INSIGHT by Günther Thallinger, Chair of Steering Group at the UN Convened Net-Zero Asset Owner Alliance
Asset owners’ fiduciary duty requires them to consider, evaluate, and make decisions based on what supports the best interests of their stakeholders. This is an individual responsibility since each asset owner represents different assets and that which is in the best interests of those asset is as varied as the assets themselves.
Given asset owner specificities, what could be gained from working collaboratively? A fair question, yet one that overlooks the complexity of systemic risks, such as those posed by climate change. Just in the first half of 2023, parts of South Asia experienced some of the most intense heatwaves in history (which climate change rendered 30 times more likely to occur); the world’s ocean surface hit an all-time high at 21.1C, carrying the risk of marine heatwaves with devastating effects on marine wildlife and coast-protecting coral reefs; and scientists predicted a 66% likelihood that the world will exceed the annual average of 1.5C of warming in the next 5 years.
For long-term institutional investors, these adverse climate impacts pose an existential threat. In fact, the insurance industry is already facing material consequences with actors withdrawing from areas with high catastrophe exposure. Insurers have, for example, withdrawn from the Californian home insurance market leaving some homeowners without coverage.
To exercise their freedom to invest responsibly, asset owners need to have the data, the tools, and the methodologies to properly assess climate risk and to integrate it into their individual investment decision-making. Adding climate considerations into every part of an asset owner’s business is not always straightforward, but it is essential for what the Net-Zero Asset Owner Alliance (Alliance) sees as ‘the basics of decision-making’. So, how can asset owners address climate risk to ensure they are continuing to act on their individual and unique fiduciary responsibilities?
To build the basics of decision-making and to then operationalise them means evaluating and reducing one’s own exposure to high-emitting assets, recognising the business case for investing in climate solutions, and engaging diverse stakeholders, since addressing climate risk requires systemic change that goes beyond portfolio-allocation strategies. Optimally delivering on this requires collaboration.
| Measuring exposure and reducing emissions in one’s own investment portfolio and business activities
To protect one’s own assets and to signal to the real economy that aligning with the Paris Agreement’s goal of limiting warming to 1.5°C is the prudent way forward, an asset owner would first seek to reduce its exposure to high-emitting assets. The Alliance members do so by individually committing to achieving net-zero greenhouse gas emissions by 2050 in their portfolios.
However, ensuring that an asset owner’s portfolio is indeed aligned with net zero—across all asset classes and all markets—is no simple feat. For example, measurement of companies’ scope 3 data remains sparse and unreliable. That’s where collaboration proves essential. As part of the Alliance, members contribute to and benefit from industry-leading decarbonisation methodologies as well as from opportunities to impactfully raise the need for comprehensive climate reporting, for example, with both corporates and policymakers.
| Expanding opportunities to invest in climate solutions
With the inclusion of climate considerations into decision-making, low-carbon investments simply surface as better investments. However, individual asset owners may find that opportunities to invest in climate solutions aren’t as plentiful, because the current risk profiles of the most needed investments—development of low-carbon energy supply in emerging markets and developing economies (EMDEs), for example—remain challenging for institutional investors. In these cases, instruments that provide concessional capital, such as blended finance, could be used to adjust the risk profiles in target markets.
An individual investor would rarely engage multilateral development banks (MDBs) and/or development finance institutions (DFIs) on mandate reform themselves, although the issue is crucial for scaling blended finance. The Alliance, however, can and does use its voice to approach change-making institutions on issues that are crucial for ensuring an investable low-carbon universe for asset owners. Thus, while an individual asset owner may want to contribute to development and scaling of climate change solutions, it may find itself hindered in doing so effectively if unable to affect change in the global financial architecture.
| Affecting systemic change—engagement with investee companies, asset managers, and policymakers
As seen in the case of raised perceived risk for certain climate solution investment, the lack of an enabling policy environment limits real-economy transition and investor action. UNEP’s 2022 Gap Emissions Report confirmed that both the current policies as well as the updated Paris Agreement nationally determined contributions stand insufficient to limit warming to 1.5°C. Thus, to contribute to tackling climate change systemically, an asset owner might consider adding a third layer to its efforts—policy engagement. Asset owners can leverage their influence through engagement with investee companies, asset managers, and policymakers.
However, a single asset owner will surely find it challenging to act effectively on all those fronts alone. Thus, contributing to an industry initiative offers one the possibility of extending its reach and impact. As part of the Alliance, a member can support elevation of crucial policy discussion, ranging from mandatory disclosures to governmental carbon-pricing. In this way, individual asset owners can encourage and empower policy action that addresses the climate crisis systemically.
| Future of collaboration
The devastating effects of climate change and the risk of imminent largescale economic disruption that they pose have not been fully acknowledged by all stakeholders.
However, this only highlights how well-positioned actors with long-term views, such as asset owners, in leading and pushing for a just net-zero transition. Institutional investors understand the need to act immediately, effectively, and systemically. More and more are also realising that acting within an industry-led alliance greatly facilitates this.
Thus, the Alliance persists on its course to provide tools and support its members in their respective net-zero transitions, which they undertake in the ultimate delivery of their individual fiduciary responsibilities.
| about
The Net-Zero Asset Owner Alliance is a member-led initiative of 86 institutional investors, with over US$11 trillion in assets under management, committed to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050. The Alliance members were the first in financial industry to set intermediate targets (aligned with the Paris Agreement schedule) and they report on their progress annually. The Alliance is convened by UNEP FI and PRI and is supported by WWF and Global Optimism.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
