The winding path to net zero: do institutional investors have a plan?

Institutional investors are scrambling to firm up their net-zero plans as their 2050 - or in some cases 2030 - targets loom closer, as they attempt to work through several hurdles such as regulatory ambiguities, data management complexities and a talent shortage. 

By May this year, asset managers globally had committed $16 trillion of assets to reach net-zero greenhouse gas emissions by 2050.

When it comes to asset owners, Australian superannuation funds, Singapore’s state investment fund Temasek, and various insurers such as AXA, to name a few, have announced a commitment to reach net-zero carbon emissions.

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Others, such as the sovereign wealth funds of Singapore and Norway, have yet to commit to such targets. In late August, Singapore’s GIC published in a note that it preferred to instead invest in companies that develop green solutions and engage with portfolio companies to address climate risks and opportunities, for instance through helping them transition towards more climate-resilient business models.

Attaining a net-zero portfolio would involve divesting from emissions-heavy assets such as oil refineries and coal mines, for instance, which GIC has maintained would do more harm than good.

“The transition in the real economy is what matters to the future of our planet,” the note wrote. “Investment portfolios are one step removed from the real economy. For example, an investor could potentially sell its carbon-intensive assets to make its portfolio look greener, but that action in itself would not necessarily reduce the amount of carbon emissions in the real world.”

“Even if divestments lead to a rise in the cost of financing for such assets, other investors could be ready to buy them and might even operate them less sustainably thereafter,” GIC said.

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Some institutional investors have more detailed net-zero strategies than others, but environmental, social and governance (ESG) experts in the asset management space as well as several investment management consultants told AsianInvestor that many that have made net-zero commitments do not have solid plans put in place yet to reach those goals.

While it is too early to say if those companies will succeed or fail, the fact is that many of them had made the commitments without first coming up with a strategy to get there. And as 2050 looms closer, some investors are scrambling.

“You’d be surprised by how many asset owners have come to us with these net-zero targets and asked us how to achieve them,” one consultant said.

The 2050 goal, or 2030 in some cases, looks a lot closer on this side of the 2020s, the person said.

MARKETING PLOY OR REAL DEAL?

Branding concerns could be one explanation for why institutional investors announced net-zero goals before they were sure it could be done. But whether or not they were genuine about the targets when they were first announced, more investors are serious about the goal today.

“If we’re talking about single family offices, right now, some are genuine, while some are just doing a show,” Elsa Pau, founder of ESG data platform BlueOnion, which counts family offices, insurers and asset managers as clients, told AsianInvestor.

“But two years ago, I was still trying to convince them to look at ESG as a risk factor. Now they see it, and they are trying to carve out a bigger part of their assets to ESG-related investments,” she said.

“It's shifting away from that marketing perspective into impact investing. So how do we make sure that the money we put into a particular deal or a company is really bringing in the impact that we're looking for? So that's interesting the dynamics that we are seeing,” Nadim Jouhid, head of investment solutions for Asia Pacific at BNP Paribas Securities Services told AsianInvestor.  

Measuring that impact is only one of the challenges these institutional investors face, among other issues such as regulatory ambiguities in certain markets, data management and standardisation complexities, talent shortages, and difficulties in measuring Scope 3 emissions.

REGULATORY AMBIGUITY

Both Singapore and Hong Kong have mandatory ESG disclosures for listed companies and ESG reporting guidelines for fund managers. However, there are some loopholes in Hong Kong’s guidelines that are preventing the transparency necessary for ESG measurements, according to Pau.

“Currently, the Mandatory Provident Fund Schemes Authority (MPFA) is demanding trustees report on climate and the ESG risks of the underlying assets,” she said. “However, the law at the moment does not require the trustee to know or understand what's being invested. So there's a dilemma, right? There's a predicament there. Because if you did not know what the investment managers are investing, how would you be able to report climate risks?”

When asked if the holdings could be revealed, the regulators said that they cannot dictate trustees do that, and when trustees were approached, they say they do not know what they can do since they do not know the holdings and that the asset managers will not tell them, Pau said.

“It's a situation like this that has us going around in circles. It’s a black box at the moment,” she said.

Singapore’s guidelines are a little clearer, she said, although she does still see ESG denials among asset managers and family offices.

“It’s a lot about regulations, so I’m not seeing much genuine interest. We have Limited Partners (LPs) investing in ESG not because they want to be ESG, but because it’s a trend that’s going to bring them a lot of money.”

DATA MANAGEMENT AND STANDARDS

Ever since the Task Force on Climate-related Financial Disclosures (TCFD) released its  recommendations in 2017, corporates and financial institutions have increasingly adopted reporting standards aligned with the framework.

But diligent reporting does not always mean that changes are being made.

“A lot of the local asset managers have no clue what they are supposed to do. They would buy access to a rating or buy raw data from a provider like MSCI for example, then throw it into a report for the Securities and Futures Commission (SFC),” she said.

“They don't know how they're compared to their peers, they don't know whether it is a material risk for that company that they're investing in,” she added. “And we can't blame them because they are too busy in this investment climate.”

That said, some institutional investors have become more sophisticated in recent years and have a better understanding of their ESG data requirements.

They often use a mix of internally-developed solutions and third parties to aid them in executing their ESG strategies, depending on how large they are and the resources they have, investment consultants and ESG experts told AsianInvestor.

Increasingly, investors have sought out multiple ESG solutions providers, which is a trend that will likely continue in years to come, a senior sustainability head at a global financial services firm told AsianInvestor.

They are looking for more flexible net-zero solutions, Jouhid said. “For instance the ability to manage different data sets and understand them. If you buy the data from a ratings company, for instance, how do you know that you’re looking at the right set of data through those market data providers for your investments?”

Look out for part 2 of this story, which explores more challenges to do with data management, standards, a talent shortage and measuring Scope 3 emissions.