As COP26 drew to a close in Glasgow, participants committed to a decade of action to align with the Paris Agreement and its call to limit global warming. With the conclusion of COP27, progress should be checked.
Over the past year, the Glasgow Financial Alliance for Net Zero has grown to over 550 financial institutions, the Net-Zero Asset Owner Alliance now claims 80 investors and the membership of Climate Action 100+ has grown to over 700.
While creating and growing alliances on such a global scale was a formidable challenge, it might have been the easy part. Keeping the commitments that signatories have made is proving equally difficult, an issue we address in our latest report.
The PRI focuses much of its research efforts on asset owners, who are uniquely positioned to generate net-zero emissions through their investment mandates and allocation decisions. Our signatories told us how difficult it is to keep up with the chops represented by these coalitions – measuring, monitoring and drastically reducing emissions in complex portfolios in a way that does not attract accusations of greenwashing.
To address this issue, the PRI commissioned research from signatories on the practical implications of implementing climate commitments in multi-asset portfolios. Interviews with signatories quickly revealed a series of new challenges. For example, much of the guidance and available datasets focus on listed equities, ignoring asset classes common to well-diversified portfolios such as private equity, sovereign bonds and infrastructure.
Our new report, Achieving climate commitments in multi-asset portfolios, seeks to leverage the insights and experience of those leading climate action for the benefit of all of our members. It is designed to help asset owners develop a climate strategy, integrate it into multi-asset portfolios, and interact with third-party asset managers.
One of the signatories involved in the research, Udo Riese, Head of ESG Implementation, Allianz Investment Management, said the report addresses many of the challenges faced by asset owners. “This report is an excellent starting point and outlines a number of considerations that asset owners will need to take into account when developing a policy, designing a mandate and selecting, appointing and monitoring managers,” he said.
The report is suitable for trustees, advisors or trustees looking to implement climate commitments in multi-asset portfolios. It explores the factors identified by signatories as key to making progress on climate commitments:
- The availability and reliability of emissions data needed to establish baselines and measure progress. This takes different forms in specific asset classes, such as private equity, sovereign credit and derivatives.
- The importance of asset allocation decisions, including benchmark selection, mandate design and allocation to climate solutions.
- The need for an effective engagement strategy, including collaboration, a focus on actionable quantitative metrics, and asset optimization of all portfolios.
- The role of divestment in the potential funded emissions reduction of a multi-asset portfolio.
- The urgency to act and the willingness of asset owners to act have outstripped the ability to meaningfully measure portfolio and funded emissions. This report cannot fill all the gaps it can share on best practices, given the current state of affairs.
Deloitte partnered with us on this project, conducting the interviews with the signatories. Katherine Lampen, head of sustainable finance at Deloitte, explained that “multi-asset investors need to incorporate a diverse mix of funded emissions metrics and carbon reduction strategies.” She said the sheer size of assets under management contained in multi-asset class portfolios highlights the importance of supporting investors in this work. “Concrete, actionable solutions are needed to drive meaningful emission reductions in the real economy,” she added.
We hope the report helps investors struggling to reach net zero. In the coming months, we will also be releasing a series of case studies that will help signatories understand the different tools, methodologies and frameworks our signatories use to combat portfolio emissions.
As PRI CEO David Atkin noted in a foreword to the report, investors supporting global climate initiatives are facing rising expectations from governments, stakeholders and regulators. . “With growing scrutiny of climate commitments, it has never been more important to back commitments with action,” he said.