UN’s Net-Zero Asset Owner Alliance Proposes Climate Engagement Guidelines

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.”

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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).

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Tags: Asset Owners, Elevating Asset Manager Net-Zero Engagement Strategies, Net-Zero Asset Owner Alliance, United Nations

It looks as if inflation is cooling, numerous indicators show. But how enduring will that be? Pretty enduring for at least the next several years, according to a Natixis research paper by Jack Janasiewicz, a portfolio manager and strategist, and Garrett Melson, a portfolio strategist.

“Disinflation has been making steady progress as the breadth of those forces” increases, they wrote.

The Consumer Price Index print for October, 3.2%, was down from the previous month’s 3.7% and far down from the pandemic-era peak of 9.1% in June 2022. Natixis noted that monthly CPI boosts lately are near their pre-pandemic levels, meaning low. Month over month, the once-elevated core CPI (that is, minus volatile food and energy prices) has tumbled since the pandemic.

The Atlanta Fed’s Sticky ex-Shelter Consumer Price Index, which tracks prices that change less often than others, such as service costs, is at a low ebb. This is important because service costs jumped last year and have since settled down.

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There has always been a gap between CPI (which measures what people say they buy) and the Fed’s favorite yardstick, the Personal Consumption Expenditures Index (which reflects what they actually buy), or PCE. The difference has narrowed radically from a year ago, meaning consumers are less freaked out by price hikes, which had caused them to believe their perceived outlays were more expensive than they really were.

Similarly, wholesale prices for used cars, an often-eyed barometer for consumer behavior, is way down. “Used car prices should see further deflation,” the Natixis report declared. Grocery bills, which leapt more than an annual 8% in early 2021, are mostly flat now. Ditto for energy bills: gasoline, heating oil and natural gas. Meanwhile, a Bloomberg economist survey found strong expectations that the CPI should approach 2% in early 2024.

Housing costs, which make up almost half of the core CPI, have been a stubbornly high component, mainly owing to reduced supply as builders cut back after the financial crisis of 2008 and 2009. The National Association of Home Builders expects this situation to ease, and so does Natixis.

“Shelter prices will drop—not if, but when,” the firm’s report stated. Wages have climbed, and that should make homes more affordable, Natixis opined. At the same time, the annualized rate of ascent for pay is slowing, from 8% a year ago to 5% now, which should prevent wages from fueling further inflation, per the Atlanta Fed.

The psychological effect of public inflation expectations is always powerful, and the Natixis study, citing a University of Michigan poll, showed that consumers largely expect prices to fall over the next five years.

What’s more, the inflation breakeven rate—the difference between the yield of an inflation-adjusted bond and a fixed-rate one with the same term—has tightened, to around two percentage points today from almost double that at the outset of 2022. The smaller recent figure indicates lower anticipated inflation, Natixis explained.

If Natixis is right, one economic worry for the general public should dissipate.