Ninety One published its annual Planetary Pulse Report, ‘Asset owners weigh risks and opportunities of investing for an inclusive energy transition’. The report explores asset owners’ investment approaches to the risks and opportunities presented by climate change.
Ninety One’s research, conducted independently by FT Longitude, surveyed 300 asset owners and consultants across eight sub-industries. Making up the respondents were 125 in Denmark, Germany, the Netherlands, Switzerland, and the UK; 80 in the US and Canada; 60 in Australia, Hong Kong and Singapore; and 35 in Botswana, Namibia and South Africa.
The research investigates asset-owners’ strategies and investment through the lens of real-world impact, in terms of the targets they set, the frameworks in which they operate, and the practices they implement. The findings show that asset owners are deploying a broad spectrum of approaches. These range from setting targets for entire portfolios to investing in the efforts of high emitters committed to achieving their own transition pathways.
A recent report by the UN highlighted that global CO2 emissions, fossil fuel production and consumption urgently need to peak and swiftly decline to keep the Paris Agreement’s temperature goal within reach. The latest IPCC report supports this argument by modelling five different future emission scenarios, where in each scenario global surfaces are expected to hit at least 1.5 degrees, calling for the world to drastically reduce emissions now.
Climate-focused targets: moving to a granular approach
Our survey shows that almost half of asset owners (48%) have between one-quarter and half of their assets under management (AUM) invested in portfolios with climate-related instructions or objectives, up from 40% in 2022.
The climate-related targets and metrics that asset owners are using remain broadly the same as in 2022. Emissions-reduction targets were the most used in 2022, and this is still the case in 2023. Nearly half (49%) of asset owners have an emissions-reduction target in place for their fund, while 43% – rising to 54% in Asia-Pacific (APAC) – use Climate Value-at-Risk (VaR). In North America, the second-most-used target type is portfolio coverage/asset-level alignment (40%) and, in Europe, it is implied temperature rise (44%).
Scepticism and the adoption of proprietary frameworks
A notable minority of asset owners (34%) state that using established frameworks actively prevents their investments from making a real-world impact. Whilst some asset owners use proprietary or consultant-developed frameworks, 43% argue there is too much discretion permitted in the selection of climate-related targets, and 44% say the same about the metrics that underpin them.
The majority of asset owners (57%) believe that using an established climate-related target-setting framework has a real impact on emissions levels.
Greater awareness of the trade-offs
Our research suggests there is a disconnect between decarbonisation intentions and outcomes. The majority of asset owners (55%) who implement climate-related factor integration as a tool say it contributes more to portfolio decarbonisation than to reducing emissions in the real world.
Transition finance displays an inversion of this pattern – 34% say it makes a significant contribution to portfolio decarbonisation, compared to 52% who say it is lowering real-world emissions.
The transition finance opportunity
Our survey shows just over half of asset owners (51%) agree that financial institutions have a responsibility to help fund the decarbonisation of high emitters. Less than half (40%) report that their fund currently owns or manages transition finance investments, with over a third (35%) saying they will likely be making transition finance investments within the next 12 months.
The majority of consultants (60%) say they advise clients to make allocations to transition finance, even where this could increase portfolio carbon intensity.
Just over half of respondents (51%) state that emerging-market transition finance is a major commercial opportunity for asset owners; however, half (52%) also appear concerned about the risk/return profiles available in the universe of emerging-market transition finance assets.
Nazmeera Moola, Chief Sustainability Officer at Ninety One:
“The energy transition is undoubtedly the biggest systemic shift of this generation. As a result, the universe of investment opportunities has exploded to build the foundations of a new era and support the development of market leading innovations. Transition finance is being clearly recognised for its real-world credentials over and above meeting portfolio decarbonisation targets. However, asset managers are still faced with a number of challenges whilst implementing climate-related investment practices.
“Our research shows there is a disconnect between decarbonisation intentions and outcomes, and that investors need to be able to capture the full picture of their portfolio’s emissions to measure climate impact. Now, more than ever, we need to bridge the gap, collaborate and act as a driving force to meet the 2050 climate goals.”