The number of mid-century net zero commitments by the world’s largest institutional and wholesale investors have inched up slightly, according to Robeco's 2023 Global Climate Survey, as the majority are now focused on implementing earlier pledges and reshaping portfolios.
European investors and insurance companies are much more likely to be committed to net zero than other investors, as 37% of investors there have already made a public commitment, and a further 24% are in the process of doing so.
However, the energy crisis has prompted a rethink of abandoning fossil fuels, especially in the Asia-Pacific region (APAC). While 38% of investors in Europe have been allowing higher allocations to oil and gas companies in the short term, this is notably higher elsewhere, at 48% in North America and 59% in APAC.
Nearly half of investors (47%) have reviewed some of their ESG approaches to avoid short-term underperformance, including unwillingness to miss out on strong returns in the oil and gas sector, reads the third edition of Robeco’s report, released March 21.
In fact, while the energy crisis has reinforced the importance of backing renewables for over half (51%) of investors, only 30% have accelerated their portfolio decarbonisation efforts in the light of recent events.
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The survey, conducted by CoreData Research, covers 300 of the world’s largest institutional and wholesale investors in Europe, North America, APAC and South Africa.
Investors surveyed include insurance companies, pension funds, private banks, fund-of-funds, advisory firms, wirehouse brokers/dealers, endowments and foundations, sovereign wealth funds and family offices; ranging from each holding less than US$1 billion ($1.34 billion) to over US$1 trillion in assets under management (AUM). Together, the investors surveyed represent a total AUM of some US$27.4 trillion.
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With greater AUM represented in Europe and North America, was there a smaller sample size in APAC, and did this distort the study’s results?
Robeco tells The Edge Singapore the sample size for APAC investors surveyed is 82, representing 27% of the total survey sample.
Robeco’s climate and biodiversity strategist Lucian Peppelenbos tells The Edge Singapore that many passive investing strategies simply followed benchmarks. “They automatically had higher exposure because market benchmarks simply recarbonised last year because of increased weightage of oil and gas companies in benchmark compositions.”
“Given that in the last few years, investors have been through a global pandemic, rising inflation and interest rates and increasing geopolitical turbulence, it is not surprising that investor action on climate change is not a smooth, linear process,” says Robeco.
On divesting, 14% of investors with net-zero targets in place say their current approach is to completely divest from oil and gas companies and 23% with a net-zero target say they will do this in the next two years.
This increase is even greater for investors in the process of setting a net-zero target, with 39% saying that they will completely divest from oil and gas companies in the next two years.
See also: TCFD: Asia Pacific is the second-best region at reporting climate disclosures
“Overall, these findings show that committing to a net-zero target is likely to increase pressure on oil and gas companies to move away from fossil fuels if they can, and for increasing investor divestment from carbon-intensive assets,” says Robeco.
Measuring game
That said, Robeco notes “a lot of progress” on materiality assessment, with the majority of investors (55%) assessing the impact of their portfolios on carbon emissions.
Scope 3 emissions, or indirect emissions, such as business travel and waste disposal, remain a challenge, with only 20% of investors measuring these.
In addition, only 27% have obtained a forward-looking view of investee companies’ emissions pathways, which Robeco says is critical to investment opportunities, engagement and divestment decisions.
The survey indicates a significant take-up of climate change scenarios, with 25% of investors having either already integrated these into capital market assumptions or are likely to do so in the next 12 months.
Furthermore, 29% have adopted, or will adopt, climate-tilted benchmarks over the next year.
Politics for or against ESG
Investors also speak of political headwinds, which highlights a regional divergence. As the anti-ESG movement in the US picks up, 47% of investors in North America are concerned about rising political and legal resistance to their sustainable investment plans, compared to only 30% in Europe.
“As it now seems likely that ESG investing will be an election issue in the US, investors there may have to find a way to factor this into their investment approach, particularly if they believe that climate change has financial implications,” says Robeco.
On the flipside, the majority of European (63%) and APAC (57%) investors are more concerned about political pressure for failing to act on ESG and climate compared to a minority in North America (40%) that feels the same.
Social and nature issues the new frontier
In the process of moving to a low-carbon economy, a just transition — or addressing the social implications of the energy shift — is also becoming more important to investors. Some 68% say it will be a significant factor to their investment policy in the next two years. However, only 41% have the knowledge to support this.
Biodiversity is becoming a majority concern and moving towards parity with climate change, says Robeco. Nearly half (48%) of investors say it is important or central to their investment policy and this is projected to increase to 66% over the next two years.
Equities, green bonds and private markets are the leading asset classes for biodiversity integration, says Robeco. However, the biggest barriers to implementation are a lack of suitable data and ratings (53%) and insufficient internal expertise (41%).
Initiatives like the Task Force on Nature-related Financial Disclosures (TNFD) are working with asset owners and others to develop a framework to promote greater understanding of how biodiversity impacts financial risks and investment performance. Currently, the TNFD is working on beta versions of the framework, with a first version of the full framework due out in September.
Only 25% of investors are currently using funds specifically targeting biodiversity goals, but there has been a big jump in demand for impact funds (60%) and thematic funds (57%) compared to 2022, notes Robeco.
Robeco is a pure-play international asset manager founded in 1929 with headquarters in the Netherlands, and 16 offices worldwide. As at Dec 31, 2022, Robeco had EUR171 billion ($245.29 billion) in AUM, of which EUR168 billion is committed to ESG integration.
Peppelenbos says sustainability and the climate are the most discussed topics with their clients. “The survey shows that investors are progressing in implementing their commitments to net zero and stepping up on biodiversity, while at the same time navigating challenging energy markets and political pressures.”
Peppelenbos adds: “While a lack of knowledge and data can still create barriers for implementation, we need to act now because as investors we have the means to put money to work where it can make a difference.”
