The Net Zero Investment Consultants Initiative’s (NZICI) core objective is for its member organisations to align their advisory services and operations with a 1.5 degrees emissions trajectory, as per the Paris Agreement. But that’s going to be a challenging task, according to members of the alliance, as the 12-strong group must navigate differences in size, geographies, and policy landscapes, across a hugely diverse asset owner client base worth over £8.2trn.
Recalibrating the world’s economy to a low-carbon reality is a highly complex undertaking. According to the Institutional Investors Group on Climate Change (IIGCC) it will require £100trn in climate solutions investment and significant policy changes to meet Paris emissions goals.
Responses and challenges
“It is not easy to make a net-zero commitment,” says co-chair of the UK Investment Consultants Sustainability Working Group (ICSWG), and global head of research at Willis Towers Watson (WTW), Luba Nikulina.
According to Nikulina, NZICI’s nine core commitments instil, at a very high level, the actions consultants are required to take to align with net zero. NZICI’s number one pledge is to “integrate advice on net-zero alignment into all…investment consulting services as soon as practically possible and within two years of making this commitment.”
Consultants like WTW are also tasked with ensuring the asset managers they allocate capital to are integrating climate risks and opportunities into investment decisions (pledge four).
The net-zero mission has created hurdles for some firms, as implementing a policy of this magnitude requires scaling up internal capabilities: “The ability to find time, resources, bandwidth, and capacity is a key challenge for some of our clients,” says Nikulina. “Firms must reprioritise, dedicate efforts to educating themselves, upskill, understand decisions, and then continuously implement them.”
At the top of the investment value chain, a selection of WTW’s more “progressive” institutional clients are prioritising engagement with asset managers, based on underlying assets.
According to Mhairi Gooch, responsible investment consultant at Hymans Robertson, becoming a net-zero adviser is primarily about guiding asset owners to align investment strategies with the net zero world. This means conveying the message that climate change presents the biggest risk to their investment duties.
Gooch explains a consultant’s role goes beyond encouraging pension schemes to meet member benefits to ensure investments are truly sustainable: “The net zero agenda is much broader than reducing emissions.
“Issues such as biodiversity loss, deforestation, and the significant social challenges that accompany this, all feed in. We need to be considering these in our advice to clients for today and for the future.”
Crucially, this involves working with a client’s current position and where they are on their journey today, according to Redington head of stewardship and sustainable investment strategy Paul Lee.
For instance, Lee explains, that while regulatory pressure has forced some larger pension scheme clients to publish Task Force on Climate-Related Financial Disclosures (TCFD)-aligned disclosures, smaller schemes are constrained by capacity.
“Integrating net zero at every level is difficult to deliver in practice. Some schemes lack the capacity to deal with another challenge, so we work to tailor our approach.”
This has caused some pensions consultants to lobby government and regulators to adjust their demands for smaller schemes. Though Lee also hails modest schemes’ ability to be agile, adding that this could play to their favour as regulation on climate persists.
“We encourage our clients to always approach climate through an investment lens, and that has been an adjustment for some,” says Lee. “Net zero must be integrated into existing governance structures and practices, and it is vitally important that it is not a standalone issue.”
Business as usual
Scientists have warned that any other business-as-usual scenario will precipitate catastrophic consequences for the planet. The World Meteorological Organisation in Geneva estimates there is
a 50 per cent chance average global temperatures will temporarily rise to 1.5 degrees above pre-industrial levels for one of the next five years.
“It is not just about plotting a path,” says Gooch. “Companies have to offer credible plans, based on realistic approaches, and include science-based targets that factor in social aspects such as pivoting workforces and providing good work for stakeholders.”
Gooch explains that for asset owners, change has to include that real-world aspect. Removing all the worst emitters from a portfolio is not enough.Engagement and allocating capital to drive change and manage risk and return needs are crucial. “All this has to be carried out through a just transition lens,” she says. Here, ‘just transition’ refers to the framework of encompassing social interventions required for climate – securing workers’ rights and livelihoods while transitioning to a low-carbon world.
Collaboration over competition
With so many international working groups and investor initiatives dedicated to climate change, it is clear that such a major goal will require collaboration and a concerted effort across society. This emphasis on collaboration is part of what makes ESG investing so novel, according to Cardano deputy chief investment officer Keith Guthrie who points to how different this is to previous economic environments driven by traditional absolute return mandates. Guthrie says that consensus across investor bases is key to the net-zero agenda, as is a degree of commonality across standards and approaches.
“Companies are much more likely to respond in a positive way if 80 per cent of their investors are requesting the same thing,” says Guthrie. “If businesses are receiving 30 different messages from different parties that will act as a barrier. Needless to say, investors should have their own policies and voting mechanisms in place, but they should all be signed up to common standards.”
In agreement is Progeny financial planner Richard Gilliam, who points out initiatives like NZICI aim to bring collaboration to the industry’s transition: “This is underpinned by the thinking that firms cannot be net zero in isolation.”
The time to act is now
While the £106trn Glasgow Financial Alliance for Net Zero (GFANZ) has faced criticism from climate groups over its inaction, with the recently-launched Oil and Gas Policy Tracker (OGPT) revealing many GFANZ members had failed to implement an oil and gas policy, despite commitments, Nikulina emphasises its power in moving the needle on advice and elevating the voice of asset owners.
She explains that consultants play a key role in connecting and aligning the pledges of the Net Zero Asset Owners Alliance (NZAOA) and the Net Zero Asset Managers Initiative (NZAMI), for instance.
“Asset owners are ultimately allocators of capital. They have the power to shift private capital towards real systemic change,” she says. “Duty to act lies with businesses and asset managers.”
While there is certainly action at the top of the investment value chain, with asset owners complying with TCFD requirements and making net-zero pledges, data is still failing to filter through from underlying businesses and assets, in a standardised way.
The potential role for the International Sustainability Standards Board (ISSB) to play here is significant, according to Nikulina. The ISSB recently launched a consultation on its first two proposed standards in March. One details general sustainability disclosure requirements, and the other climate-related disclosure requirements.
According to Guthrie, achieving an orderly transition will be one of the more significant challenges over the next 10 years: “These [targets] are very stretching objectives to meet in the real-world economy. Decarbonising the economy by 50 per cent by 2030 is going to require significant change in every single sector.
“An aspect of concern for me is that we need to shift the focus away from headline carbon emissions metrics, and towards real, forward-looking change which encompasses both metrics and measures.”