Introduction

This report evaluates the impact of investing in line with the Race to Zero goal of limiting global warming to 1.5°C. The authors explore the implications of asset managers following a climate scenario that may not occur, given a recent report from the United Nations Environment Programme. They analyse various investment strategies, which include: portfolio decarbonisation, active ownership, tilting, impact investing, and ESG integration to combat climate change. The authors conclude that the strategies most likely to deliver a real-world impact from an environmental perspective could put asset managers in breach of their fiduciary duties.

Assessment of investment strategies

The authors examine a range of investment strategies in the context of the Net Zero Asset Manager Initiative (NZAMI), with a particular focus on asset managers. They assess the strategies based on the possibility they can deliver a real-world impact on reducing aggregate carbon emissions. Strategies include active stewardship, impact investing, ESG integration, portfolio tilting, and decarbonisation. The authors find that the strategies most likely to deliver a real-world impact would breach fiduciary duties. They suggest new mandates to signatories of the NZAMI to accelerate climate change action while being compatible with the fiduciary duties of the signatories.

Net zero alignment of investment strategies

The authors scrutinise several strategies by reference to common investment themes, such as ESG and impact investing. They analyse factors such as climate change developments, market economics, and regulation. The authors recommend that service providers and investors create meaningful communication around climate policy to reduce long-term risks. The report indicates that none of the evaluated strategies, including decarbonisation, are capable of delivering an aggregate impact on reducing carbon emissions. Therefore, the authors suggest various modes of alignment to attain net-zero carbon emissions by 2050.

Climate scenarios and fiduciary duty

In this section, the authors outline how the fiduciary duties of investors and corporate boards interrelate when addressing climate change. They examine the duties of asset managers, focusing on those of the Net Zero Asset Manager Initiative (NZAMI). The authors argue that fiduciary concerns will arise if the strategies commit to delivering real-world changes in carbon emissions. Additionally, many asset managers will conclude that such strategies are not in line with their fiduciary duty without explicit client consent. The authors suggest redrafting the NZAMI commitments to maximise the initiative’s impact on climate change while remaining consistent with the fiduciary duties of asset managers.

Conclusion

The report concludes by emphasising that asset managers will encounter difficulties balancing their fiduciary duties with a commitment to climate change. The strategies most likely to deliver a real-world impact are also the most likely to contravene fiduciary duties. Further, even if the strategies are not in violation of fiduciary duties, misinterpretation could lead to legal disputes. Therefore, the authors suggest new mandates to signatories of the NZAMI to accelerate climate change action while being compatible with the fiduciary duties of the signatories.