The Rising Prominence of Net-Zero Emissions in Manager Selection

    Stockholm (NordSIP) – Among the many trends of 2021, the adoption of net-zero carbon emission targets and the rising relevance is perhaps one of the most salient developments so far. Be it nordic pensions, Handelsbanken, Nordea, Fidelity, Jupiter AM, BlackRock or PFA, the adoption and requirement of net-zero targets appears to be on its way to becoming a standard practice. Another similar shift in the industry appears to be the requirement of ESG integration in manager selection.

    These two observations are not merely anecdotal. According to the latest ESG asset owner survey from bfinance, an investment advisory firm, the measurement of carbon emissions and ESG integration in manager selection are a rising trend in the industry.

    Net-Zero Emission Targets

    The survey revealed a major shift towards measuring portfolio carbon emissions or carbon intensity, echoing the rising demands for net-zero emission targets. Just 13% of investors assessed overall carbon emissions relating to their portfolio more than three years ago; 46% do so now (including new implementers) and a further third are “actively considering” it.

    For asset owners focused on equities, the issue of carbon emissions was most important. The practice of capturing carbon emissions data has also become increasingly widespread across fixed income and even private markets.

    Echoing NordSIP’s own observations, a UK Public Pension Fund quoted in bfinance’s report commented that “We are setting a Net Zero goal so will expect managers to demonstrate credible alignment e.g. use of the IIGCC framework.”

    Asides from the net-zero target emissions, bfinance also points out that this adoption of carbon reporting is part of a broader ‘all portfolio’, data-driven trend among ESG investors.

    What Matters in Manager Selection

    According to the survey, UN PRI is now a requirement for asset manager selection. The majority of equity and fixed income investors report that they’re “unlikely” to hire a manager who is not a signatory of PRI, while nearly half expect a dedicated ESG headcount.

    There is also a significant increase in the attention paid to diversity concerns in manager selection. For hedge fund and private equity selectors, gender and/or ethnic diversity stands out as a top and the second most influential concern. Respondents noted that although these issues in isolation wouldn’t rule a manager out, where a combination is present we would rethink the appointment.”

    There is also progress over time. The bfinance report quotes one investor as saying that “ESG scoring is not qualitative anymore, it has the same weight as other aspects of the manager set-up”. Indeed, three-quarters of investors have “stricter ESG criteria” in manager selection than they did three years ago, and a similar proportion have modified how ESG is handled during manager due diligence

    Other Findings

    The bfinance poll covered 256 investors around the globe, including “ESG advocates and cynics alike” managing approximately US$7 trillion in assets. Asides from the two tendencies above, the poll also found three new tendencies among sustainable investors. As their experience grows, investors are no longer thinking of responsible investments merely as another strategy.

    ESG investments are being framed as a source of impact, as a total-portfolio subject and around the issues with standardised data. This point spills over into the other two. Data standardisation is crucial if ESG investors are to understand the impact of their portfolio and manage ESG issues effectively across the whole portfolio.

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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