Investment consultants to play "crucial" role in investment industry’s push for net zero
Investment consultants are planning to use their influence in the investment industry to push for net zero carbon emissions by 2050 or sooner.
A group of investment consultants with USD10 trillion in assets under advice, including Willis Towers Watson, Redington, and bfinance, have pledged to integrate net zero alignment across all their investment advice within the next two years.
“The initiative underlines the growing awareness that a move to net zero must be realised at every stage and level of the investment process,” says Fiona Reynolds, CEO of the United Nations Principles for Responsible Investment (PRI), which has backed the initiative.
Investment consultants form a crucial link between asset owners and asset managers, determining which firms and strategies are favoured for selection.
“Investment consultancies have a key role to play in facilitating this shift, by working with their clients to help embed ESG considerations throughout their investment activity. The scope and influence of the founding partners behind the initiative is extensive and sets the tone for the rest of the sector,” says Reynolds.
Barnett Waddingham, Cambridge Associates, Cardano, Frontier, Hymans Robertson, JANA, LCP, Meketa, and Wilshire have also signed up to Net Zero Investment Consultants Initiative (NZICI) as founding members of the movement.
NZICI’s launch follows on from similar collective pledges from asset owners and asset managers, introduced in September 2019 and December 2020 respectively.
“It is not surprising, perhaps, that the Asset Owners Alliance and the Net Zero Asset Managers Initiative have preceded this step from investment consulting firms,” says Kathryn Saklatvala, senior director at bfinance.
“Consultants tend to work with a diverse range of clients and must address their very different needs and wishes – at our firm alone we have clients in more than 40 countries including pensions, insurers, endowments and so on, each with their own complex networks of stakeholders and trustees,” says Saklatvala.
“Consultants were, to some extent, a ‘missing piece of the puzzle’: these firms are often the crucial link between investors and asset managers,” says Saklatvala.
According to Net Zero Investment Consultants Initiative, most institutional portfolios are currently invested in a way that is aligned to an implied temperature rise of roughly 4 degrees above pre-industrial levels.
This is twice the recommended limit for global warming enshrined under the Paris Agreement, which aims to keep global temperature increases under 2 degrees above pre-industrial levels.
Luba Nikulina, global head of research at Willis Towers Watson, and co-chair of the Investment Consultants Sustainability Working Group in UK, adds: “Investment consultants are responsible for advising asset owners on the investment of trillions of dollars of capital. How this capital is invested and applied to influence real-world action will be key to whether society is able to achieve the global goal of net zero emissions by 2050 or sooner.
Nikulina concludes: “This commitment directly addresses the urgent need for coordinated action on climate change.”
The NZICI pledge sets out nine actions that investment consultants will take to support the goal of global net zero greenhouse gas emissions by 2050 or sooner.
These include: giving advice on net zero alignment in all investment consulting services, monitoring and evaluating asset managers’ integration of climate risk when making investment decisions, and aligning any discretionary assets with the Net Zero Asset Managers initiative.
bfinance’s Saklatvala explains that managers will not be excluded from manager search processes based on the lack of an explicit pledge to align with net zero, “except where that may fit the needs of specific clients.”
“Climate competency is a complex topic and pledges are no guarantee of an effective, thoughtful process,” explains Saklatvala. “In addition, while a manager’s overall corporate position is important, the approach taken in a specific investment strategy is not necessarily the same as the approach taken at firm level.”
However, investment consultants will encourage asset managers to align with the Paris Agreement goals and the requirements of the Net Zero Asset Manager Initiative, according to Willis Towers Watson’s Nikulina.
“We will be prepared to exclude fund recommendations because the asset manager lacks appropriate climate competency or because the fund is not aligned with the Paris Agreement goals,” says Nikulina.