Failure by design: Is the net zero asset managers initiative broken?
This initiative was designed to align asset managers’ portfolios with net-zero targets. However, their methodology lacks standardisation and rigour, leading to ambiguous targets and little progress towards net zero. An overhaul of the initiative is needed to ensure asset managers are held accountable.
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OVERVIEW
The ‘Net Zero Asset Managers Initiative’ (NZAMI) focuses on portfolio emissions and the offloading of climate risks onto companies. However, these measures do not accurately identify the necessary steps for reducing emissions in the real world. The report finds that on average, asset managers have set targets that align just a few percent of their emissions with net zero. To improve alignment, asset managers need to track real-world emissions reductions, and NZAMI needs to provide more rigorous standards and guidelines.
The NZAMI has set forth company transition targets, but there is a difference between being net-zero aligned and net-zero. Asset managers have designed their own initiatives to suit the transition targets, providing little consistency within NZAMI. The report recommends that asset managers commit to more robust and standardised methods and tools such as the ‘Science-Based Targets Initiative’.
NZAMI’s company transition targets require companies to create emission reduction plans while asset managers receive credits for investing in those same companies. The report finds that companies can overestimate their commitment to sustainability, leading to a lack of action towards achieving net zero. Asset managers and regulators need to provide more transparency and clarify who is responsible for emissions reduction targets.
The NZAMI uses various frameworks and approaches to set targets, leading to a lack of consistency in reporting. The report finds that asset managers can pick and choose which goals to adopt, which creates no standardised approach to achieving net zero. To make NZAMI more effective, it is necessary to have transparent standardisation of targets and goals.
PAII has differing methods for setting goals and adhering to targets. It is vital to note that companies’ interim targets are not to be confused with meeting net zero reduction goals. The report recommends that companies need to improve their emission reduction plans to reach their critical goals.
The Science-Based Targets Initiative (SBTi) requires financial institutions to apply their targets to 100% of their listed equity and bonds, which could lead to a higher cost of capital for high-emitting companies. More asset managers need to be transparent in their reporting, including how they are using SBTi’s guidance to support long-term goals and commitments.
The report analyses the commitments of BlackRock, State Street, and Vanguard, which have the most significant influence on climate change policy across the globe. BlackRock has set the most ambitious target, applied to 77% of its assets under management. However, it is unclear how asset managers plan to meet these goals. Asset managers need to adopt a more consistent and standardised approach to meet specific goals and objectives for achieving net zero.
Overall, the report concludes that the current NZAMI methodology lacks standardisation and consistency leading to ambiguous targets and lack of progress towards net zero. Asset managers should commit to more rigorous standards such as ‘SBTi’, track real-world emissions reductions, and provide greater transparency in their reporting. Regulators also need to establish transparent guidelines and standards to achieve a common goal of net zero.