The Bottom Line: Net Zero Asset Managers initiative supports the carbon transition, but managers’ actions will have an impact on portfolio structures, investments and outcomes.
Net Zero Asset Managers (NZAM) initiative has attracted 220 signatories with $57 trillion in assets under management
Ahead of the conclusion on November 13, 2021 of the Glasgow Climate Pact negotiations, it was reported that the Net Zero Asset Managers initiative (NZAM) had attracted 220 signatories with $57 trillion in assets under management, including some of the largest asset managers in the US. These signatories include firms like BlackRock, Vanguard, State Street Global Advisors, JPMorgan Asset Management, Invesco, Franklin Templeton, Wellington and Neuberger Berman. More signatories are expected to follow. Initially launched in December 2020, the initiative aims to galvanize the asset management industry to commit to the goal of net zero greenhouse gas (GHG) emissions by 2050 or sooner, in line with efforts under the Paris Climate Agreement to limit global warming “to well below 2℃, preferably to 1.5℃, compared to pre-industrial levels.” By agreeing to shift investing to align with net zero emissions¹ by 2050 or earlier, this private sector initiative, along with other such undertakings, provides support to governments in their leadership efforts to address the severe consequences of climate change and to limit emissions. Convened by six not for profit UN supported and investor networks, including AIGCC, Ceres, IGCC, IIGCC, UN PRI and CDP, signatories to the initiative take on the voluntary obligation to comply with a ten-point commitment that involves managing their portfolio assets to achieve net zero greenhouse gas emissions. Refer to accompanying box. These commitments could have wide ranging implications for the way active and passive investment portfolios are managed in the future as well as their performance outcomes—potentially beyond any associated strictly by employing an ESG integration approach². For this reason, the commitments invite transparent communications with stakeholders in due course to address various questions that arise as a consequence of the actions to be taken in the future by signatories.
¹ According to the Intergovernmental Panel on Climate Change (IPPC), net zero emissions are achieved when anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals over a specified period. Where multiple greenhouse gases are involved, the quantification of net zero emissions depends on the climate metric chosen to compare emissions of different gases (such as global warming potential, global temperature change potential, and others, as well as the chosen time horizon).
² As used here, ESG integration is defined as the systematic and consistent accounting for environmental, social and governance factors where these are relevant and material to investment decisions.
Commitments made by investment management firm signatories will spread across the sectors and companies and the pledges will, in time, extend to all their mandates.
The commitments made by investment management firm signatories will spread across the sectors and companies in which the asset managers invest, and the pledges made by the asset management firms will, in time, extend to all its mandates. These include sustainable investment funds such as sustainable mutual funds and sustainable ETFs as well as conventional funds, separate accounts, managed accounts and other investment vehicles. That said, it is recognized that the capacity of managers to meet their goals depends on the mandates covered by agreements or representations with and to clients, their managers’ regulatory environments as well as the follow through of governments of their own commitments under the Paris Climate Agreement and beyond. Such mandates are intended to capture index fund portfolios that track conventional indices that are today not aligned with a goal of achieving net zero emissions. In any case, shifting investments to achieve net zero will impact portfolio profiles and potentially performance outcomes in ways that invite a communication and discussion with beneficiaries and stakeholders. In turn, stakeholders whose assets are managed by any of the signatory companies should initiate a dialogue with their managers and seek responses to a number of initial leading questions. These questions, which are likely to expand in time, are listed below and the responses to these are intended to supplement the information to be provided as part of disclosures asset managers are required to produce within 12 months of signing on to NZAM. These include the initial percentage of their portfolio that will be managed in line with net zero, their ‘fair-share’ interim targets for the assets under management that will be managed in line with net zero, and target date, the methodology used in target setting. As part of the commitment, asset managers aligning with net zero must also prioritize real economy emissions reductions, consider material Scope 3 emissions, increase investment in climate solutions and create investment products in line with net zero. The signatories also agree to only use offsets that involve long-term carbon removal where there are no technologically and/or financially viable ways to eliminate emissions.
Stakeholders whose assets are managed by any of the signatory companies should engage in a dialogue with their managers to seek responses to the following questions (additional questions may evolve over time):
Disclosure-related questions:
1. Above and beyond disclosures required under NZAM³, how will fund shareholders be consulted or notified regarding the adoption of decarbonization goals and implementation strategies?
2. To what extent will such actions require prospectus amendments or shareholder votes?
3. How might such commitments apply to external sub-advisors?
4. Are any such changes expected to impact management fees?
5. What are the manager’s plans, if any, for disclosing financial and non-financial outcomes linked to the implementation of such strategies?
Portfolio-related questions
6. What analytical framework(s) might the investment adviser adopt to simulate and achieve targets while also quantifying potential impacts, positive or negative, on portfolio holdings? Analysis of potential impacts in the short-to-long term?
7. What action steps are likely to be taken to transition the portfolio? What impact on capital gains/losses? Turnover, etc.?
8. What are the anticipated changes, if any, to performance comparison indices against which performance results will be evaluated?
Passive vs. active management-related questions
9. How will the manager’s commitment affect index funds managed pursuant to conventional indices?
10. What considerations, if any, are being given to a shift to new indices aligned with net zero commitments?
Net Zero Asset Managers Commitment4
³ First 12-month report and annual TCFD reporting.
⁴ Source: Net Zero Asset Managers initiative
