What does delivering a net zero investment portfolio actually entail?

Perils of merging science, social policy and company interests

How difficult is it to achieve a net zero investment portfolio? On the face of it, the trend is favourable.

A key point of note for the IA, which represents investment managers collectively managing some £8.5trn of assets, is that it then sees global investor initiatives and coalitions of investors as being increasingly important in then delivering results.

It points to the likes of Climate Action 100+ and the Institutional Investors Group on Climate Change (IIGCC) as playing a critical role in getting companies to align with Paris Agreement goals.

Making the call

Having access to improved data allows investors to make a call about how to transition their portfolios towards net zero emissions: Should they divest of polluting assets? Should they engage with all the companies in their portfolio to encourage them to develop their own net zero strategies? What is the balance between the two approaches and what point should an investor exit a company that fails to take steps to curb its emissions?

These are the crucial questions that will shape an investors net zero strategy. But as the IA also outlines in its report ultimately ambitious economy-wide efforts are also required if net zero portfolios are to become commonplace.

The group delivers a sort of wishlist of broader economy-wide priorities required for the UK to hit its 2050 Net Zero target, including action on heating and cooling buildings; carbon capture and storage; electric vehicles; low-carbon power generation and supply; increasing forest cover; changing fuel taxation regarding heavy goods vehicles; and removal of fossil fuel subsidies.

How are investors responding?

There is no question levels of engagement with the net zero agenda are hugely varied, leaving investors to ponder how best to effect the changes needed to avoid climate catastrophe.

Consider, for example, the sheer number of companies represented across the ubiquitous Global Industry Classification Standard, GICS, sectors used by portfolio managers to define their investment universes and construct their investment portfolios.

Each of those sectors could be hit in different ways by measures and actions required to deliver net zero emissions.

And since Net Zero is about the future, consider the challenge facing portfolio managers relying on the equally ubiquitous MSCI Emerging Market index; where the index maker has already charted a path towards greater exposure to China in future.

Funds using this benchmark, or tracking it, will need to adjust accordingly, and ensure the companies in scope of this changing universe are sufficiently adept at providing the climate-related risk data that they need to make investment decisions.

Still, advances are occurring. 

For example, in the insurance sector members of the influential ClimateWise initiative are increasingly communicating their beliefs and strategies on climate-related issues to customers and clients.

Members are developing and revising policy statements with associated communication campaigns to support portfolio alignment targets with a view to transitioning investment portfolios to net zero emissions by 2050 or sooner.

A key objective is to make insurance customers more resilient to the related downsides of climate change; flooding, wildfires and hurricanes among them. Teaching customers how to manage this type of risk better themselves is better for insurers too.