London | The kerfuffle over whether Prime Minister Scott Morrison would manage to secure a speaking slot at the UN’s climate ambition summit this past weekend probably overshadowed the fact that not every slot went to a budding green political leader.
The funds management industry got a few minutes in the sun, led by Legal & General Investment Management, Zurich Insurance and the Institutional Investors Group on Climate Change.
The IGCC used its slot to spruik a new initiative it co-launched on Friday, called Net Zero Asset Managers – a starting line-up of 30 big players with $US9 trillion ($12 trillion) under management, among whom the Australian presence is IFM Investors.
They are prepared to go where Morrison seems reluctant to tread: setting strict targets for “the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner”.
Once BlackRock announced its commitment to climate-driven investing in January, the issue of environmental, sustainability and governance (ESG) principles hit the funds-management mainstream this year.
So there isn’t much in the Net Zero Asset Managers’ 10-point plan that comes as a surprise: reshape portfolios; encourage clients into climate-friendly investment products; use their shareholdings to push companies; and report progress using Task Force on Climate-related Financial Disclosures (TCFD) benchmarks.
The question, as always, is exactly how these broad commitments play out in practice, in the markets.
This year, the headline has been all about divestment – led by BlackRock’s jettisoning of thermal coal in its actively managed portfolios.
Many fund managers are sceptical of blanket divestment, saying it tars the reforming companies with the same brush as the unrepentant.
“The idea that you are enabling a positive change for the world by excluding oil or cement … all you do is push them into the hands of private equity, who don’t have to disclose at the same level of detail,” says London-based Janus Henderson portfolio manager Tom O’Hara.
The Net Zero crew are themselves wary of rushing into divestment. The initiative’s website says “engagement and stewardship are key levers … and may have more impact on real economy emissions than simply divesting”.
You could argue 2020 has been an easy year to be ESG. The cycle was such that cutting exposure to many carbon-intensive stocks and sectors made sense purely from an investment perspective. But if the rotation away from growth picks up in 2021, investors could be tempted to get dirty.
“Oil is still a big part of the index, industrials is still a big part, materials, chemicals, steel, all these things. You’re going to have to start owning these things in order to protect your portfolio and deliver performance,” O’Hara says.
“That will be a real test of just how far we have gone in this ESG journey: whether it is going to dictate everything, or whether it was a convenient argument in a cyclical downturn in 2020.”
Nick Kirrage, a London-based value manager at Schroders, reckons it’s possible to have it both ways.
“There is an ESG thing: we believe business models are going to change, things will be different in the future. But that’s not inconsistent with still buying oil and gas when it’s gone down by 70 per cent,” he says.
In his view, there’s no escaping that oil and gas will still be in demand for the foreseeable future – so the trick is to own the producers who “can also be part of the solution, not just part of the problem”.
The European oil and gas majors such as Shell, Total, Equinor and BP, with their push into renewables and their green sheen, are evidently punting on their shareholders taking this approach.
Australia’s Santos and Woodside, though, said last week that in effect they’re prioritising returns over renewables. Investors may accommodate that, or there may be a bit of “stewardship and engagement” heading their way.
Ned Bell, chief investment officer at Bell Asset Management, says the trend in 2021 might shift from negative screening of the carbon-heavy to a positive embrace of the transition leaders. And since there aren’t really many names that get top-notch ESG ratings, he reckons there could be a pile-on to match the tech scramble of 2020.
“Like you’ve seen huge premiumisation in large-cap growth stocks in the US, I think you’ll start to see that in terms of those crème-de-la-crème ESG companies over next 12 to 18 months.”
Presumably many fund managers will be relying on ESG ratings from the increasing panoply of private providers. These throw up quite inconsistent results, making it hard to use them as an anchor for investment decisions.
O’Hara hopes the European Union, of all things, might be the solution to this. They have been developing the blandly named Green Taxonomy, which will assign pretty detailed, rigorous – and mandatory – sustainability ratings to a company’s revenues and capital expenditure.
The EU’s track record on financial regulation is mixed, as O’Hara concedes, but he hopes it might take the ESG debate in a more informed, intelligent direction. “I’m hoping we see a more pragmatic approach to ESG rather than this more blanket avoidance stuff.”