The ‘privileged’ role of asset owners in speeding up decarbonisation investments
Asset owners should focus on real world decarbonisation via engagement and drop their obsession with hollow numbers and targets, a senior net zero insider argues
Many asset owners around the globe are setting long-term net zero targets and trying to steadily decarbonise their portfolios over the next few decades. Most companies they invest in are following suit, albeit some reluctantly.
However, well intentioned asset owners should avoid focusing too much on simply hitting quantitative targets for risk of disserving the complex climate web of considerations that no purportedly suite of metrics can claim to neatly capture.
Instead, they should use these science-based targets to guide a more holistic assessment of their portfolio’s climate transition possibilities and pathway with the intent of contributing to a meaningful real economy wide decarbonisation.
At least that is the view of Komal Jalan, a senior sustainable investment manager at Mercer. She argues that, since the ability of different asset classes to contribute to decarbonisation varies, and each has a different starting point, so the task is not a simple one.
"When we talk about net-zero and its implementation from a portfolio perspective, our intent is to stay focused on achieving real economic decarbonisation and alignment to the Paris Agreement," Jalan told Net Zero Investor.
Asset owners can achieve portfolio decarbonisation by divesting or screening high emitting assets, [but] this alone may not meaningfully contribute to real economic decarbonisation.
Further, it is achievable to optimise portfolios for reduced carbon exposure - 20% to 45% less carbon intensive than benchmark - whilst preserving risk return characteristics as a cheer win for being on track for targets.
"These are largely emissions based re-weightings that penalise companies with high emissions profiles and can effectively contribute towards portfolio decarbonisation," Jalan pointed out.
"However, solving for real economic decarbonisation and an orderly transition through managed diversified portfolios, requires a carefully designed approach that is capable of looking beyond simply reducing emissions quantitatively to hit net zero targets."
Jalan reveals she works closely with investment managers to challenge and explore climate risk management strategies and spot new opportunities.
"We are open to looking closely at examples where high emitting companies of today can also have a strong case for investment looking out into the future through a climate lens, when qualitatively reviewing their transition readiness," she said.
Fossil fuels are often likened to tobacco until Jalan understands that many fossil fuel intensive companies are in fact capable of bringing about real economic decarbonisation as well portfolio decarbonisation.
Jalan said she spends a lot of time sitting down with management to understand such asset-specific decarbonisation pathways.
"Complicated carbon calculations are only possible through engagement with managers and company boards. We harness this information to help our clients with their investment decisions."
Asset owners play a privileged role in the investment value chain to effect influence that can be meaningful for real economy decarbonisation through tools such as advocacy, engagement and voting.
Learning from the past
Not all climate labels are sustainable, they must go through the same ESG due diligence. For instance, windfarms are great for decarbonisation, but care must also be taken not to impinge on the flightpath of migrating birds that are critical to the surrounding ecosystem.
"We must avoid creating a second problem while solving the first. Climate analysis should evolve to systematically include biodiversity factors as well as the social impacts of physical and transition risks," Jalan said.
She stressed the sector should also learn lessons from past ecological disasters.
For example, the 2015 rupture of the Fundao tailings - iron ore mining waste - dam in a town in Brazil, which resulted in devastating human loss, polluted rivers and harmed agriculture.
"Carbon sequestration and storage are new climate solutions that we need to ensure for safety from leakage before fresh disasters unfold."
She noted that "if we achieve Paris alignment, we have a better chance to protect portfolios and help to achieve better risk-adjusted returns."
"Asset owners can lead the ripple effect on asking the right questions along their investment value chain that’ll progress real economic decarbonisation. Rather than just focusing on numbers and targets around net-zero, it is time to walk the talk if investors want to drive real change," Jalan concluded.
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