Investment guru: asset owners are building net zero ‘muscle and savvy’

Asset owners face tough hurdles when it comes to deploying capital in climate-solution areas, where long time horizons and policy risk are front of mind and which can be roadblocks to faster change.

Having said that, asset owners are building some muscle and savvy for the net zero investment challenges ahead.

At least, that is the message from investment veteran Roger Urwin, co-founder of the Thinking Ahead Institute at Willis Towers Watson, a network of asset owners and asset managers committed to mobilising capital for a sustainable future. 

"Asset owners, and the asset managers, have come a long way in their net-zero mindsets and skillsets [as] net zero ambition involves writing a completely new investment chapter," the investment veteran stated.

The response of the industry has been to mobilise a lot of "new thinking in a short space of time", as Urwin called the amount of effort and innovation that has been applied "exceptional."

"We are seeing the fruits of this in the industry’s deeper understanding of net zero scenarios and alternative pathways with the TCFD process an important catalyst," he pointed out in a recent op-ed.

In fact, "there are credible investment strategies emerging with bigger allocations to climate solutions in combination with deeper engagement with companies, within the industry and in public policy." 

At the same time, Urwin stressed "there has been correspondingly and appropriately little appetite for divestment."

Energy transition

In the energy transition, it is not costs that are holding investors back, Urwin argued. 

"We now have renewables looking attractively priced and we can absorb somewhat the energy-transition costs arising from new capital deployment," he said.

"What we can’t seem to do is deploy capital at the speed needed; with less than half the rate of deployment required of solar and wind being the most obvious example."

This lack of speed is because of the frictions involved, Urwin explained, such as capital allocation decisions with fiduciary duty issues, benchmark and time-horizon issues, planning and policy bottlenecks, capacity issues for enabling infrastructure, political infighting around priorities; and aligning the incentives to support the transition.

"Understanding these quandaries is not helping us fix them because they are too deeply embedded."

Can governments and regulatory pressure get asset owners back on track? Urwin is not entirely sure.

"There are few signals that they have the convictions and mechanisms to do this. Jean-Claude Juncker, in his EC President role, very honestly said a few years ago: 'I know the policies we need, but they are not ones that will keep us in power'.”

Setbacks

Inevitably there have been some setbacks, including recent performance challenges with low carbon allocations being "whip-sawed" by the consequences of concerns about energy security, Urwin continued.

"There are no easy answers in how to deal with these performance issues, and greenwashing temptations, which are further complicated by politics – particularly in the US," he said.

"These issues illustrate the difficult balancing acts ahead for investors in staying true to their beliefs and principles," Urwin analysed, adding that "fiduciary duty, with its heavy presumption of financial pre-eminence, hasn’t helped the net zero challenge."

On the minus side of the ledger, new circumstances are introducing "clunkiness and disjointedness" into governance arrangements, which is feeling the strain under the grip of massive complexity, Urwin added.

"This has produced a pile-up problem: too much fragmented reporting and not enough joined-up action. We all notice the grind of new technical stuff, onerous regulations, the talking over each other, and the conversations not landing."

The governance pathway will involve normalising and standardising our practices, as well as mastering a new language – "this will all take time," he stressed.

So, overall, how are asset owners and investors doing when it comes to net zero progress?

"It is reasonable to suggest we are doing as well as can be expected in the difficult circumstances and asset owners are building some muscle and savvy for the challenges ahead," Urwin said.

"But at this check-in point we are nothing like on track for the climate outcomes sought," he concluded.

"In the net-zero pathway, let’s be clear, we have a lot of ground to make up."

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