Net zero tolerance: are asset owners too soft on profit-driven managers?

Large asset owners in the UK should stop accepting fund managers’ modest net zero efforts and press firms much harder on climate ambitions if they ever want to get anywhere near their green goals.

Several insiders said that the current attitude and approach from large institutional investors, primarily pension funds, is too passive as they do not force managers into any meaningful changes nor entice them to step up their green investment efforts.

“If asset owners want to get managers to respond, fundamentally, they have to be willing to move mandates,” said Laura Hillis, director for climate and environment at the Church of England Pensions Board, the £3.2 billion UK pension fund that represents the Church of England.

Although Hillis understands “that is a really difficult thing for [asset owners] to do, but it has to be on the table for their net zero objectives to be achieved.”

Jenn-Hui Tan, who leads global stewardship and sustainable investment efforts at asset manager Fidelity International, could not agree more.

In fact, the City insider does not think it’s his firm that should drive change within the green investment community.

“It’s the responsibility of the asset owner, not the asset manager. The asset manager has to work in service to the mandates we are given,” Tan said during a recent event at the London Stock Exchange.

Hillis stressed that asset managers look at any investments through a much shorter-term lens than pension funds, which makes it challenging to steer them in the right direction. Both parties simply have different interests.

“While they tend to manage money on behalf of a lot of asset owners, we are thinking about investing companies on a 20-year review while they may be thinking ‘we are only going to have this asset in the portfolio for a couple of years,” she said.

Her fund recently announced to walk away from any oil and gas investments, a move that made headlines across the entire sector.

“We are talking to policymakers, we are moving our focus to the demand site,” Hillis explained.

Moreover, in May, a number of UK asset owners announced plans to review how asset owners long term interests have been served by their managers when exercising their stewardship and proxy voting at major European oil and gas companies during the 2023 proxy season.

Several members of the UK Asset Owner Roundtable, including Brunel Pension Partnership, Scottish Widows and The Church of England Pension Board, amongst others, said they "are concerned at a perceived misalignment between our long-term interests and how investment managers are exercising proxy voting at key annual general meetings of European oil and gas majors."

Specifically, UK asset owners expressed concerns that, despite warnings from the United Nations and the IPCC of the risks of delayed action on climate change, short-term interests are trumping long-term interests of pension funds.

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That may be the case, but Jaako Kooroshy, head of sustainable investment research at FTSE Russell, pointed out that for most large investors wishing to align their portfolios with the Paris goals “the main obstacle is to think about a strategy that really allows you to have a balanced approach, managing exposure to current emissions."

“Whether that is scope 1 or 2, or value chain emissions, while managing your exposure to future emissions reduction to ensure you’re part of the story of transition finance, but also making sure you understand what is exposure nowadays, and getting the balance right,” he said during the LSE panel in London.

Penalties and rewards

Some in the industry believe asset managers should be rewarded, or penalised, in order to speed up net zero efforts.

“I worked with Canadian pension scheme CDPQ back in 2016,” recalled Anita George, a member of the advisory board for finance at the Solar Alliance, also present at the event in London.

“We announced a carbon reduction target for the portfolio and an increase in green investment,” she explained, adding that in the first 12 months, “there was a lot of activity, but the results were inconclusive.”

However, two more years down the line, George’s boss introduced a carbon parameter which was directly linked to the pay packages of fund managers.

“The whole reality changed,” she said.

Hillis, however, said that it’s all about “getting the policy right.”

She noted that “what you find is when investors are looking at risk, they want to see a coherent set of policies. Having policies that subsidise fossils while incentivising renewables is not helpful.”

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