The ESG Advisor: Asset Managers Are Making Net Zero Carbon Commitments

Attacking the climate crisis requires concerted action from governments, but also from the private sector. That's the message that came out of the COP26 meetings in Glasgow this week from U.S. Treasury Secretary Janet Yellen:

"As big as the public sector effort is across all our countries, the $100-trillion plus price tag to address climate change globally is far bigger. The gap between what governments have and what the world needs is large, and the private sector needs to play a bigger role."

The good news is that the Glasgow Financial Alliance for Net Zero--which includes banks, insurers, and asset managers--announced it has about $130 trillion in commitments to reach net zero carbon emissions by 2050, which would appear to be sufficient to close the gap. The asset manager portion of the alliance, called the Net Zero Asset Managers initiative, has 220 signatories with $57 trillion in assets under management.

While there is not quite a "bad news" side to this yet, it's important to keep in mind that these remain commitments, and that most asset managers have not fleshed out exactly how they will reach the goal. In her report on the topic, Morningstar's Jackie Cook notes that asset managers are embarking on an uncharted journey, with significant concerns about inconsistency in corporate disclosures and the quality of company-level carbon emissions data.

Nevertheless, the Net Zero Asset Managers initiative is asking signatory asset managers to commit to the following roadmap:

• Set interim net zero carbon emissions targets for 2030;
• Account for Scope 1 and 2 emissions in their portfolios and Scope 3 emissions where possible;
• Prioritize real-economy emissions reductions rather than relying on carbon offsets;
• Create investment products aligned with net zero and facilitate increased investments in climate solutions;
• Provide clients with net zero and climate risk/opportunity analytics;
• Implement a stewardship and engagement strategy with a clear escalation and voting policy;
• Engage with other key actors in the investment system;
• Ensure direct and indirect policy advocacy is supportive of net zero carbon emissions goals; and
• Publish appropriate disclosures that demonstrate actions being taken are in line with commitments.

One possible roadblock to asset managers achieving net zero carbon emissions across their portfolios is buy-in from their clients. On one hand, asset managers can take the view that what’s good for the climate is what’s good for their clients’ investments, which face increasing climate risks and opportunities to invest in climate solutions. On the other hand, some clients may see net zero differently, as being more about real-world outcomes than investment outcomes.

If you are an advisor, asset owner, or individual investor, you can help by communicating your support for net zero carbon initiatives. And you can make your own net zero commitment by doing these three things:

• Direct new investment capital to funds run by asset managers that have signed on to the Net Zero Asset Managers initiative;
• Engage with asset managers you currently use to encourage them to make a net zero carbon emissions commitment and sign the initiative ; and
• Transition your investments away from those who do not make a net zero carbon emissions commitment.

And, for advisors, commit to reporting to your clients the progress you are making on transitioning their portfolios to net zero. A full list of current asset manager signatories can be found here.

SEC Casts Aside a Trump-Era Limitation on Shareholder Democracy

Perhaps the most important link between investor commitments to net zero carbon emissions and real-world outcomes is the ability of shareholders to influence the policy and behavior of companies through direct engagement, shareholder proposals, and proxy voting. This is how asset managers can address their concerns over corporate climate-related disclosures and emissions data, for example.

The SEC under the Trump Administration (when it had a 3–2 majority of Republican appointees) took steps to limit shareholder proposals from making it to proxy ballots, allowing them to be excluded if they raised broad social policy issues that were not clearly connected to specific company practices, or if they sought to implement social policies that amounted to “micromanaging” the company. Use of the term “social policies” was meant to suggest that these are never financially relevant to shareholders. As a result, several key climate-related proposals were excluded from shareholder votes over the past three years.

This week, the SEC, which now has a 3–2 majority of Democratic appointees, has rescinded that guidance and issued new guidance saying that the level of detail requested in a shareholder resolution should be sufficient to allow shareholders to assess an issuer's impacts, progress toward goals, risks, or other strategic matters appropriate for shareholder input. In general, proposals that raise issues with broad societal impacts will be allowed to a vote, a view consistent with SEC guidance from 1976 to 2018.

In effect, the new guidance supports net zero carbon initiatives by allowing shareholders to put proposals on proxy ballots that will help them understand whether a company is on the path to net zero. Such proposals also serve the purpose of demonstrating to companies the importance to its shareholders of transitioning to net zero carbon emissions by 2050.