*Rising to the climate challenge*
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CLIMATE CHANGE
RISK ASSESSMENTS
NET ZERO
STEWARDSHIP & REPORTING
Although the industry’s commitment to climate continues, as with other areas in our survey, the results show that practical and concrete responses to these commitments are less visible.
While 87% of the surveyed asset managers report integrating climate into their investment processes, at a strategy level, only 63% of strategies perform climate risk assessments and just 67% are monitoring emissions-based metrics. Similarly, while 59% of asset managers have a firm-level net-zero target, these cover just 34% of strategies.
Only 63% of strategies perform climate risk assessments and just 67% are monitoring emissions-based metrics.
Across the board, asset managers are increasingly integrating climate-related risks and opportunities into their investment processes (87% vs. 80% last year). Those who fail to factor in climate stand out as laggards.
Are climate-related risks and opportunities measured and assessed as part of the investment process (by firm)?
Inevitably, the level of integration varies across asset classes. At the top end of the spectrum, 96% of illiquid alternative strategies factor climate-related risks and opportunities into their investment processes. In contrast, just over half of LDI strategies do.
Are climate-related risks and opportunities measured and assessed as part of the investment process (by asset class)?
Across the board, asset managers are increasingly integrating climate-related risks and opportunities into their investment processes.
While 87% of the surveyed strategies state that they integrate climate-related factors into their investment processes, only 63% perform climate risk assessments. As with climate integration, climate risk assessments are most prevalent in illiquid alternative strategies and least prevalent in LDI strategies. As part of these risk assessments, all asset managers identify the largest emitters in their portfolios but only 81% report engaging with them to encourage emissions reductions.
Do you perform climate risk assessments?
Climate scenario analysis appears to be the most common climate risk assessment used by managers, although the uptake is lower than we’d expect at only 56%. Given the increasing industry attention on portfolio alignment metrics, such as Implied Temperature Rise (ITR), we expect these to become more commonplace in climate risk assessments.
What climate risk assessment tools do you use?
Climate scenario analysis appears to be the most common climate risk assessment used by managers, although the uptake is lower than we’d expect at only 56%.
63% of strategies are using climate risk assessments for future forecasting and 67% monitor their portfolio against emissions-based metrics. Given regulatory requirements for TCFD reporting, which asks for the carbon footprinting of portfolios, we expect this to improve.
Fixed income and equity strategies are most likely to monitor their emissions-based metrics, while illiquid credit strategies are least likely. Although illiquid credit assets are private and so are subject to lower scrutiny and reporting requirements, we expect asset managers to press for fuller reporting to better understand associated investment risks from the climate transition.
Do you monitor your portfolio against emissions-based metrics?
While portfolio carbon footprint is the most popular emissions-based metric, total absolute carbon emissions and Weighted Average Carbon Intensity (WACI) are also popular.
The lack of consensus and standardisation of definitions may explain why exposure to carbon-related assets and the proportion of the fund invested in low-carbon opportunities are less commonly monitored.
Which emissions-based metrics do you monitor?
Only 37% of the surveyed strategies monitor their portfolio’s alignment with the goals of the Paris Agreement, with over half of LDI and equity strategies doing so, compared to just 13% of illiquid credit strategies.
Do you monitor your portfolio's alignment to the goals of the Paris Agreement?
Portfolio warming metrics (such as ITR) are most commonplace among the strategies we surveyed – 55% of those using alignment metrics monitor portfolio warming. Almost half of these strategies monitor targets set according to the Science Based Target initiative (SBTi). The CA100+ Net Zero Benchmark and Transition Pathway Initiative are the least popular, despite being recommended metrics in the Institutional Investors Group on Climate Change’s (IIGCC) Net Zero Investment Framework, which 41% of the surveyed asset managers claim they use.
Which portfolio alignment metrics do you monitor?
59% of the surveyed asset managers have made a net-zero commitment at the firm level, though it’s notable that US asset managers still lag behind their global peers (a repeat of the trend we saw last year). While most asset managers are targeting net zero by 2050 – in line with scientific consensus for the emissions reduction required to meet the goals of the Paris Agreement – 15% have set an earlier target date of 2030 or 2045.
Despite over half of the surveyed asset managers having made a firm-level net-zero commitment, only 34% of strategies have a net-zero target and just 17% have a specific decarbonisation objective.
As with the firm-level targets, most strategy-level targets (78%) aim to reach net zero by 2050, and a few are targeting net zero earlier – by 2030 or 2045. Looking at the 67% of strategies without a net-zero target, we can see that most of them (94%) don’t have a decarbonisation target either.
Percentage of asset managers with a net-zero commitment (by region)
Does the firm have a net-zero commitment?
Does the strategy have a net-zero target or decarbonisation objective?
Of those strategies without a net-zero target, many have commented that they have a firm-level target and reference being members of various net-zero industry groups, such as the Net Zero Asset Managers initiative. Seeing asset managers hide behind broad firm-level targets is concerning. It raises the question of how firm-level targets will be achieved if managers aren’t reflecting them across their products and strategies. Other asset managers blame the lack of appropriate net-zero methodologies for not having set a target.
That said, several asset managers state that while they don’t yet have firm or strategy-level net-zero targets, they do monitor their portfolio emissions and are considering appropriate decarbonisation objectives to adopt in the near future.
While most asset managers are targeting net zero by 2050, 15% have set an earlier target date of 2030 or 2045.
Although 92% of the surveyed strategies claim to prioritise climate change in their engagement efforts, only 54% track and report on this. As with our broader conclusions on engagement, it becomes difficult to assess progress without monitoring activity. It’s also hard to see how certain engagement activities can be prioritised if they aren’t tracked or reported.
The proportion of climate-related engagement varies by asset class. No asset class record more than 50% of their engagements being related to climate change. For liquid alternative strategies, only 13% of engagements are climate-related.
Do you prioritise climate change for engagement for this strategy?
Of all engagement relevant for this strategy, what proportion was in relation to climate change?
It’s hard to see how certain engagement activities can be prioritised if they aren’t tracked or reported.
Of the surveyed strategies that use climate risk assessments, all identify the largest emitters in their portfolio but only 81% engage with them to encourage emissions reduction. More strategies engage with their portfolio companies on emissions data collection and quality than on emissions reduction.
While it makes sense that emissions reduction is only possible once an asset manager understands the current emissions data associated with its portfolio, it’s nevertheless important that they encourage investee companies to make efforts to reduce their emissions rather than to merely measure them.
Climate engagement
More strategies engage with their portfolio companies on emissions data collection and quality than on emissions reduction.
One of the best ways asset managers can keep their clients up-to-date on their approach to climate change is by publishing regular reporting, such as annual TCFD reports.
72% of the surveyed asset managers have published or are looking to publish a TCFD report – a big increase from 45% last year. We expect this upward trajectory to continue.
Looking at reported emissions metrics, most asset managers measure scope 1 and 2 emissions (i.e., the firm’s operational emissions). In contrast, only 57% of asset managers measure and report their scope 3 emissions. This presents a considerable gap as scope 3 is where financed emissions (i.e., the emissions from portfolio assets) are reported.
Have you completed TCFD reporting as a firm?
Do you measure the firm's scopes of emissions?
By not measuring their financed emissions, asset managers are completely overlooking climate-related risks.
While there’s less consensus over the definition of scope 4 (i.e. avoided) emissions, 10% of asset managers already seek to measure them.
