Asset managers explore new paths to carbon neutrality
The push to reduce carbon emissions is taking a new direction in the asset management industry, with fund managers experimenting with new ways for investors to buy their funds without increasing the size of their carbon footprint.
Last week, an innovative ‘carbon-neutral’ share class was launched by French asset manager VIA AM, in order to compensate for the greenhouse emissions of companies in its portfolio through carbon offsetting.
Carbon-neutral shares are available for its flagship European strategy, the VIA Smart-Equity Europe fund, but the firm says it may look to launch similar share classes across its other equity products.
“We are convinced that offsetting GHG emissions makes a lot of sense and is an objective way to address global warming while preserving the long-term performance potential for investors,” says Laurent Pla, founding partner of VIA AM.
“We do expect to raise significant AuM, but we also need to ensure that investors find these approaches compelling. If investors become more focused on investing via carbon-neutral share classes, then we will certainly propose that clients invested in traditional classes switch to carbon-neutral classes. And to satisfy any demand, we would launch similar share classes for the other Smart Equity funds within our fund group.”
A number of carbon-neutral funds have been launched in the past few years, with prominent examples including AllianceBernstein’s Green Managed Volatility Equities fund and BNP Paribas subsidiary Theam’s Quant World Climate Carbon Offset Plan.
Asset managers are increasingly recognising their role in combatting climate change, with environmental-focused coalitions like Net Zero Asset Managers now representing over a third of global assets under management. The world’s largest asset managers including BlackRock, Vanguard, and Invesco have put their weight behind the movement, pledging to become reach net zero carbon emissions by 2050.
At the same time, investor demand for ESG funds is skyrocketing. PwC, the professional services firm, predicts that the share of European assets held in ESG investments could nearly quadruple from 15 per cent in 2020 to 57 per cent by 2025, outstripping traditional investment products.
Pla says that in the past, VIA AM had to “weigh client returns with good intentions” when it came to incorporating ESG in its investing.
“As systematic managers who like the truth of numbers, we believe that another way to integrate a strong ESG dimension into our management is by measuring and offsetting companies' Co2 emissions. By giving clients choice to trade via these new share classes, we hope that we and they can play a modest but objective contribution to driving down carbon emissions,” says Pla.
The asset manager has partnered with Judo Cares, a French firm that helps financial institutions offset carbon emissions by finding and selecting the best offsetting programmes.
Judo Cares’ founders have combined experience of more than 25 years in carbon finance, having led the emergence of impact finance at Société Générale.
Co-founder Marc La Rosa says transparency is a key advantage of carbon-neutral investing, as opposed to ESG. “I think instead of claiming ESG compliance, which doesn't mean a lot to me, asset managers would be much better off claiming something clear, which is that we are carbon-neutral, or we have neutralised the impact of our investment.”
VIA AM has chosen to split the cost of carbon offsetting between the asset manager and the investor. Investors pay a 0.05 per cent higher management fee, while VIA AM reduces its profit margin by the same amount.
“At the end of the day, I think if you want to do something for the environment, probably there is a cost attached to it,” says La Rosa.
“The reason why I think it's the right thing for the investor to accept to bear a cost for compensation is because it gives an incentive for them to look at where the money goes, and look at the carbon footprint of the investments, because at the end of the day, the higher the carbon footprint, the higher the cost.”
Paying to offset emissions means that it is cheaper for VIA AM to invest in low-carbon businesses. Other carbon-neutral funds such as AllianceBernstein’s carbon-neutral strategy have said they aim to keep portfolio emissions about 90 per cent below the benchmark, paying to offset only the remaining emissions.
“I think it's really a virtuous circle if investors are starting to pay for the carbon footprint, even for a share of their investment,” says La Rosa.
Carbon emissions from VIA AM’s portfolio companies will be measured twice a year, based on the portfolio’s average composition over the year, according to Judo Cares.
The firm will then find carbon offset projects that have been verified independently by organisations including Verra, a non-profit standard-setter for carbon markets.
These standards help avoid common pitfalls of carbon offsetting schemes, such as those that award carbon credits based on projected future carbon capture. Newly planted trees often require 20 years to capture the amount of carbon that some carbon-offset schemes promise, which is why Judo Cares works with projects that award carbon credits only after the fact.
Carbon offsetting has also been criticised for being “too easy”, since companies can simply pay money, rather than changing their underlying business.
“That's totally false,” says La Rosa. “When the time comes when everybody has to pay for it, it will be much more expensive for asset managers that have high-polluting assets in their portfolio, and their performance will be worse. So they'll have to change and the virtuous circle will be triggered.”
While VIA AM currently does not measure and offset carbon emissions from its own operations, the firm does finance the planting of trees every year.
The role of asset managers in transitioning to a net-zero future has become more central as governments set ambitious targets. Last week, the UK enshrined a new target to slash emissions by 78 per cent by 2035.
Index provider MSCI says asset managers should use their voting and engagement powers to push companies toward a net-zero future and “avert climate catastrophe”.
According to a study by Transition Pathway Initiative, the number of companies with credible net-zero targets has more than doubled in the past year. However, only 17 per cent of high-emitting companies are aligned with a pathway to keep temperature rises to two degrees or below by 2050.
MSCI says that addressing climate change "will require the largest reconstruction of the global economy since the industrial revolution" and that market participants can be "a powerful and positive force to urgently drive the systemic transformation needed to avert climate catastrophe".