Asset managers need to play a role in the energy transition

The transition to net-zero greenhouse gas (GHG) emissions requires unprecedented change by companies, fund managers and governments, as well as additional investment of as much as $20 trn over the next two decades, according to the International Monetary Fund’s (IMF) latest Global Financial Stability Report.

The report noted that strong fiscal policies, complemented by a broad range of regulatory and financial policies, will be necessary to facilitate the green transition.

The IMF also called upon the world’s $50 trn investment fund industry, especially those with a sustainability focus, to play a role financing the transition to a greener economy and helping to avoid some of the most perilous effects of climate change.

Although funds with a sustainable label only account for roughly $7 trn of the overall investment fund landscape, Bloomberg Intelligence’s (BI) latest ESG 2021 Midyear Outlook report estimates that ESG assets are on track to skyrocket to over $50 trn by 2025, representing more than a third of the projected $140.5 trn in total global assets under management, according to

The IMF report pointed out that sustainable funds differ from their conventional counterparts in that their goal is to fulfil a sustainability objective while also generating financial returns. Under this broad umbrella are the environmental, social and governance or ESG funds as well as those that focus on the just the E component as well as the narrower climate change mitigation specifically.

The report said “The positive role of funds comes directly from their ability to influence the corporate sector. Through stewardship, which includes direct engagement with firms and proxy voting, funds can effect changes in firms’ sustainability practices. For example, earlier this year, activist investors stunned the investment and energy industries by winning seats on Exxon Mobil’s board as part of their bid to change its climate strategy.”

It shows that funds across the board have stepped up in proxy voting. Conventional investment funds voted in favour of almost 50% of climate-related shareholder resolutions in 2020, up from about 20% in 2015. Funds though with a sustainability lens had an even stronger track record, voting in favour of about 60% of such resolutions, and even close to 70% in the case of environment-themed funds.

“Better classification systems for funds, where fund labels and taxonomies are uniformly used and understood, helps to summarise a fund’s investment strategy and its overall approach to engagement and stewardship,” said Fabio Natalucci, Felix Suntheim, and Jérôme Vandenbussche, in a blog accompanying the report. “Our analysis shows that labels have become an increasingly important driver of fund flows – especially in the retail segment of the market.”

The paper believes that the global climate information architecture such as data, disclosures, and sustainable finance classifications – could be strengthened both for firms and investment funds. This includes better classification systems for funds, where labels and taxonomies are uniformly used, and understood/ This would also help to summarise a fund’s investment strategy and its overall approach to engagement and stewardship.

A separate and new report form the OECD ‘ESG Investing and Climate Transition’ echoes many of the IMF’s views.  It says that while ESG investing had become mainstream in a number of its jurisdictions, there remain considerable barriers to its ability to support long-term value and climate-related objectives.

These included the “promulgation of different approaches, data inconsistencies, lack of comparability of ESG criteria and rating methodologies, as well as inadequate clarity over how ESG integration affects asset allocation”.

To resolve some of these issues, the IMF and OECD are working with the World Bank and OECD to develop principles for such classification systems to harmonise existing approaches and support the development of sustainable finance markets.

In its report, the OECD also highlighted the problems with ESG ratings. It said they often lack transparency, differing substantially in the metrics on which they draw, as well as the methodologies used in their calculation, raising questions as to the extent to which their aggregation contributes to long-term value.

Methodologies also tend to differ substantially across rating providers, it added, resulting in a lack of correlation between them.

The OECD noted rating providers appear to place less weight on negative environmental impacts, placing greater importance on disclosure of climate-related corporate policies and targets, with limited assessment as to the quality or impact. This could hinder the use of ‘E’ pillar scores by investors to align portfolios with the low-carbon transition, it warned.

As a result, the report recommends greater transparency and precision of the meaning of sub-category scores so metrics could contribute to better alignment of E pillar scores with a specific purpose, such as assessment of climate transition risks and opportunities, or broader environmental impacts.

It noted that “such clarity would allow investors with specific sustainability goals to use ESG approaches as a more effective tool for portfolio rebalancing and risk management.”

The OECD also believes there should be policies to foster transparency and comparability of ESG investment approaches, as well as to strengthen the tools and methodologies that underpin disclosure, valuations, and scenario analysis in financial markets associated with a low-carbon transition. Other recommendations included frameworks utilising standardised core metrics to form baseline reporting for the E, S and G pillars for use by market participants.

The report said disclosure practices based on the recommendations of the Task Force on Climate-related Financial Disclosures should be strengthened to improve granularity, reliability and interoperability of metrics with respect to climate metrics, targets, and transition plans.

In addition, the OECD recommended greater transparency and clarification of the stewardship plans and policies of major asset managers and institutional investors in their engagement with boards and executive management on the reduction of climate intensity and commitment to emissions targets.

©Markets Media Europe 2021

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