Partnering for Impact: Institutional Investors and the Net-Zero Transition
Brian Minns, CFA, will speak at the Climate Risk and Returns Conference from CFA Institute, held 20–21 April 2023 in New York City.
Partnerships among institutional investors are crucial to achieving a low-carbon economy.
As institutional investors, we have a fiduciary duty to act in our beneficiaries’ best interests and earn sufficient investment returns to meet their expectations. To achieve this, we also need to ensure there are stable financial, social, and environmental systems on which to build those returns.
At University Pension Plan (UPP), we believe promoting healthy systems goes hand in hand with our fiduciary duty to our members. That’s why, when we developed our response to climate change and our net-zero approach, we set our sights beyond our own portfolio, because we know that emissions must also decline in the real world and that a well-managed, low-carbon transition requires systemic change from all corners of the global economy.
The net-zero transition also presents opportunities for investors — institutional and otherwise — to build confidence, resilience, and competitiveness in the wider economy through profitably financing activities that support sustainable solutions and lower emissions.
By contributing to collaborative initiatives with the global investing community, investors create reciprocal relationships through which we can share expertise and best practices, leverage resources, and amplify our influence to create the change we need. In this way, we can reduce uncertainty and risk and maximize our return-generating potential.
Such collaborative effort among asset owners is one of the most effective means for organizations like ours to catalyze systemic change and carry out our shared fiduciary duty.
Systemic Risk Requires Collective Action
When investors directly engage and set expectations for both the companies they own and the external managers they partner with, we help keep these firms focused on the transition pathway, on improving their resiliency and lowering emissions. Investors also need companies to improve their climate-related disclosures to better track their progress toward net-zero goals and make more informed investment decisions.
Such finance-led groups as Climate Action 100+ and the Institutional Investors Group on Climate Change (IIGCC) work to ensure sound science, alignment, and consistency across all member activities. By engaging with various high-emissions companies through a common set of objectives, we are working not only to change their behavior but also to improve climate-related expectations and the structure of information flows for all companies and investors.
Collective Advocacy to Protect and Enhance Value
Through collective advocacy with policymakers and regulators, investors can encourage rules and frameworks that support the interests of our beneficiaries and create the conditions for a well-managed climate transition. Investors can collaborate and amplify their voices through such well-established industry initiatives as the UN-convened Net-Zero Asset Owner Alliance (NZAOA), a member organization composed of 85 institutional investors with more than US$11 trillion in assets under management (AUM), and the Ceres Investor Network on Climate Risk and Sustainability, which collectively represents more than 220 investors and in excess of US$60 trillion AUM.
Through our participation in policy working groups, such as those convened by the Canadian Coalition for Good Governance and the Responsible Investment Association, we can define and promote good corporate governance practices in Canada and around the world. We can also influence public policy to improve governance standards. More transparency, accountability, and disclosure, in turn, help manage risk and protect the value of investments.
Partnership in Times of Change Makes the Collective Stronger
As domestic and international climate transition regulations and incentive frameworks evolve, investors face new legal and reputational risks as well as potential impacts on returns. Rather than navigating this evolving landscape alone, they can join investor alliances and help coordinate policy advocacy, facilitate improved knowledge sharing, and mitigate old and new risks.
For example, to counteract greenwashing and provide investors with more and better information to help guide their decisions, the International Sustainability Standards Board (ISSB) will implement new global accounting standards for measuring and reporting climate-related impacts in January 2024. Collaborative investor groups contributed to the development of these new standards and stand ready to support their launch around the world. Once again, individual investors would be hard pressed to keep up with the rapid pace of change in this area or to develop the collective influence that a group of investors can muster.
There are many options to join with like-minded investors in local markets or on the international stage. The global low-carbon transition will continue to pose a challenge for all types of investors and present both risk and opportunity along the way. Net zero won’t be achieved in isolation but will take collective action throughout the financial community.
Together, through partnerships among institutional investors and investors of all sizes, we can help shape the future of finance and bring about the systemic, global change required to make net zero a reality.
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All posts are the opinion of the author. 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.
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1 thought on “Partnering for Impact: Institutional Investors and the Net-Zero Transition”
Thank you, Brian. This among the clearest discussions of this issue I have seen. I do have two questions, based on my experience as an asset allocator and public pension trustee:
How do Boards and sponsors translate their goals (net zero, for example) into actionable benchmarks and compensation schemes for CIOs and investment staffs? How should they keep score ex-post to verify outcomes?
Your discussion recognizes the important political aspects of driving the energy transition (“collective advocacy with policy makers and regulators”). How far should/can asset owners dive into politics? Isn’t collective action among asset owners effectively political? These are of course more relevant questions from a U.S. perspective, but climate action won’t achieve much without active participation from the United States.