The United Nations’ Net-Zero Asset Owner Alliance, an initiative that includes 86 institutional investors who manage $9.5 trillion in assets and share the commitment to become net-zero by 2050, released a report discussing how asset owners should communicate their goals for environmental, social and governance investing with their asset managers.
Members of the alliance have committed to transition their investment portfolios to be net zero of greenhouse gas emissions by 2050. These include some of the largest asset owners and institutional investors, including Alecta, AMF, Nordea Life and Pension, Allianz and CalPERS.
According to the paper, “Elevating Asset Manager Net-Zero Engagement Strategies,” asset manager engagement is necessary to address idiosyncratic risk in climate investments. The UN group lists reporting and governance guidelines that alliance members should follow, because their asset managers may not be in full communication with asset owners about climate investment goals.
“Asset managers must adopt a consistent, transparent, and outcomes-oriented climate engagement strategy, which recognizes that climate change poses systemic risks to asset-owner portfolio returns,” the report stated. “This alignment of engagement outcomes to portfolio management and stewardship decisions is critical for asset managers’ continued ability to win mandates of clients committed to net-zero.”
Governance and Integration
The report advised asset managers to implement governance and oversight structures that ensure engagement activities are integrated across their businesses to support their broader climate engagement strategies. Asset managers should take the following steps to ensure proper governance, according to the report:
- Demonstrate documented standards to ensure consistency of messaging, ambition and reasoning for action across stewardship, portfolio management and executive management teams;
- Show how climate engagement outcomes are communicated and integrated across teams and functions; and
- Adopt governance structures that ensure clear accountability for the oversight, implementation and verification of engagement activities.
Publishing Climate Engagement Strategy
Asset managers should design their strategies so that asset owners can assess whether a manager’s strategy is aligned with the owners’ own goals, the report stated. The following guidelines were recommended for asset managers to follow in developing their climate strategies:
- Describe how climate engagement fits into broader climate risk management approaches and investment portfolio activities;
- Illustrate how climate engagements are planned; and
- Ask companies and issuers to set public and explicit sector-based expectations for companies’ and issuers’ climate action. Expectations should make use of public standards or benchmarks.
Climate Engagement Practices
According to the alliance, climate engagement practices should reflect the asset managers’ published climate engagement strategies. The report listed the following steps to ensure that implementation of a climate strategy follows the firm’s guidelines:
- Outline how climate engagement efforts are prioritized across the firm and between teams, including how resources are allocated to climate engagements and how and why priority issuers are selected for engagement;
- Demonstrate how their internal tracking systems enable sharing of climate engagement insights and actions across teams and portfolio management activities; and
- Consider regularly publishing engagement memos or research papers to highlight progress, practical expertise and knowledge acquired from conducting climate engagements.
Transparency and Accountability
Asset managers should make appropriate disclosures relating to their climate engagement strategy implementation, according to the report. These disclosures should be made to ensure asset owners are aligned with the asset manager. The UN recommends asset managers take the following steps:
- Timely transparency (to clients at a minimum and potentially the broader public) on engagement objectives set and progress against these within the reporting period;
- Transparency to the broader public relating to asset managers’ messaging to issuers; and
- Transparency to the market on the actions asset managers have taken to address the systemic hurdles to net-zero pathways that cannot be addressed solely through corporate engagement, such as expanding beyond issuer engagement (into e.g., policy or sector engagement).
Related Articles:
World’s Asset Owners Discuss ESG Investment Plans at United Nations (Part 1)
Most Asset Owners Seek to Implement ESG Strategy, Says Morningstar
Large Asset Owners Lauded for Pushing Sustainable Investing
Tags: Asset Owners, Elevating Asset Manager Net-Zero Engagement Strategies, Net-Zero Asset Owner Alliance, United Nations