NZAOA launches new investor guidelines on how to monitor asset managers

The UN-backed asset owner group that is pushing for the implementation of net zero standards has launched fresh guidelines for investors on how to communicate climate goals with their asset managers.

The United Nations' Net-Zero Asset Owner Alliance (NZAOA), comprising of 86 institutional investors who manage close to $10 trillion in assets worldwide, said its latest imitative should help asset owners in their ESG communication with managers.

The coalition of pension funds, insurance firms and other capital owners has set itself the commitment to make all of their investment portfolios net zero by 2050, in line with the Paris Agreement.

NZAOA, which includes Allianz, CalPERS and AMF, highlighted that more asset manager engagement is needed to tackle "idiosyncratic risk in climate investments." 

The UN group has introduced a range of reporting and governance guidelines that its members are urged to follow, because their asset managers may not be in full communication with asset owners about climate investment goals, the NZAOA said.

“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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Goals and targets

Crucially, the NZAOA said managers' strategies, communication and activities should be structured in a way that allows asset owners to assess where their approach is in line with the capital owners' goals and targets.

"[Managers should] describe how climate engagement fits into broader climate risk management approaches and investment portfolio activities," the report said.

"[They should] 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."

Engagement

The group also touched on shareholder engagement, saying such practices should reflect the asset managers’ published climate engagement strategies. 

To ensure that implementation of a climate strategy follows the firm’s guidelines, managers should outline how climate engagement efforts are prioritised across the firm and between teams, the group said.

The NZAOA stressed this included how resources are allocated to climate engagements and how and why priority issuers are selected for engagement.

Moreover, "managers should demonstrate how their internal tracking systems enable sharing of climate engagement insights and actions across teams and portfolio management activities."

Finally, managers have to "consider regularly publishing engagement memos or research papers to highlight progress, practical expertise and knowledge acquired from conducting climate engagements."

Oversight

In order to keep proper oversight of all these activities and responsibilities, the NZAOA is urging asset owners to advise the asset managers they work with to adhere to certain governance and oversight standards that should lead to the integration of transparent engagement structures.

"Asset managers should demonstrate documented standards to ensure consistency of messaging, ambition and reasoning for action across stewardship, portfolio management and executive management teams," the report stressed.

They should also show how climate engagement outcomes are communicated and integrated across teams, it stated.

Also, managers should adopt governance structures that ensure clear accountability for the oversight, implementation and verification of engagement activities.

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