Asset management has a unique power to act on climate change

This post is by Miranda Beacham, a member of The Society of Pension Professionals and head of UK responsible investment at Aegon Asset Management.

Many look to governments to act on climate change but, to combat this crisis, significant effort is needed from everyone. As an industry, asset managers are very aware that we need to play our part and we have made a strong start, but we also recognise there is more to do.

We are a uniquely placed industry
The industry’s role in the allocation of, and custody over, many trillions of US dollars in financial assets makes us extremely, and perhaps uniquely, well placed to help manage and mitigate the terrible effect climate change is having on the world.

Asset managers have made promises on the net zero agenda. For instance, 315 asset managers, controlling US$59 trillion in assets, have signed up to the Net Zero Asset Management Initiative (NZAMI). This has committed them to working with their clients to achieve net zero by 2050 or sooner, with interim targets for 2030. Similarly, the UN convened Net Zero Asset Owner Alliance (NZAOA) has 86 signatories and is a pioneering initiative for the finance industry to set intermediate net zero targets, including CO₂ reduction within ranges, for 2025 (of 22-32 per cent) and for 2030 (40-60 per cent).

Previous COP summits have highlighted the need for all financial decisions to take climate into account and this is where investment managers can make a real impact. When making investment decisions, we are aware that transparency is required for both the companies that asset managers invest in and how the asset managers operate themselves. Transparency around climate risks and the potential for greenwashing are issues that the managers are very conscious of.

We also need to co-operate with central banks and regulators, making sure that financial systems can withstand the impacts of climate change and support the transition to net zero.

Committed asset managers, such as those who have signed up to NZAOA and NZAMI, have to make sure their investments align with their net zero commitments. The targets are challenging. For example, the institutions that Aegon Asset Management and others invest in are domiciled in different continents, come from different industries and are at different stages of maturity. We really need to understand exactly what we are investing in and how each company is tackling this huge responsibility. In general, environmental, social and governance (ESG) analysis and engagement activity is based on Climate change is now a crucial factor to be considered in every aspect of investment. Across all asset classes and geographies, asset managers are integrating ESG into the analysis of their holdings, considering the issues at the point of investment and then monitoring and engaging on them.

Investing in companies to deliver returns for the pensioners of the future means investing in a diverse range of assets. Our widespread engagement across sectors acts as a useful tool to highlight environmental concerns and encourage change across a broad spectrum of businesses. In equities, we have the added benefit of voting at companies’ annual general meetings and have seen an increase in the number of resolutions tabled to approve climate transition plans, or from shareholders prompting action in terms of a climate strategy or environmental reporting.

Asset managers are increasingly expected to use their voting powers
There is greater and greater regulatory and investor expectation that asset managers will use their substantial voting powers to help the shift to a more sustainable economy and, whilst there is definitely more to do, there are countless examples that this is now happening in practice.

Within bond markets, we cover both corporate and government issuance. The corporate bond sector has seen a huge increase in bonds labelled as ‘green’, with the money raised used to fund specific projects addressing climate change.

Many in the industry now provide specific products which align consumer preferences to investments. For example, Climate Transition products, sustainable products, ethical ranges and so on, which are helping to drive more sustainable business practices. But there are also asset transition risks that relate to the switch to a lower carbon economy, as well as risks to assets directly from the impacts of climate change, such as increasing average temperatures or rising sea levels. Portfolios or funds invested in companies that may end up with ‘stranded assets’, ie assets that have to be written off, written down or devalued, are having to be adjusted. Perhaps the most obvious example of stranded assets are in the oil and gas sector where lost profits are estimated to exceed US$1 trillion due to climate policy.

Asset management may not come to mind as the most obvious solution to climate change but the industry, underpinning the economy, is in a very powerful position to act. Many asset managers are starting to make a tangible difference and can do even more by working to mobilise the power of finance, together with governments, companies and within our own industry.