The challenge for asset managers in the climate crisis
For all the wrangling over targets and commitments at COP26 in Glasgow, one thing is clear: The transition to a net zero economy will require vast investment over the next few decades – and the asset management industry will be responsible for much of it.
The financial sector may not be the solution to climate change, but it might be the agent of change. Our task will be to deliver capital to the companies, the projects, the innovations that we identify as the best placed to support and profit from that transition. It will be a collective effort with our institutional clients, and alongside governments, regulators, corporations, banks and individuals.
Public policy will form the backdrop for our efforts, but we cannot sit back and wait for governments to bring us the solution: The common good is our common responsibility. And in that common effort, asset managers will put to work the power of some $100 trillion1 .
Aspirations and action
Our collective power comes from the ability to decide whether to allocate or withhold that capital. It comes from skilful engagement to drive management decision-making and from partnering with our clients to understand and influence this new era. In this way, we believe we can support the development of a sustainable global economy that will allow us all to thrive into the second half of this century.
It is clearly right to have such noble ambitions – and to express them. But what is crucial right now is the integrity of our commitment.
For companies and asset managers alike, we all understand the importance of this. We all want to set ourselves challenging targets. We all want to show the world we are bold pioneers on the road to net zero. But that aspiration has been the source of negative headlines.
Corporations are accused of ‘greenwashing’, of getting their marketing machine in order before their operations have caught up. The asset management sector runs similar risks, and this creates two clear problems:
First, if our investee companies think we only talk about environmental, social and governance (ESG) issues for PR purposes, or in response to regulation, then it significantly reduces the power of our engagement with those firms. As active, responsible investors, our legitimacy in discussions with executives is crucial.
Second, if our clients, the asset owners, are left doubtful about the value of ESG integration and impact investing, then not enough money will be directed into these strategies. That will mean that not enough differentiation is made in the cost of capital between the best and worst behaving companies. And that risks slowing, or even derailing, our collective efforts.
The question then is: How do we make sure this doesn’t happen? Put simply, bravery and transparency.
Asset managers need to show the world that we are serious about creating real change – and be clear about the reasons why. We must be open about our responsible investment objectives and about the impact our conviction has on things like stock selection and asset allocation. And we must provide good arguments, anchored in the transition mindset, when we decide that a greenhouse gas emitting business should remain in our portfolios.
This is a fundamental consideration. If we are to continue providing investment products that will deliver returns – that will pay pensions – through the coming years, asset managers and their clients cannot, en masse, dump every business that produces a kilo of CO2. Not only that, but not every trustee will be comfortable leaping from the cosy world of traditional utilities or transport, to the bleeding edge of renewables start-ups.
The pace of change must be sensitively managed, the best-in-class companies rewarded, transitioning companies supported, and our rationale clearly communicated. Yes, we will provide the capital that brings a new cohort of net-zero-aligned businesses to scale, but we will also fund the visionary incumbents determined to adapt.
Asset managers should also show courage in our engagement with companies. We should demonstrate a proactive, objective record on the levers we can use, such as voting, to influence corporate decision-making around climate change. We should move quickly to detail candidly every engagement we make as soon as is practical – our goals, our successes, and our failures too.
We must also be clear on one very important belief: That following a more sustainable investment approach – one that addresses the significant risks of climate change – will deliver stronger and more resilient financial returns over the years and decades to come.
This underpins the asset management case for responsible investment. We are not ‘saving the planet’: It will carry on spinning happily long after we are gone. This is about protecting and rebuilding our civilisations and our economies. Ecological sense has never made more financial sense: We are, in the truest sense, investing in our long-term future.
That principle, however, bumps up against our human instinct. It sometimes appears we are hard-wired to seek short-term gain while being blind to more distant horizons. Our conviction must be to build for long-term prosperity by addressing long-term challenges, rather than focusing all our energies on next quarter’s percentage return.
This is at the heart of AXA IM’s thinking around sustainable asset management. The desire to arrive at that distant horizon with a world still worth living in.
This is the moment to act
In practical terms this requires asset managers to be decisive – to be truly ‘active’. It means engaging the biggest emitters to force them to change – and to divest if they refuse or go too slow. It means financing the transition for companies that are committed to building more sustainable operating models. It means using and developing tools around ESG to pinpoint risks and opportunities. And, it means asset managers taking the lead, because we need an industry-wide push to be most effective.
Our industry needs major investors who are committed to this right now, working to build a genuine and powerful narrative that takes the messages from our glossy brochures and puts them profitably to work in the portfolios of our clients.
Yes, the risk of greenwashing is real. But while we are right to closely scrutinise corporate commitments (and take care with our own), we must not end up anchored by inertia as the tide rolls in. Ecological sense has never made more financial sense – and the asset management sector has the scale to help build a new sustainable framework for the global economy. Every time we put our clients’ capital to work, we should ensure we are doing so with our eyes on a future where we can all prosper.