to reach net-zero emissions alignment across their portfolios by 2050 or sooner and set interim 2030 emissions reduction targets”. UK names include Fidelity, BlackRock, Schroders, Royal London, Rathbone and River & Mercantile.
‘The proof of the cake will be in the eating’
But while the aim of net-zero emissions by 2050 is a big flamboyant statement from the investment industry, what do such pronouncements actually amount to in practice? Equally importantly, how can private investors assess how well managers are doing on the path to net zero and sidestep potential greenwashing?
The fact is that it’s too easy for companies to sign up with a very long-term perspective but little in the way of granular, measurable plans in place to achieve the goal. The industry knew it needed to make a statement, so it did – but now there are lots of asset managers trying to put their policies in place and work out what their pathway to net-zero emissions looks like.
Julia Dreblow, founder of the ethical fund consultancy SRI Services, applauds the fact that managers are signing up. However, she says: “The proof of the cake will be in the eating. We need to see real action from asset managers now, exerting influence where they can. Measurement and reporting are the crucial ingredients of this cake, and though both are improving, progress is patchy.”
2050 deadline is a long way off
However, the 2050 deadline is much too far away, given the speed of climate change. At Castlefield, where as well as multi-manager portfolios we run four sustainability focused equity funds, the investment team prefers to see companies targeting a substantial reduction in emissions in the next decade.
“It is important that we get countries to sign up to the goals for 50% emission cuts by 2030 that are being proposed as part of COP26 (the 26th United Nations climate change conference, which takes place from the end of his month),” stresses Dreblow. “These should help focus minds, as 2030 is within the 'shelf-life' of today's politicians.”
The multi-manager generalist Alliance Trust (LSE:ATST)’s situation is an interesting example of the scale of the challenge for managers. The trust itself is already at net zero, although as head of marketing Mark Atkinson observes: "That's not so hard to achieve when you're a little company with a handful of employees and a small office in Dundee”.
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However, portfolio management is outsourced to Willis Towers Watson, a signatory to the NZAMI. It announced measures in April both to deal with its own corporate emissions and to ensure net-zero emissions across its portfolios by 2050.
Atkinson points to various steps Alliance Trust and WTW are taking to demonstrate their commitment, although longer term “the trust’s carbon journey plan is still under development”. These steps include, among other things, disclosure of the portfolio’s carbon footprint, exclusion of certain stocks with significant exposure to tar sands and thermal coal, vetting all portfolio managers on ESG grounds, and joining forces with other investors through Federated Hermes to engage and bargain with big companies.
Some fund firms have more ambitious targets
Some larger mainstream fund managers are setting themselves more ambitious targets than the COP26 goals. For example, Aviva (LSE:AV.) (including the fund management arm, Aviva Investors) announced in March that it plans to reach net zero across the whole company by 2040. Its pathway involves a 25% reduction in carbon emissions from its investments by 2025 and 60% by 2030, plus net-zero emissions across Aviva’s operations and supply chain by 2030.
Importantly, it has also committed to annual public progress reports and to validation through the independent Science Based Targets initiative, which means investors can see exactly what is going on.
How fund investors can assess a net-zero policy
The wider difficulty for time-pressed private investors, of course, is how to assess which managers are wholeheartedly committed to prioritising their net-zero emission goals, and which are to a greater or lesser extent paying lip service to them. Unfortunately, so far there is no reliable quick fix, so be prepared to put in some legwork.
The fund group’s net-zero policy is one thing to look at: does it include measurable targets, oversight by senior managers and a commitment to regular progress reports, or is it dominated by woolly platitudes? Look also at the culture of the investment manager - some, including Castlefield, have internal ESG resources, but others find it economically advantageous to outsource ESG assessments, buying in reports on companies that allow them to say to say the stocks have been endorsed and rubber-stamped. Over-reliance on third-party work is risky because the manager may have little insight into the validity of its provider’s process, the extent of its transparency or the rigour of its disclosure.
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It is therefore really important to understand how embedded the ESG process and output is with a manager, compared with investment decisions.
The industry is starting to wake up to its responsibilities, and in this respect the involvement of the regulator is extremely important. The UK’s ongoing implementation of the (more conveniently known as the TCFD), headed by Mark Carney, requires companies to improve disclosure regarding climate change issues. This covers their governance and plans for corporate carbon reduction but also, crucially, requires them to think about how global warming is going to impact their whole supply chain in coming years and decades.
But these are early days for the TCFD. Meanwhile, as Dreblow points out, individual investors do not have an easy time in this area. “Investors can, and should, look at fund manager voting reports - but they should also look out for initiatives such as Make My Money Matter and Tumelo to stay on top of emerging issues,” she suggests.
Rory Hammerson is a partner and fund manager at the ethical investment firm Castlefield.
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