Asian Investors Slow to Issue Net Zero Mandates

Ex-GPIF CIO calls for asset owners to be broader, deeper and more coordinated on climate engagement, warning they cannot diversify away from risks.

Asset owners in the Asia-Pacific region are not yet giving clear net zero mandates to asset managers, according to a new landmark study.

More than 40% of asset managers said the absence of client mandates aligned with net zero was a key barrier to climate action, in a survey on trends in climate-conscious investment practice conducted by the Asia Investor Group on Climate Change (AIGCC).

Globally, asset managers have argued that asset owners’ net zero targets need to be incorporated into their investment management agreements (IMAs) in order for climate considerations to be built into portfolio construction, capital allocation and stewardship decisions.

But the AIGCC’s ‘State of Net Zero Investment in Asia’ report found that just 28% of asset owners active in the Asia-Pacific region had set net zero targets for all or part of their portfolio, compared with 49% of asset managers.

The survey did, however, provide evidence that asset owners are starting to align mandates with net zero to achieve climate goals and mitigate portfolio risks. Four in ten survey respondents said IMAs now typically require incorporation of climate factors into investment decision-making, while a third said mandates required managers to act in accordance with a climate policy or strategy.

Overall, 68% of asset managers and 43% of asset owners have integrated climate change considerations into investment policies to varying degrees.

The survey is the fifth in a series conducted by the AIGCC, but it is more extensive than previous research because the organisation polled investors beyond those in its member base. Overall, the research draws on data from more than 200 asset owners and managers, collectively representing US$76 trillion AUM.

A total of 70% of all survey respondents – 84% of asset managers and 51% of asset owners – said they recognised climate as a source of financially material risk and opportunity.

“Asset owners, as stewards of capital, hold the power to accelerate the energy transition. Now is the time for them to act and lead by example in their respective markets and transition, not only their portfolios but whole economies, to net zero,” said AIGCC CEO Rebecca Mikula-Wright.

Active engagement

The AIGCC survey found a large gap between asset managers and owners in the region when it comes to active engagement with portfolio companies on their alignment with net zero pathways.

A total of 44% of asset managers are participating in collaborative corporate engagement initiatives on climate, including Climate Action 100+ or the AIGCC’s Asian Utilities Engagement Programme, compared with 18% of asset owners. This may suggest that a number of Asia-Pacific asset owners are currently outsourcing corporate engagement responsibilities to their asset managers.

Further, 50% of asset managers and 20% of asset owners have shown robust climate corporate engagement, according to the survey, by including climate change considerations in proxy voting policies, setting engagement targets, or reporting on climate stewardship actions and outcomes.

“Universal owners should not only pay attention to what they own, but also what they don’t,” said Hiromichi Mizuno, Special Advisor to the CEO of MSCI, and former CIO at Japan’s Government Pension Investment Fund, the world’s largest pension fund. “Only paying attention to the short-term profitability of portfolio companies at the expense of the global environment will bite your portfolio in the future.”

Speaking at a webinar to launch the report, Mizuno said investors needed to behave more holistically and collaboratively, including a broader, deeper and more coordinated approach to engagement. In particular, asset owners should place greater emphasis on policy-level engagement, he said.

“If the government mandate says asset owners must decarbonise their portfolios, the government can help by creating policies that push the whole economy to decarbonise. Many governments have committed to carbon neutrality by 2050, but few if any have come up with the policies to really help asset owners and managers to achieve carbon neutrality quickly.”

Transition planning

In other aspects of their net zero investment strategies, the AIGCC study found slightly more alignment between asset owners and managers.

A third (33%) of asset managers said they had published a climate transition plan, which explains how they have embedded climate change considerations into their future business strategies and assumptions, while only a fifth (20%) of asset owners said they had done so.

These proportions are expected to rise in jurisdictions across the region as they introduce the climate disclosure standards of the International Sustainability Standards Board. The AIGCC said a top-down strategy helped investors demonstrate how they are addressing systemic climate risks, in line with their fiduciary duty.

Relatively few asset managers or owners in Asia-Pacific are seeking to actively invest in climate solutions. The AIGCC said there was strong interest from investors to allocate capital to low-carbon companies and clean energy solutions “under the right policy conditions”, but currently just 12% of survey respondents committed to increase investments in climate solutions. Few investors have formalised climate solutions strategies, targets and metrics, the AIGCC noted.

Despite such a small proportion of survey respondents looking actively to invest in climate solutions, roughly double are taking steps to limit investments that impact the climate negatively. A total of 32% of asset managers and 23% of asset owners have investment policies or formal approaches to fossil fuels, the survey found.

In terms of climate disclosures, 47% of investors (57% of asset managers and 38% of asset owners) are disclosing some level of climate risks and opportunities, as outlined by the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).

Asset managers appear to be considerably more advanced in their approach to adapting to the physical risks of climate change.

Almost four in ten (38%) asset managers and 20% of asset owners told the AIGCC that they had conducted a physical risk assessment over some or part of their portfolio, with varying levels of detail. Few investors set out detailed actions or plans to address these risks.

Natural disasters linked to climate change pose particularly high risks to investors and societies across the Asia-Pacific region, which suffered 80 such disasters in 2022 costing an estimated US$36 billion in 2022.

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