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More and more institutional investors, including insurers, are pledging formal commitments to net zero emissions, according to a new white paper, “Net-Zero Investment”, issued by Cerulli Associates, the Boston-based research firm.
The report showed that US institutional investor could be risking competitiveness by being left behind in a global swing way from emissions.
However, there were huge disparities between three of the world’s largest economic regions with Europe and Asia both far ahead of a lagging USA.
In July 2021, eight of the world’s largest insurance and reinsurance firms launched a net zero alliance, which quickly gained more members.
“Institutions’ reporting requirements have become more
stringent across Europe, Asia, and the US.”
The asset owners surveyed by Cerulli, which included insurers, are being driven by factors such as legislation, including the EU’s Sustainable Finance Disclosures Regulation (SFDR).
According to the report, 43% of asset owners in Europe have made public pledges on their net zero targets, while 44% in Asia have, and a far lower 32% in the US. “As they implement measures to achieve this commitment, [asset owners] will increasingly evaluate portfolio-level metrics,” says Cerulli in their report.
The paper said the rise in net zero pledges was being driven by the legislation. “Institutions’ reporting requirements have become more stringent across Europe, Asia, and the US as they aim to ensure they have sufficient data to report to their stakeholders,” they explained.
For example, in Europe, approximately 80% of institutional investors now request data on their exposure to energy transition risks and physical climate risks and 61% request the carbon footprint of their portfolios. This means that Europe-based insurers must be familiar and compliant with all ESG and sustainability-related goals.
Whilst behind in levels of commitments, an increasing number of US-based asset owners were offering panning to embed climate risk into mandates - despite a lower level of public pledges to net zero; 38% of US firms require climate risk reporting from managers and 34% plan to within the next two years. Currently, US financial services firms have a reputation for being behind the curve on sustainability and net zero guidance though this is changing.
In Asia, portfolio-level exposure to climate risks was at 69% and security-level exposure to climate risk at 74%. Scenario testing metrics for climate change was recorded at 57% and will be the most requested by asset owners in the next two years, says Cerulli.
One of the most significant ways the net zero goals will be highlighted in coming years will be in reporting and disclosure requirements – some of which will stem from the SFDR legislation.
“Large insurers, especially those in France, already are modelling
carbon emission trajectories across their investments."
Cerulli’s research indicates that institutional investors throughout Europe will be increasingly looking to partner with asset managers with strong expertise in climate risk assessment and reporting. “Such tools will be highly sought after by European institutional investors that are increasingly focused on scenario analysis and stress testing. Over the next 12 to 24 months, asset managers should anticipate a strong uptick in interest in measuring portfolio temperatures,” they said.
The greatest demand for such solutions will come from insurers in France, the Nordics, Benelux, and the UK. “Large insurers, especially those in France, already are modelling carbon emission trajectories across their investments,” they added.
These countries have some of the most fast-moving reporting and standards legislation domestically as well as EU legislation and a variety of other policies to combat emissions.
The paper said the US market was sustainability newer and less developed than other regions, which could be down to political pressure that could heed more private investment being lacking during the Trump presidency.
In the US institutional market, net zero stakeholder pressure comes from a combination of sources, Cerulli said. For asset managers, asset owners (57%), competitive/peer pressure (39%), and NGOs and advocacy groups (35%) are the primary drivers.
Institutional asset owners, meanwhile, cite pressure to commit to net zero from investment committees (51%), employees (45%), and NGOs/advocacy groups (27%). More than half of asset managers polled that have a net-zero commitment are signatories of the Net Zero Asset Managers Initiative (57%) and Climate Action 100+ (54%).
Currently, 59% of US-based asset owners allocate less than 25% of their total portfolios to responsible investment products.
However, this rate is changing, the report said. In 1Q 2022, the US Securities and Exchange Commission (SEC) proposed new requirements for public companies to provide direct and indirect GHG emissions data to investors under the guidelines of the GHG Protocol (Scopes 1, 2, and 3). Much like in Europe, legislation could match public appetite and push the corporates to change.
President Joe Biden has also promised more legislation to attain net zero goals. The passage of August 2022’s Climate Change bill could also see more pressure.
“Sustainable investing and divestment from fossil fuels often is done in
conjunction with active ownership activities such as investor/investee dialogue."
According to the report, 46% of surveyed asset owners in Asia had excluded fossil fuels from their investments. “Moreover, asset owners and asset managers may seek to engage with investee companies, instead of divesting from them,” said the report. “Sustainable investing and divestment from fossil fuels often is done in conjunction with active ownership activities such as investor/investee dialogue, paying heed to social implications of decarbonisation and divestment."
On top of this major investors pointed to the importance of having a holistic transition strategy in place.
Insurance investors could be a key marker in seeing pressure for more companies to pledge net zero. The report pushed divestment and active engagement strategies as the next chapter in net zero pledges with expectations there would be more emphasis on this process, and “sin companies” in the coming years.
