Post COP26 reflections for the asset management industry

This is 1 of 3 blogs relating to COP26 from Mike Lee, EY Global Leader, Wealth & Asset Management.

COP26 is proving to be an inflection point when the global investment industry steps up to the challenge of climate change. The summit has seen leading asset managers set hugely ambitious goals to reduce their “financed emissions” and invest for a future economy that’s radically different from today’s. Most notably, institutions in the Glasgow Financial Alliance for Net Zero (GFANZ) committed to aligning more than US$130t of private investment, financing and insurance with Paris Agreement goals by 2050.

Delivering on these targets will be challenging, especially since it’s a process that needs to start immediately. Asset managers recognize the integral role that they need to play, together with other private sector actors and governments, and are clearly determined to tackle the problem head on. But while they face major hurdles in areas such as data access, comparability and stewardship, they have some potential advantages too, such as the long-term horizons of many of the institutional investors and investee companies they work with.

The good news is that addressing climate change and other sustainability challenges represents a huge opportunity for wealth and asset managers. Firms want to demonstrate leadership and need to elevate their purpose. What better way to do it than by taking a proactive approach to the climate agenda on behalf of investors? For active asset managers in particular, the ability to make themselves distinctive through an ESG lens will confer a new and invaluable source of competitive advantage.

This opportunity comes hand in hand with a responsibility to build investor awareness. I’ve written before about the vital importance of investor education. Climate action is the perfect illustration of why firms must elevate clients’ understanding of investment decisions. Asset managers can’t implement investment changes, such as divesting “brown” assets or increasing allocations to climate solutions, unless investors agree and fully understand the knock-on effects of these decisions.

One example of knock-on effects comes from renewable energy generation. Renewable energy is one of the most cost-effective ways to power homes, industries and transportation networks. However, many may not recognize that renewable generation assets often need to be sited in remote or offshore locations far from existing power grids. According to the International Energy Agency, meeting long-term sustainability goals could therefore require a 50% rise in spending on the globe’s nearly seven million kilometers of transmission lines over the next decade.

The industry’s fiduciary duties extend beyond education. As they accelerate the redirection of capital, firms need to consider the full effect of their actions. Decarbonizing portfolios will do nothing to benefit the planet if high-emitting assets are merely transferred to other owners. Several industry leaders have recently pointed out that setting higher standards for publicly listed companies runs the risk of pushing legacy assets into the hands of private investors.

Asset managers can prevent this from happening by taking a balanced, principled approach to decision-making. That means recognizing that investment choices should be viewed through multiple lenses – ?not just that of clients but also those of employees, local communities and society. Trade-offs between stakeholders need to be explicitly recognized and reconciled if asset managers are to create value in the long-term.

This isn’t just the right thing to do. It’s about acknowledging that no organization or industry can achieve change independent of the wider world. Financial institutions need to bring customers, companies, regulators and governments with them if they’re to facilitate the transition to a climate-friendly future. Collaboration – whether that’s cooperating at the global level or partnering with service providers at a firm level – will be essential to asset managers’ ability to turn their climate-related commitments into real-world improvements.

We all have a responsibility, including as individuals, to work with business and governments to address the challenges of climate change. In a world where “immediate (re)action” has become the norm, how can the investment industry champion a more measured, integrated understanding of what is needed while accelerating a transition that requires action now?

To learn more about credible decarbonization plans for wealth and asset managers, go to our recently published article: FS firms turn carbon ambition into action | EY - Global.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.