CLIMATE CHANGE
A continued commitment
Very important
Somewhat important
Somewhat unimportant
Very unimportant
Not sure
Overall our research found that 86% of strategies measure climate-related risks and opportunities, which is largely in line with the 87% recorded in 2022. This decrease is likely due to the larger LDI sample size of our survey this year. As the graph below demonstrates, most of the managers who aren’t assessing climate-related considerations are managers of LDI strategies.
While 74% of managers monitor emissions-based metrics for their portfolios – which should be 100% in a world of climate reporting under Taskforce on Climate-Related Financial Disclosures (TCFD) – only 38% of managers monitor some sort of Portfolio Alignment metric.
This is arguably not good enough in a world where corporate pension schemes need to record portfolio alignment metrics in their annual TCFD reports, which is the case for the first time this year."
This is up from 38% in 2022, which shows portfolio alignment metrics are gaining momentum, and implies a more sophisticated approach used for integrating climate-related considerations as compared to just relying on emissions. However, this is arguably not good enough in a world where corporate pension schemes need to record portfolio alignment metrics in their annual TCFD reports, which is the case for the first time this year.
Of the portfolio alignment metrics that managers are monitoring, portfolio warming metrics – such as the Implied Temperature Rise (ITR) – are the most popular. While these metrics are the most complex alignment measures, they are also the most intuitive ones to interpret as they provide an estimate for the warming (in degrees Celsius) that would occur if the whole world was on the same trajectory as the portfolio.
Of the surveyed managers that monitor the financed emissions of their portfolio, 92% measure absolute emissions and 90% measure the emissions intensity of £1million invested (i.e. carbon footprint). Weighted Average Carbon Intensity (WACI) is another carbon intensity metric which appears to be measured by fewer managers. Apart from the main emissions metrics, 61% of managers also monitor their portfolio’s exposure to carbon-related assets and 33% look at the proportion of the fund which is invested in low-carbon opportunities. This is a metric we expect to gain more and more attention as investors increasingly focus on climate opportunities.
Emissions is still the magic ingredient for investment strategies incorporating climate change considerations. However, 20% of managers still don’t measure the Scope 1 & 2 (direct emissions).
Worse yet, 32% of managers still don’t measure Scope 3 emissions, which we know is an area where asset owners are pushing for data quality improvements.
This is disappointing and begs the question of whether managers are truly integrating climate-related considerations into investment decisions.
A concept that’s been gaining increasing momentum is ‘Scope 4 emissions’, a new term created by the World Resources Institute (WRI). This refers to the emission reductions that occur outside of a company’s value chain – avoided emissions. 13% of managers we engaged with have started measuring their Scope 4 emissions.
Emissions is still the magic ingredient for investment strategies incorporating climate change considerations into their strategies."
Climate change remains a key area of ESG focus, energy and resources. The commitment to decarbonising portfolios continues, with 57% of managers reporting they have some kind of firm-wide net zero commitment. The majority of commitments are to reach net zero emissions by 2050, in line with the global emissions reductions required to meet the goals of the Paris Agreement.
While the divide has narrowed, US managers surveyed typically lag behind their European and Asian counterparts in setting net zero commitments. To some extent, this will be driven by regulatory requirements around monitoring and reporting on climate change-related risks, as well as the controversial rhetoric around ESG being seen as “woke capitalism”. In particular, UK-based managers are ahead of those based in the US when it comes to putting climate change high on the agenda, as seen by the proportion of net zero commitments – 64% vs. 48% respectively.
In particular, UK-based managers are ahead of those based in the US when it comes to putting climate change high on the agenda."
While the number of managers with firm-level targets remained relatively constant year-on-year, this hasn’t filtered down to strategy level, with only 30% having commitments here (vs. 34% in 2022).
Moreover, of those that have set strategy-level decarbonisation targets, it is concerning to see that 16% of the strategies do not yet monitor emissions-based metrics.
Of all strategies with a decarbonisation target, some 15% are yet to identify the largest emitters in the portfolio. This is a crucial first step for understanding the emission profile of a fund – i.e. baselining for the decarbonisation objective – as well as that of the underlying assets, so that a manager can identify how the strategy will achieve its goals. This tends to undermine our trust in the robustness of these decarbonisation targets.
Zooming out of net zero specifically, 62% of surveyed managers have set some form of decarbonisation target, 5% higher than net zero commitments specifically. Behind the 5% delta are the managers who have potentially shorter-term or interim decarbonisation targets, but not net zero commitments as such.
Digging deeper here, we can see that 6% of managers have shorter-term decarbonisation goals for 2030, but don't have overall net zero targets. At the same time, 36% of managers with a long-term ‘net zero by 2050’ goal also have interim decarbonisation targets for 2030.
Best practice suggests that implementing a decarbonisation strategy should begin with identifying those issuers that produce the highest emissions. Of managers with a decarbonisation target, 70% have identified the largest emitters in their portfolio. Asset classes where a larger proportion of managers have done this are multi-asset, public equity and real assets.
While identification is a good starting point, this alone is not enough to move the dial on decarbonising a portfolio. It is encouraging to see that 81% of managers which have identified their largest emitters claim to be engaging with the relevant issuers.
When considering emissions measurements, the most commonly cited challenge is poor data quality, especially in regards to emissions. It is therefore interesting to see that 77% of managers have identified portfolio constituents with absent or poor emissions data coverage. However, of these, 11% don’t engage with constituents on emissions data collection and quality.
One of the best ways asset managers can keep clients up to date on their approach to climate integration is through their annual TCFD report. Reporting financed emissions is one of the key aspects of TCFD reporting.
Overall, 74% of surveyed managers have completed – or are in the process of completing – a TCFD report. These figures are significantly lower in the US.
Many managers are engaging with collaborative initiatives as they look to grapple with the changes taking place within the industry. About a third of managers surveyed joined climate change initiatives in the past 12 months, with the most popular being:
NZAM
CDP
TPI
AIGCC / IIGCC
IIGCC NZEI
TNFD
PCAF
Climate Action 100+ Phase 2
Finance for Biodiversity Pledge
Valuing Water Finance Initiative
Just under a quarter (23%) of managers have continued to hire dedicated climate resource. Most resource has been hired to support disclosure & regulatory obligations and stewardship (mostly voting), as well as boosting research and development teams.
