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.

Meanwhile, the UN-convened Net Zero Asset Owner Alliance includes institutional investors representing more than $5trn of assets, who are committing portfolios with net zero greenhouse gas emissions by 2050. This means aligning portfolios with a 1.5^oC warming scenario in keeping with the Paris Agreement.

The Alliance has initiated an Inaugural Target Setting Protocol, which requires companies to set out interim emissions targets for their portfolios for 2025.

The aim is for some of the world's biggest investors to publicly release "transparent, rigorous and realistic targets and then commit to report against them in the next four years".

The hope is that such short-term targets will force investors to ramp up both their engagement efforts and their divestment strategies. More broadly, there are signs that both long term and short-term targets are shaping investment strategies.

As ClimateWise noted in 2020: "At least 65 insurers had adopted some form of coal divestment policies."

Meanwhile, scores of banks have adopted similar policies in recent years, pledging to end financing for coal, tar sands, and Arctic oil projects.

However, Robert Howard, senior compliance manager at Charles Stanley, sees distinct challenges facing institutional versus retail investors in respect of Net Zero targets.

He says by way of example, that if a bigger financial group is investing in its own portfolios to support its own products, then it will have its own internal teams making decisions on their own investments. That gives more control over being able to state that they intend to be Net Zero by 'date X'.

The retail investment space is a more complex story. A provider may have a 'responsible investing' tab on its public website, including a commitment to reduce emissions by 'x per cent' by 'date x', but how are they reporting this, and how are they being held to a public commitment such as that?

"It is conceivable for a boutique investment firm to make a 2050 pledge now, knowing full well nobody is going to be around in 2050 to check it," Howard counsels.

"It is a great sales opportunity. But greenwashing is a possibility unless firms have actually through it through and actually have a roadmap."

However, Howard acknowledges that the FCA is cognisant of such concerns.

A good approach to take in respect of greenwashing fears is to check what interim targets may have been set for 2030, rather than focusing solely on longer term targets, Howard suggests, given targets set for 2030 may "hold feet to fire".

Portfolio managers may still be in charge at that point, and shareholders are more likely to still be around in nine years' time, and they might not be happy if called out on having failed to sufficiently press companies on their net zero progress.

Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management and task force member in the Data User Group of the TCFD organisation, recalls how the discussion about net zero really took off after the autumn of 2018, and thus is one of the more recent climate-related issues to hit companies and investors.