As the warming climate drives up temperatures and ignites wildfires across many parts of the globe this summer, a new study shows some of the world’s largest asset management companies have some of the smallest net-zero targets for their portfolios.
Assets committed to net-zero by 43 member firms of the Net Zero Asset Managers Initiative (NZAMI) ranged from 4% to 100%, according to the analysis by investment research firm Morningstar. But only nine managers committed 100% of their assets to net-zero and 15 committed less than 50%.
The Morningstar analysis, which was released in July, is the first time the investment community has had an in-depth look at the climate commitments of NZAMI members.
The report notes that smaller managers and those specializing in sustainable investment committed a higher proportion of net-zero-aligned assets under management (AUM) than larger and more diversified managers.
Vanguard Group, for example, the world’s second-largest asset manager at $8.1 trillion in assets, came last at 4% net-zero assets under management. State Street Global Advisors, the fifth-largest manager at $4 trillion, was fifth lowest at 14%. Invesco, ranked No. 20 in the world at $1.6 trillion, reported the fourth-lowest net-zero AUM at 12%.
Even Brookfield Asset Management, whose head of transition investing is former governor of the Bank of England (and Canada) Mark Carney, was the 12th-lowest firm with net-zero AUM of 33%. Carney founded the $130-trillion Glasgow Financial Alliance for Net Zero (GFANZ) last year.
NZAMI signatories have committed to achieving net-zero CO2 emissions from companies and sectors financed through their portfolios by 2050. They join other signatories in the banking, insurance and asset owner sectors that are also part of the GFANZ alliance.
NZAMI requires its signatories to disclose in the first year after they join the percentage of AUM they target to manage in line with net-zero. This percentage reflects the proportion of total assets targeted to achieve the company’s “fair share” of global carbon reduction required by 2030 to maintain a global temperature rise of no more than 1.5°C (generally considered to be 50%). NZAMI also requires members to disclose when they intend to meet these targets and their target methodology.
The Morningstar study is based on a subset of 43 members that joined within the last 12 months out of NZAMI’s total membership of more than 270 signatories representing $61 trillion in assets (nearly half the total AUM in GFANZ). Another 40 signatories issued earlier targets.
As managers of money on behalf of institutions and individuals (or asset owners), asset managers act as central gatekeepers in sustainable finance. “Asset managers have a crucial role to play in pushing companies to set ambitious and credible net-zero targets,” said Hortense Bioy, director of global sustainability research at Morningstar and lead author of the report.
But the Morningstar study shows that the major players are exercising little ambition in this important climate change role.
Asset managers have a crucial role to play in pushing companies to set ambitious and credible net-zero targets.
-Hortense Bioy, director of global sustainability research at Morningstar
Vanguard’s target, for example, consists of only nine funds sub-advised by another company (also listed in the report) and excludes the vast majority of Vanguard’s own assets. State Street adopted a similar approach, although it counted assets from clients and index portfolios expected to adopt net-zero targets.
BlackRock, the world’s largest asset manager at $9.6 trillion, was 27th highest on the net-zero list at 77% of net-zero AUM. However, the study notes that the BlackRock target is based on decarbonization pledges from companies in its portfolios, rather than any major changes to its portfolios to finance or encourage emission reductions. “This approach assumes that more companies will adopt net-zero targets and the portfolios themselves will decarbonize as a natural consequence of the companies’ real-world decarbonization,” stated the report.
BlackRock’s and Vanguard’s unambitious approach to net-zero targeting is in line with their business model, based largely on passive investing in exchange-traded funds and index funds.
This is in contrast with the top managers on the list, which include relatively small firms, many of which have explicit, actively managed responsible investment mandates. These include Valo Ventures, Stafford Capital Partners, Ridgewood Infrastructure, Quinbrook Infrastructure, Mirova, FSN Capital Partners, Developing World Markets, Clean Energy Ventures and Asteria Investment Managers, all with 100% net-zero AUM.
To be fair to the large companies, the study notes that NZAMI permits a wide variety of target-setting approaches and methodologies, which partly accounts for why similar firms have varying targets. This flexibility makes it difficult for investors to assess managers’ climate goals, “raising questions about the reliability of any of the commitments and decarbonization targets.”
Shortly before the report was released, GFANZ issued new guidance for all its member organizations, including a framework for net-zero transition plans. As well, Race to Zero, the umbrella organization for the UN’s 10,000 net-zero signatories, including GFANZ members, released new membership criteria, including a requirement to produce fossil fuel phaseout plans.
But in an email interview, Bioy said she isn’t optimistic that either the GFANZ guidance or the Race to Zero membership rules will improve target setting. “External factors, such as the energy crisis, the Ukraine invasion, as well as the lack of data and methodologies, will continue to contribute to the wide divergence in target setting criteria,” she said.
So, what are institutions and individuals supposed to do when looking for an asset manager? The report ends with a bit of advice. “Climate-focused investors will want to partner with the most committed asset managers – that is, well-resourced firms with the appropriate data, tools and expertise to create the best net-zero-aligned investment strategies and demonstrate the impact they generate through engagement with issuers.”
Eugene Ellmen writes on sustainable business and finance.
