Net zero report shows corporate efforts are failing, must be targeted
Despite action, emissions are rising and zero carbon remains a pipe dream. A new asset analysis argues the case for prioritising areas that need most work, and emphasises the need for real world, not just portfolio impact.
‘Net Zero Investing: Searching for Returns’ is based on data from Planetary Pulse, a global asset owner survey conducted by Ninety One, an active investment management firm. This shows that despite a multi-billion dollar effort to address contributing factors to climate change, progress remains scant.
Most respondents to the study have set interim targets at a top-down level or among specific classes of assets. From this, 49% now have an emissions portfolio-reduction target in place, and 95% have set emissions reduction targets covering all listed equity and corporate fixed income portfolios.
Nevertheless, they also reported little clarity on actual impact. Worryingly, listed companies and those with corporate debt indices, have seen their emissions increase since 2015, rising by 22% overall according to the MSCI Net Zero Tracker. Divesting assets has been shown not to influence this trajectory.
‘More than half [53% of asset owners expect it to get more difficult to achieve emissions reduction targets, while delivering the best possible returns,’ said Daisy Streatfield, Ninety One’s Sustainability Director. ‘A shrinking investment universe that reduces portfolio emissions will exclude industries and sectors that have the potential to transition to low-carbon business models, as well as deliver strong financial returns. In addition, strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks.
‘From an investment perspective, we need to shift focus from reducing financed emissions to financing reduced emissions,’ she continued. ‘This will enable allocation of investment to those who need it the most and allow the finance industry to invest at the scale required for transition and for climate solutions that deliver decarbonisation. Investors also need to engage with high emitters to influence transition plans, recognising that net-zero pathways differ for sectors and regions.’
A number of recommendations to investors are also included in the report. These include:
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- Add dedicated climate solution and transition sleeves, which enable targeted allocations to generate impact through reducing and avoiding emissions, provide diversification and complementary performance profiles.
- Refine net-zero strategies for existing allocations to equities, corporate fixed income and sovereigns to more effectively use engagement and capital allocation to maximise impact, manage risk and maintain return objectives. This includes differentiated approaches for active and passive exposure.
- Adding or enhancing allocations to private markets and real assets given the very significant potential for delivering real economy impact.
- Impact can be further amplified by increasing active allocations, increasing emerging market allocations, and increasing allocations to transition investments and climate solutions.
You can download the full report here.
‘The global economy is off course to hit net-zero emissions by 2050. At this stage, our efforts need to target financing reduced emissions and real-world impact,’ Streatfeild adds. ‘Investors should be looking to increase emerging market allocations, supporting sustainable economic growth and reducing emissions. By focussing on portfolio purity [a reduction of their own portfolio carbon emissions], without delivering real-world carbon reduction, asset owners are not stimulating the kind of change needed to tackle the climate crisis.’
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Image: Chris LeBoutillier