The recently published Asia Investor Group on Climate Change (AIGCC)’s Net Zero Investment Report highlights an upward trend of investors transitioning to more climate-aligned investment products across asset classes and geographies.
“Over the past two years, climate change has become a topic in many of our conversations with clients and potential clients — it is definitely front of mind for institutional investors in this region,” Danielle Welsh-Rose, ESG investment director and Apac head of sustainability institute at abrdn, told AsianInvestor.
“We have seen a demonstrable increase in the appetite for both standalone climate-focused strategies and the alignment of conventional strategies to address climate risks.”
Out of the 20 Asian asset managers surveyed by AIGCC in December 2021, 41% indicated that they are looking to launch up to five climate-related investment solutions in the next two years.
There are a number of factors driving this interest from institutional investors, including demand from pension fund members and regulatory pressures, according to Welsh-Rose.
“Ultimately we are seeing that clients are becoming much more sophisticated in appreciating the value destruction or value creation that can come from climate change,” she said.
The survey also indicates that companies can expect further dialogue with investors on climate, as investors step up corporate engagement work and show willingness to vote their shares in support of climate resolutions.
“Institutional investors are now understanding that they need to look at both risk management and value creation opportunities from climate change,” said Welsh-Rose.
The lack of tools to measure and report on “green impact” remains a primary concern for Asian investors, where approximately 45% of survey respondents (down from 56% in 2020) indicated that this was the top barrier to investment.
As such, Asian investors are actively seeking more tools and guidance frameworks to measure the actual green impact of their investments, and are becoming increasingly aware of the dangers of greenwashing, said the report.
In the context of sustainable investing, greenwashing is defined as making unsubstantiated or misleading claims about the sustainability characteristics and benefits of an investment product.
According to Welsh-Rose, these conversations around greenwashing highlight very legitimate concerns and “increased expectations around transparency and credibility coming from clients, regulators, and other external stakeholders.”
There are a number of actions that investment managers can take to mitigate the risk of greenwashing.
“One very important action is around having the right skills and expertise — it is vital for investment managers to ensure that they have ESG capabilities embedded not just within investment teams, but across the business in functions such as risk and compliance, and product,” she said.
“It is also vital that investment managers set up strong internal frameworks and standards for ESG integration, with clear processes and accountabilities, and with transparent reporting to clients and external stakeholders.”
The report also highlights that investor accountability has become a prominent topic in the battle against greenwashing. Forty-five percent of the Asian investors surveyed indicated that their organisations are actively considering implementing actions such as linking executive remuneration to climate metrics, while 5% of the participants report they have already taken such action.
MEASURING NET-ZERO COMMITMENT
Jenn-Hui Tan, global head of stewardship and sustainable investing for Fidelity International, told AsianInvestor that while investment is trending toward net-zero by 2050 — in line with the Paris Agreement — investors are taking different approaches to achieving these targets.
Some favour an approach that focuses more on the exclusion of companies that produce a lot of carbon emissions and the preference for low-carbon emitters in their portfolios. Others, like Fidelity, take an approach around engagement, investing in companies across the investable universe, but using their influence as shareholders or lenders to encourage the companies to reduce their emissions.
In 2021, Fidelity International developed its internal Climate Rating system, which aims to identify climate-related risks, net-zero investments, and targets for transition engagement in their investments.
“What we are seeking to influence is emissions reductions in the real world, not just paper portfolios that have low emissions or low carbon footprints, and the view we take is that carbon emissions come by definition from high emitters that tend to be concentrated in certain specific sectors that we need,” said Tan.
“No one's saying that we don't need energy production or materials or utilities and manufacturing, so the key challenge is to address these high emitters and hard-to-abate sectors and put them on a decarbonisation pathway.”
Essentially, when exploring investment in some of these sectors, Fidelity is looking to measure how committed these companies are to ensuring their green transition, said Tan.
“We recognise that decarbonisation is not going to happen in one or two years — in some cases, the technological solutions that need to be developed either don't exist or need to be scaled and proven.”
“What we're looking for are management teams that are implementing ambitious targets, making commitments, implementing the right levels of governance, and allocating capital, in a way that supports that transition of the underlying business,” said Tan.
“Using our climate rating, we'll assess those companies on five different buckets and we will use that assessment to then drive the process of target setting for funds that we want to apply this net- zero methodology to.”