Practical analysis for investment professionals
02 November 2022

Asset Owners “COP” In on Climate Change

The UN Framework on Climate Change (UNFCC) is set to convene the 27th annual Conference of the Parties, commonly known as COP27, in Sharm el-Sheikh, Egypt, next week. The goal is to assess global progress in addressing and mitigating the impacts of climate change, and myriad voices will seek to influence the dialogue.

The global asset owner community will lend a strong and influential set of voices to the proceedings. This group, comprised of pension funds, sovereign wealth funds, foundations, and endowments, is increasingly engaged and outspoken around environmental, social, and governance (ESG) issues. And the top 100 asset owners control $23.5 trillion in assets as of 2020, according to Willis Towers Watson, so they stand a good chance of being heard.

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The Voice of the Asset Owner

Roger Urwin of Willis Towers Watson’s Thinking Ahead Institute believes asset owners have critical roles to play in the global climate change debate.

“Their allocations, ownership muscle and trickle-down influence will be important in opening the door to net zero pathways,” he said. “The [2021] Glasgow COP summit has highlighted how asset owners can work together as part of a wider collaboration framework to produce better long-term outcomes for the whole system.”

As a group, asset owners take ESG and climate change very seriously. In fact, according to our first Morningstar Voice of the Asset Owner Survey, fielded in August, 85% of asset owners believe ESG is “very” or “fairly” material to investment policy, with 70% saying it has become more material in the past five years.

Our survey sought to understand asset owners’ opinions and attitudes on investment policies, current investment trends, the impact of regulatory change, key stakeholders and influencers, and, importantly, the role that ESG plays in investment decisions. The findings are instructive as COP27 approaches and we consider how asset owners can bring their influence to bear on this important topic.

Surveyed asset owners are pushing for constructive change around ESG and climate on multiple fronts. For example, most respondents felt that ESG ratings, indexes, data, and tools have become either “a lot” or “somewhat” better in the past five years. But they expect continued improvement to be initiated by governments, rating agencies, standard-setting bodies, service providers, and markets. In other words, asset owners are looking for an array of key participants across the ESG ecosystem to drive change.

When it comes to implementing ESG policies, about 40% of the asset owners surveyed use external asset managers, presumably outsourcing important elements of their investment policies, such as proxy voting. More than two-thirds say stewardship is a “somewhat” or “very” significant part of their ESG program, including both direct and collaborative engagement.

Asset owners generally view regulation of ESG as beneficial for addressing greenwashing through greater transparency, more enforcement, and better regulation. In addition, nearly three-quarters expressed support for regulations intended to achieve specific sustainability objectives.

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Words into Action

While advancing public debate on ESG is important, asset owners have proven time and again that actions speak louder than words. They have been instrumental in developing ESG practices over the past several decades, often filling the void created by the absence of effective public policy, engaging on their own and collaboratively through initiatives like Climate Action 100+.

Asset owners were among the first investors to request disclosure on company sustainability issues, signaling that ESG matters for their investment decisions. They have used their influence to engage with companies on such environmental issues as carbon emissions, waste management, and pollution as well as social issues encompassing management and board diversity, fair labor practices and treatment of indigenous peoples, and corporate governance best practices.

COP26 led to the creation of the Glasgow Financial Alliance for Net Zero (GFANZ), an umbrella organization made up of separate alliances for asset owners, asset managers, banking, insurance, consultants, and financial service providers.* Realizing GFANZ’s promise will depend on financing from the large asset owners that expressed a favorable stance on regulation targeting specific objectives like “net zero by 2050” in our survey. The agenda at COP27 will emphasize financing the transition to a low-carbon economy. Commitments by banks to reduce financed emissions have become a contentious topic in the United States where companies and asset managers are already under scrutiny from politicians for their support of ESG investing. With reports that banks are balking at their commitments in this area, asset owners are pushing back. This illustrates the challenges of managing for net zero amid energy market volatility, geopolitical turmoil, and political polarization, but it is consistent with our survey findings that energy management and greenhouse gas emissions are the most material ESG issues for asset owners.

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Tackling a “Wicked Problem”

The Conference of the Parties, or COP, has been coming together for over a quarter century to assess global progress in countering climate change. These ambitious proceedings aim to secure voluntary national commitments on carbon reductions and financing as well as follow-through and progress reports. They reflect the challenge of collective action in the face of an inherently complex and difficult-to-solve “wicked problem” like climate change, which features tensions between the developing and developed worlds about burdens, costs, and equity. It is a problem that requires influential, steady, and honest voices to drive the debate forward through words as well as actions.

The global asset owner community is one of these important voices.

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* For full disclosure, Morningstar Inc. is committed to be net zero by 2050 and actively participates in the Indexes and Research & Data workstreams of the Net Zero Financial Service Providers Alliance (NZFSPA).

All posts are the opinion of the author and of the speakers quoted or discussed. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/ioanna_alexa

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About the Author(s)
Thomas Kuh, PhD

Thomas Kuh, PhD, is Head of ESG Strategy at Morningstar Indexes, a newly created role to advance Morningstar’s global ESG strategy and accelerate its growth in the index market. An experienced leader with over 30 years in sustainable investing, he is a pioneer in ESG indexing. Kuh was the first Global Head of ESG Indexes at MSCI, where he spearheaded the launch of low carbon indexes and initiated the collaboration with Bloomberg Barclays to develop the first suite of ESG fixed-income indexes. More recently, he was Head of Index at Truvalue Labs, integrating real-time ESG signals from unstructured data into index design. Earlier in his career, Kuh was Managing Director of Indexes at KLD Research & Analytics, creator of the first ESG index, where he collaborated with BGI on the launch of the first ESG ETFs. He was also Head of Indexes at RiskMetrics Group prior to its acquisition by MSCI and is founder and president of Benchmark ESG Consulting LLC. Kuh is on the Advisory Board of the Journal of Impact and ESG Investing. He was a director of Sustainable Investment Research International Company (predecessor of Morningstar Sustainalytics) from 2004 to 2009. He served on the board of directors of the US SIF, the industry trade organization for sustainable investors in the United States from 2000 to 2006.

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