Investment consultants target net zero

Wednesday 13 October 2021

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Author: Maha Khan Phillips 

In September, twelve investment consulting firms with combined institutional assets under advisory of more than $10 trillion launched the Net Zero Investment Consultants Initiative (NZICI). Through nine specific action points, they have committed to supporting the goal of global net zero greenhouse gas emissions by 2050 or sooner. The initiative is endorsed by the United Nations Race to Zero campaign and the Principles for Responsible Investment (PRI). Representatives from two of the consultancies, Paul Lee, head of stewardship and sustainable investment strategy at Redington, and Kathryn Saklatvala, head of investment content and chair of the Responsible Investment Committee at bfinance, talk to Professional Investor about the initiative.

 

PI: Why was it important for investment consultants to step up on net zero goals, with an initiative like this?

Paul Lee: We recognise the privileged role that investment consultants play as advisers and gatekeepers on the investment industry. Our support is crucial to assist many asset owners to take the steps towards net zero that they see as necessary to protect the interests of their beneficiaries and deliver value in our changing world. A formal collective statement such as we have made sends a powerful signal to our clients, and it also sends an important message to the fund management community about the change that will be expected from them.

Kathryn Saklatvala: While the Net Zero Asset Managers Initiative and the Asset Owner Alliance have been extremely influential in terms of encouraging the investment industry in the direction of Net Zero, investment consultants have an extremely broad reach and influence. Consultants are often the bridge between investor and manager, shaping the allocation of capital and driving the development of practices at firms that wish to raise institutional capital for their strategies.

 

PI: The NZICI has set out nine actions for investment consultants to take to support the goal of net zero gas emissions by 2050. What are your first priorities?

Lee: The priorities will no doubt differ between the investment consultancies depending on where they are on their own journeys. For us at Redington, our focus is on further developing investment approaches that assist our clients to take incremental steps towards net zero over time, and in working with the industry to harmonise net zero tools where these do not already exist.

Saklatvala:  Not all of these actions apply to all of the consultancies. For example, unlike some of our peers, bfinance has not introduced asset management services so the commitment relating to discretionary services (i.e. asset management) would not apply to us. I would say that the first commitment is the heart of the initiative – the most important and influential of the nine, with a clear timeframe of two years (to integrate advice on net zero alignment into all investment consulting services as soon as practically possible and within two years of making the commitment).

 

PI: For the investment industry, what are some of the risks of not aligning with net zero goals?

Saklatvala:  For asset managers, this is not just about investment risk but about business risk. Asset managers that cannot give a clear picture on the climate risk associated with their portfolios and demonstrate that the portfolio is robustly positioned for the economy’s transition will increasingly find it hard to raise institutional capital.

Lee: The world economy is changing, as the inexorable logic of climate change forces it to. Investment approaches that ignore that inevitability will not prosper in the long run, nor even in the medium or short-term. We will not serve our clients and their beneficiaries’ interests if we are not helping them invest in ways which recognise the developing shift in the world economy.

 

PI: How far have asset managers and asset owners come on this issue, in terms of their own commitments? What is one step all industry stakeholders can take today?

Lee: The aspirations are important, and asserting aims for 2050 (or earlier) is a vital first step – NZICI being one among them. But investors must rapidly move to setting out plans for getting from here to that net zero aim, and identifying the concrete steps that they will take in the near term to begin the process. Those steps are likely to be different for each investor as they depend on their own strategic aims and targets, but moving to the concrete and real from the aspirational is crucial.

Saklatvala:  One step which all asset managers and asset owners can take today is to seek an understanding of carbon intensity and forward-looking climate-related metrics (e.g. ITR) for their own portfolios. By explicitly seeking this information, we do not only gain knowledge, we also encourage the development of data in areas where information is lacking.   In terms of commitments, portfolio decarbonisation targets should be handled with care. The transition to a net-zero economy will not happen without investment in industries and companies which will change the way in which energy is produced, stored, distributed and used – investments which, at first, are often relatively carbon-intensive.

 

 

Miles Donohoe

 

 

 

 

 

 

 

 

 

Paul Lee, Head of Stewardship and Sustainable Investment Strategy, Redington

 

Miles Donohoe

Kathryn Saklatvala, Head of Investment Content, bfinance

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