Industry Voice: Net zero and multi-asset — what the transition means for portfolios

clock • 4 min read
Industry Voice: Net zero and multi-asset — what the transition means for portfolios

Asset owners are no strangers to targets; setting them, managing against them and revising them over time. Now, asset owners and investment managers find themselves having to set new targets and think about replotting their journey. This time they need to consider applying a ‘carbon budget' to target net zero emissions from their assets by 2050 or sooner.

While Schroders has committed to net zero by 2040, asset owners will need to set their own targets, which may be more or less ambitious. In this paper, Schroders seek to outline how we - as multi-asset managers - have thought about the decarbonisation journey from a practical portfolio perspective. We cover four main areas of discussion:

1 Recognise the path is different from the target

Net zero is a target, while decarbonisation is a path. We think it is important to frame portfolio actions in terms of decarbonisation.

The Paris Agreement (a legally binding international treaty on climate change for governments) has a target to limit global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. In order to reach this target, governments and companies alike need to make significant progress to reaching net zero emissions within the next 20 to 30 years, with targets set along the way.

But climate change, and the collective response to it, is nonlinear. Neither is a portfolio's decarbonisation journey.  Asset owners will have differing preferences about the speed at which they would like to get to net zero, considering the trade-offs they might need to make at the portfolio level.

2. Decide what and how to measure

The key measures that asset owners and asset managers will need to calculate are:

  • Carbon emissions (usually in tonnes) of the assets
  • Implied temperature rise of the assets (from the carbon emitted)

Targets are normally set for each e.g. ‘reach net zero carbon emissions by date X' and ‘reach 1.5°C by date Y' and are normally accompanied by interim targets. Each asset owner will need to decide which assets to include in the calculation. We think that all assets should be included, scope 1, 2 and 3 emissions should be considered, and a forward-looking view of implied temperature rises should also be taken.

3. Set a decarbonisation trajectory

In setting a decarbonisation strategy, there is a trade-off between the physical and transition costs of climate change, and the investment integrity of the portfolio. Decarbonising too slowly risks higher physical and transition costs of climate change, while decarbonising too fast risks compromising the investment integrity[1] of a portfolio.

4. Take practical steps to stay on the path and meet the target

There are four tools that asset owners and multi-asset managers can use to decarbonise a portfolio, and we suggest using a combination of them:

  • Disinvest from the assets with the very worst carbon scores which do not have a transition pathway, e.g. pure thermal coal, if permitted by local fiduciary regulation
  • Invest in positive climate solutions, without significantly compromising the integrity of the portfolio where possible
  • Engage with issuers - use TCFD to measure and encourage progress on weak spots
  • Use carbon offsets

 

 

 

This was post was funded by Schroders

 

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 Issued in November 2021 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered in England, No. 1893220. Authorised and regulated by the Financial Conduct Authority. UK003724



[1] By investment integrity, we mean the reason the portfolio exists in the first place. Unless it is a pure philanthropic fund, it is likely to have some financial objectives, and these need to be met.

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