NZAM update – November 2022 initial target disclosure

Since the launch of the Net Zero Asset Managers initiative in December 2020 with an initial group of 30 signatories, and building on the considerable momentum of the initiative so far, more than 291 signatories, representing over USD 66 trillion in AUM, have joined and committed to align their portfolios with achieving net zero by 2050 or sooner. This includes 21 new signatories who have joined since the last target disclosure update in May 2022.

Since the last target disclosures report, the network partners have developed the NZAM website to enable signatory targets to be accessed online via individual pages. This will make it easier to review initial and resubmitted targets and facilitate the network partners in updating progress on an ongoing basis when signatories submit initial and updated targets, as required by the ten-point commitment statement.

NZAM is one of the investor-focused financial sector alliances of the Glasgow Financial Alliance for Net Zero (GFANZ) that brings together leading net zero initiatives across the financial system, to accelerate the transition to net zero emissions by 2050. It is also a formal partner of the UNFCCC’s Race to Zero campaign.

The Net Zero Asset Managers initiative is delivered by six investor networks. For more on how the initiative operates, see here.

Since COP26, the Steering Committee has met 5 times and the Advisory Group has met 2 times, focusing on how to ensure effective implementation of the initiative, and to ensure credible action by signatories in relation to their net zero commitments. The initiative also held 2 biannual meetings of all signatories which have focused on supporting them in setting and implementing targets, and for more longstanding signatories, compliance with annual reporting requirements.

Target disclosures

Almost two years on from the initiative’s launch and following publication of a second set of asset managers’ initial targets in May 2022, a further 86 asset managers have now disclosed their initial targets for the proportion of assets manged in line with achieving net zero by 2050 or sooner.

All signatory’s targets, including new and previously submitted ones, are now available on the Net Zero Asset Managers initiative website.

The latest disclosures take the total number of asset managers setting initial targets to 169. 21 additional signatories have joined the initiative since May 2022, bringing the bringing the total to 291, representing more than USD 66 trillion in AUM.

The latest targets mean that, collectively, approximately USD 21.8 trillion – out of a possible USD 55.3 trillion managed by the asset managers who have set targets to date – is now committed to be managed in line with achieving net zero by 2050 or sooner. This represents around 39% of total assets.

We have also seen 63 managers commit more than 75% of their assets and 97 exceed 50%.

29 targets are currently still being reviewed by the initiative. 13 targets are non-complaint as they were not submitted ahead of the 6 July and 15 October deadline to publish the latest target disclosures on 9 November, to coincide with Finance Day at COP27. Network partners will assess these when they are ready and signatory profiles will be updated on the website once this is complete.

Those unable to commit 100% at present, due to business model or methodology challenges, have provided information on plans to increase their proportions of assets to be managed in line with net zero, and subject to interim targets, in the near term. This is consistent with the expectations of the initiative that percentage of AUM will increase over time to reach 100%.

Target setting methodologies

All disclosing signatories provide information on the interim targets that have been set in relation to the proportion of assets managed in line with net zero, including the science-based scenarios used to determine these targets. The overwhelming majority have used one, or a combination, of three endorsed target setting methodologies:

  • Paris Aligned Investment Initiative’s Net Zero Investment Framework (NZIF) – 87 signatories
  • Science Based Targets initiative for Financial Institutions (SBTi) – 39
  • Net Zero Asset Owner Alliance Target Setting Protocol (TSP) – 9
  • Combination – 23
  • Own/other methodology – 11

For more on target setting approaches, see here.

Where asset managers have not used an endorsed methodology, or a methodology has not been used in full, the network partners will continue to engage and support signatories to ensure effective and science-based implementation of targets and strategies going forward. For signatories indicating use of the SBTi methodology, it is noted that the process for target setting is as follows:

  • Committing to a Science Based Target via a letter of intent (optional)
  • Developing a target in line with SBTi criteria
  • Presenting target to SBTi for official validation (within 2 years of committing)
  • Communicating this validation to stakeholders
  • Reporting progress against these targets annually

Asset managers disclosing targets to the NZAM are not specifically required to have committed or have targets validated by SBTi at the point of this disclosure. In addition to information on targets, and in light of the network partners’ expectation that signatories have science-based policies on investment in coal and other fossil fuels, asset managers were invited to disclose information on their policies. Signatories that do not have broad policies in place were able to indicate how they were planning to consider this issue.

Further detail of each asset manager’s specific proportion and targets is set out on individual signatory pages on the NZAM website, available here. The network partners have published the key elements of the information provided by each signatory, in relation to the initial proportion of assets to be managed in line with net zero and interim targets set in relation to those assets. This information is based on information self-reported by the signatories, and there is therefore variation in the way it has been prepared. However, while network partners validate methodology usage, publication does not imply network partner verification of information provided or targets set. All asset managers are expected to provide further information on their compliance with all elements of the commitment, including setting out a climate action plan, as part of the annual disclosure and reporting process.

For more on transparency and accountability, see here.

For consistency and aggregation, all asset manager’s proportion of AUM was requested to be disclosed in USD. The network partners used the figures as provided by the asset manager.

Key themes highlighted

During the target disclosure and review process for the May 2022 progress report, a number of prominent themes were identified by asset managers. Analysis of target disclosures for this November 2022 update reinforces that asset managers are operating against a similar backdrop of challenges, which has implications for the action asset managers are currently able to take and influences the approaches taken to setting targets.

Collectively signatories have now committed on average 39% of assets to net zero by 2050, with all NZAM signatories committing to ratchet up their assets committed to net zero with a view to reaching 100%. Achieving this, however, is dependent on numerous factors including the mandates agreed with clients, clients’ and managers’ regulatory environments, supportive policy environments and the development of target setting methodologies for all asset classes.

1) The geopolitical backdrop

These targets are being set against an ongoing challenging geopolitical backdrop. The war in Ukraine is entering its ninth month, following Russia’s brutal invasion in February 2022. The current energy crisis has increased short-term demand for fossil fuels and had a drastic impact on the cost-of-living for many individuals. The politicisation of ESG issues more broadly persists, which we recognise add a layer of complexity to the target setting process.

There continues to be increased variation in the regulatory and policy environments that managers are operating in. This affects their ability to shift existing funds towards net zero alignment and can impact the level of client demand for such a shift. There are a number of cases where, due to policy changes or engagement with clients, asset managers have been able to commit a significantly higher proportion of assets than would have been possible even a few months ago. But equally, there are some who are operating in less supportive regulatory environments and are working to overcome some of the current constraints. For organisations that operate globally, they must balance a range of jurisdictional requirements when setting targets and implementing their net zero commitments.

2) Approaches to target setting

Given the wide variety of business models, geographic footprints and asset class mixes amongst the asset management community – which is reflected within the NZAM signatory base – we expect to see variation in the approach to target setting and what is achievable in terms of the initial proportion of assets managed in line with net zero.

To reflect this and provide flexibility to signatories, three target-setting methodologies endorsed by NZAM – the Paris Aligned Investment Initiative Net Zero Investment Framework, Science Based Target initiative for Financial Institutions and the UN-convened Net Zero Asset Owner Alliance Target Setting Protocol. All three methodologies include different options for target setting, or the possibility to set a combination of targets, allowing signatories to take either a ‘top-down’ emissions reduction approach or a ‘bottom-up’ portfolio coverage approach, or a combination of both.

A portfolio emissions reduction approach is an intuitive method of demonstrating alignment with a fair share of the 50% reduction of emissions required by 2050 but can encourage investors to sell high carbon assets rather than engaging to drive real world impact. Meanwhile, the portfolio coverage approach focuses on getting companies themselves onto a decarbonisation pathway which achieves real world reductions but can be more difficult to determine the portfolio emissions impact. This is why the initiative encourages the use of a combination of targets and actions to ensure real world impact while also being able to effectively track emission reductions. It has also built in some safeguards to ensure managers are engaging with companies across their entire AUM and focusing on both overall reductions and real-world impact.

3) Variations in business model and investment approach

It is important to remember that the money that asset managers invest is not their own – they are managing it on behalf of their clients and, depending on their individual business model, they could have thousands of different clients invested across hundreds of funds. Making changes to how these funds invest and what they invest in is often a complicated process that requires consultation with a number of stakeholders.

From an NZAM perspective, asset managers’ initial targets represent a starting point, often made up of the funds that can be most easily aligned with net zero. However, many have indicated that there are ongoing conversations with clients and other stakeholders which they expect to result in significant increases in the proportion of AUM managed in line with net zero in future. This is consistent with the terms of the NZAM commitment, which requires managers to review their target at least every five years and encourages them to do so more frequently where possible.

Where funds are actively managed, the fund manager has greater power to decide how the money is allocated and which companies to invest in. However, for passive investments or index funds it is more difficult. These investments typically track a benchmark and do not allow for active stock picking or deviation from the benchmark. It is possible for passive funds to implement additional criteria, but this cannot be done without changing the fund’s terms and conditions, which would need to be accepted by existing investors in the fund. While there are some net zero index funds that have been set up with additional criteria applied, this is a relatively recent development and there are far more funds that do not have an explicit net zero objective.

However, as long-term owners of the assets that they hold – at least for as long as the companies remain in the benchmark – index funds have an important responsibility when it comes to engaging with the companies they are invested in. Investment stewardship is a key mechanism for encouraging company management to better understand and address material climate risks and work towards achieving net zero emissions by 2050 or sooner. The challenge around aligning index funds more broadly will be an area of focus for network partners in the coming months, and one that they will working collaboratively across the sector to address.

4) Availability of methodologies and data

For many asset managers a key constraint identified is the absence of methodologies for accounting for specific asset classes or measuring alignment to net zero. Several managers noted that this was the case for derivatives, private equity, green bonds, sovereign bonds, covered bonds, structured products and cash, among others. There are a number of efforts in train, supported by the network partners and individual managers, to address these gaps in methodologies, which will allow a broader range of asset classes to be included in future.

Similarly, data quality and availability continue to be challenges. Many have noted that they only have included strategies, funds and geographies where data quality and availability was sufficient to underpin robust science-based target setting. However, they are continuing to make efforts to gather relevant data to enable setting of additional targets or broadening the scope of current targets going forward.

The initial targets are only a starting point and represent what asset managers can feasibly commit to today. For instance, most targets cover listed equity and fixed income thanks to available target setting methodologies for both asset classes, whereas fewer cover other asset classes, such as private equity and infrastructure, due to the nascency of supporting target setting methodologies. The intention is that as methodologies develop to cover more asset classes, as illustrated by the ongoing development and broadening of the Net Zero Investment Framework (NZIF), additional asset classes will be incorporated into targets.

Since launching, 4 managers have resubmitted higher targets (including 1 in this latest wave), highlighting how targets are not static and intended to move forwards over time. The initial targets are just that, a starting point.