The biggest investors in the US are ramping up their climate commitments, including net-zero pledges, data from research company Cerulli Associates shows.
Nonetheless, the country severely lags other markets globally when it comes to investment goals on environmental issues, according to the paper, Net-Zero Investment, published this week.
Nearly a third of US institutional asset owners have formal net-zero commitments, and another 29% indicated they have plans to add them within two years, the report found. To compare, 43% of European institutional asset owners have such commitments, and an additional 49% plan to add them. In Asia, the figures are 44% and 31%.
Regardless, the rate of adoption within the US is likely encouraging, as most institutional investors have only recently dabbled in sustainable products. Last year, 78% of those investors said they have had sustainable investments in their portfolios for less than a decade, with 62% having added them within the past five years, according to Cerulli.
A must have
“We’ve been hearing a lot from investment consultants, and clients are asking a lot more in the requests for proposals about climate,” said David Fletcher, associate director of editorial at Cerulli. “Any investment manager needs to have answers and pretty robust data to reply.”
And increasingly, asset managers are being pressured by their biggest customers to include net-zero strategies – with 57% of managers saying institutional asset owners are the primary driver of that demand, the report found.
However, industry competition is also a big motivator, with 39% of managers saying pressure to offer net-zero strategies comes from a need to do what their peers are doing. Further, more than a third also said that non-governmental organizations have played a role in getting them to explore net-zero commitments.
Meanwhile, the pressure for institutions to have net-zero commitments comes mostly from investment committees and boards (51%), employees within the organization (45%) and NGOs or advocacy groups (27%).
“Given the severity of the risk and impact that it can have on the portfolio, I would say that those are first and foremost why they are [adding net-zero commitments],” said Michele Giuditta, director of US institutional at Cerulli.
“From conversations that I’ve had with asset managers and asset owners, it’s still very much a work in progress, and they are still early on in their commitments and learning as they go.”
Different approaches
What “net zero” really means differs among asset managers. Recent reporting by ESG Clarity found that 55% of signatories to the Net Zero Asset Managers Initiative do not use Scope 3 emissions in setting or evaluating their net zero targets. Another 35% use Scope 3 at least somewhat, but only 11% said they use it definitively.
Most signatories to the initiative also don’t commit their full portfolios to net zero. Only 24% of firms do so, and that is most common among smaller asset managers, or those with $10bn in assets under management or less.
See also: – ESG Clarity’s Net Zero Database
Broadly, asset managers appear to be more on top of carbon reporting or their portfolios than institutional investors, at least in the US. Seventy-nine percent of firms have some gauge of the carbon footprints of their portfolios, with the same is true among just 46% of institutions, according to Cerulli. However, about a third of both managers and institutions measure their exposure to physical climate risk and energy transition risk.
Relatively few – 18% of managers and 24% of institutions – have their portfolios in built around a 2 degree C global temperature increase scenario, the survey found.
Among European firms, 88% measure carbon in their portfolios, while 61% of institutions do the same. And while just 29% of managers said they track exposure to climate and energy risks, 80% of institutions do. Additionally, 44% of institutions and 29% of managers align investments with the 2 degree C scenario.
Going forward
When it comes to sustainable investing, “there’s always going to be some looming skepticism,” Fletcher said. “The data in this report shows there is some reason for hope. This is real.”
Data for Cerulli’s report came from two surveys conducted last year. One had responses from 74 global asset managers that use at least one method of responsible investing, including some firms that specialize in ESG. The other survey included about 200 institutional asset owners, such as pensions, endowments and foundations, which had assets ranging from several million dollars to well over $1bn.
Cerulli is currently holding an updated survey, Giuditta said.
Given the momentum on climate action in the US, it would not be surprising to see interest in sustainable investing grow, she said.
“A major development that just took place on Sunday, with the [Senate] passage of the Inflation Reduction Act,” she said. “Greater than $300bn in assets will go to clean energy initiatives … That’s the biggest achievement, if passed, that the US has seen. It only confirms that progress is being made.”
