The finance industry’s efforts to tackle climate change must focus on financing reduced emissions, says Ninety One, as it warns that the current approach is not working.
Real world emissions continue to rise, despite net-zero targets pointing in the other direction, the investment manager said.
In its latest whitepaper, Net Zero investing: Searching for returns and real-world change, Ninety One says if the industry does not change course, it risks “inadvertently doing more harm than good”, whilst failing to achieve optimal returns for investors. Since 2015, emissions from listed companies, or those captured in corporate debt indices, have risen 22% and divesting assets does not appear to influence the trajectory of high-emitting companies.
According to Ninety One, most asset owners have set interim targets either at a top-down portfolio level or for specific asset classes, with a recent survey finding nearly half (49%) of asset owners have an emissions portfolio-reduction target in place. Some 95% have set emissions reduction targets covering their listed equity and corporate fixed income portfolios. Despite this, Ninety One says it is unclear if this is delivering the impact intended.
Daisy Streatfeild, sustainability director at Ninety One, said: “More than half of asset owners expect it to get more difficult to achieve reduction targets, while delivering the best possible returns. A shrinking investment universe that reduces portfolio emissions will exclude industries and sectors that have the potential to transition to low-carbon business models, as well as deliver strong financial returns. In addition, strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks.”
Streatfeild says that the focus needs to shift from reducing financed emissions to financing reduced emissions, which will provide investment to those who need it the most and allow the finance industry to invest at the scale required for transition and for climate solutions that deliver carbonisation.
She argues that portfolio managers must preserve and safeguard return objectives alongside net-zero goals by focusing on investments that have maximum impact and avoid restrictions that do not help deliver impact.
To achieve real-world change, Ninety One says investors could add dedicated climate solution and transition sleeves, which enable targeted allocations to generate impact through reducing and avoiding emissions; refine net-zero strategies for existing allocations to equities, corporate fixed income and sovereigns; as well as add or enhance allocations to private markets and real assets.
In addition, investors could increase active allocations, as well as emerging market allocations and allocations to transition investments and climate solutions, the firm said.
Streatfeild added: “The global economy is off course to hit net-zero emissions by 2050. At this stage, our efforts need to target financing reduced emissions and real-world impact. Investors should be looking to increase emerging market allocations, supporting sustainable economic growth and reducing emissions.
“By focussing on portfolio purity without delivering real-world carbon reduction, asset owners are not stimulating the kind of change needed to tackle the climate crisis.”
