Net zero for asset managers – the ‘what’ and ‘how’

Published on November 7, 2024 by Rabin Thakur

“Net zero” simply refers to balancing greenhouse gas (GHG) emissions by removing them from the atmosphere. While the term may be scientific, approaches to ensuring net zero are very relevant to the business world. Interestingly, more than 70% of the world’s GHG emissions since 1988 have been generated by just about 100 companies^[1].

The concept, however, has remained skewed – with higher emissions and very limited removal, leading to the accumulation of GHG emissions and an increase in global temperature.

Even if the commitments and pledges in place are met, we foresee global warming far above the limit of an annual increase of 1.5° Celsius above pre-industrial levels^[2]. Such an increase in temperature would lead to catastrophic impacts, already visible in an increased number and intensity of weather events such as hurricanes, coastal flooding, erratic monsoonal rains and extreme wildfires.

Net zero is a concept that cannot be achieved on its own. In addition to the technical know-how required, it is costly. The International Energy Agency (IEA) estimates that the world needs an annual investment of USD4tn in clean energy alone by 2030 to limit the annual increase in temperature to 1.5° Celsius^[3].

Role of private capital and asset managers

Private capital is, thus, critical for achieving net zero. The IEA estimates that contributions from private equity firms, venture capitalists and corporate venture arms will account for 10% of the capital required by 2030 for achieving net zero^[4]. While current capital investments are primarily for developing clean energy technologies and transitions, eliminating GHG emissions (referred to as “decarbonisation”) is a much wider concept.

Asset managers are typically engaged in managing financial assets. This means their direct operations do not have a significant impact on the climate. However, their investments are where most of their carbon footprint lies. For an asset manager, decarbonising would mean investing in businesses that have no or low GHG emissions or carbon footprint.

With greater advocacy for net zero among businesses recently, asset managers globally are acknowledging the need to align their portfolios towards a transition to net zero. They are aligning with coalitions such as the Net Zero Asset Managers Initiative and the Glasgow Financial Alliance for Net Zero to support the global transition to net zero^[5].

Some asset managers are transitioning to net zero as a strategic priority. However, research suggests that a large number of them are still off-track when it comes to setting net-zero ambitions and working on these proactively. The number of asset managers conducting “truly ambitious and effective climate stewardship practices” has shrunk by up to 45% since 2021, according to a study in late 2023^[6]. While there could be many reasons for this, the most plausible explanation is not integrating net-zero goals strategically into investment decisions.

Committing to net zero and integrating it into investment decisions

How exactly should an asset manager commit to net zero and integrate it into their investment decisions? The following is a broad set of processes typically followed by asset managers as a first step towards net zero.

Commit: Keeping the high-level emission reduction in mind, asset managers should commit to reducing GHG emissions in line with the Paris Agreement, limiting the annual increase in global temperature to 1.5° Celsius by the end of the century. Such a commitment should ideally be a firm-level commitment, with a wide range of applicability over the operations of the business. It should also be a formal one, endorsed by senior management.

Assess/measure: The principle “what gets measured, gets managed” applies in absolute terms to GHG emissions. A GHG inventory or carbon footprint assessment is needed to proceed with setting reduction targets and monitoring. Asset managers can rely on the methodology provided in the Global GHG Accounting and Reporting Standard for the Financial Industry developed by the Partnership for Carbon Accounting Financials. The concept of “financed emissions” resonates well with asset managers whose carbon emissions from own operations are remarkably low, although emissions from entities they are invested in are usually very high.

Set reduction targets: Asset managers could opt to align with the Science Based Targets initiative (SBTi) for target-setting. They need to set targets that are not too aggressive, so they would not need to make large modifications to their investment strategies, but also not too passive so they would have only minimal impact on the overall emissions from their investments.

Monitor: Once targets are set, emissions should be monitored in a timely manner. Any deviation from the anticipated reduction in emissions should be monitored closely and a carefully chosen approach taken to resolve this. While there is no formal or regulatory requirement specifying how frequently emission monitoring should be conducted, it is generally conducted annually.

Coalitions and initiatives could help

Considering the increasing urgency of aligning to net zero, there are a number of coalitions and initiatives designed specifically for asset managers. Global initiatives are playing an increased role in terms of providing guidance on capacity building and a common platform to asset managers. The following are some of the initiatives popular among asset managers:

Net Zero Asset Managers Initiative (NZAMI) – One of the most popular initiatives among private market participants, the NZAMI has more than 325 signatories, commanding close to USD60tn in AuM^[7]

Net Zero Investment Framework – Guidance tailored to private equity investors, including concepts such as target-setting for net zero, together with other concepts such as engaging with portfolios and reporting to limited partners (LPs)^[8]

Private Markets Decarbonization Roadmap (PMDR) – Developed by Bain & Co. for Initiative Climat International (iCI) and the Sustainable Markets Initiative’s Private Equity Task Force, the PMDR provides private equity firms with all the guidance and standards required for communication in terms of assets currently on a decarbonisation path^[9]

Net-Zero Asset Owner Alliance (NZAOA) – A UN-convened initiative for institutional investors committed to transitioning to net zero to limit the annual increase in global temperature to 1.5° Celsius^[10]

Net-Zero Banking Alliance (NZBA) – A UN-convened alliance for leading global banks committed to aligning their investments to achieve net zero by 2050^[11]

How Acuity Knowledge Partners can help

Acuity knowledge Parters are a leading outsourcing partner to asset managers globally, both public and private. With over 50 subject-matter experts in the domains of ESG and sustainability, we are well positioned to provide end-to-end research and analysis services around net zero; these include peer research on net-zero targets, industry landscape for net zero, decarbonisation pathways, net-zero levers and meeting regulatory and voluntary reporting obligations.

Source

• [1] The Guardian – Just 100 companies responsible for 71% of global emissions

• [2] McKinsey Global Institute: The net-zero transition

• [3] World Economic Forum: Critical role of cost of capital and climate policies in net zero transition

• [4] Acuity Knowledge Partners blog – Climate change and private equity

• [5] MSCI: Footprinting the world’s largest asset managers

• [6] Corporate Knights: The incredible shrinking climate ambitions of the world’s largest asset managers

• [7] NZAMI

• [8] IIGCC-NZIF

• [9] Bain & Co. PMDR

• [10] UNEP FI – Asset Owner Alliance

• [11] UNEP FI – Net-Zero Banking

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