Real returns at risk as economy wanders off net zero course

A new whitepaper from active investment manager, Ninety One, has found the setting of net zero targets by portfolio companies has not achieved its intended purpose, with real-world emissions actually rising since 2015.

The whitepaper, Net zero investing: Searching for returns and real-world change, authored by Sustainability Director Daisy Streatfeild, said while surveys and polls have indicated a large number of emissions reduction targets set by asset owners across portfolios or in certain asset classes, the MSCI Net Zero Tracker revealed emissions from listed companies have risen 22% in the last nine years.

Ninety One’s Planetary Pulse survey in 2023 showed 49 per cent of asset owners had a target in place, with 95 per cent of the Net Zero Asset Owner Alliance (NZAOA) members also having set targets for their listed equity and corporate fixed income portfolios.

“More than half (53%) of asset owners expect it to get more difficult to achieve emissions reduction targets, while delivering the best possible returns,” Streatfeild said.

“A shrinking investment universe that reduces portfolio emissions will exclude industries and sectors that have the potential to transition to low-carbon business models, as well as deliver strong financial returns. In addition, strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks.”

Streatfeild urged portfolio managers to equally balance the protection of return objectives with the achievement of net-zero targets, with several methods provided in the whitepaper for investors to consider:

• Add dedicated climate solution and transition sleeves, which enable targeted allocations to generate impact through reducing and avoiding emissions, provide diversification and complementary performance profiles.
• Refine net-zero strategies for existing allocations to equities, corporate fixed income and sovereigns to more effectively use engagement and capital allocation to maximise impact, manage risk and maintain return objectives. This includes differentiated approaches for active and passive exposure.
• Adding or enhancing allocations to private markets and real assets given the very significant potential for delivering real economy impact.
• Impact can be further amplified by increasing active allocations, increasing emerging market allocations, and increasing allocations to transition investments and climate solutions.

“From an investment perspective, we need to shift focus from reducing financed emissions to financing reduced emissions. This will  enable allocation of investment to those who need it the most and allow the finance industry to invest at the scale required for transition and for climate solutions that deliver decarbonisation,” Streatfeild said.

Investors also need to engage with high emitters to influence transition plans, recognising that net-zero pathways differ for sectors and regions.

“The global economy is off course to hit net-zero emissions by 2050. At this stage, our efforts need to target financing reduced emissions and real-world impact. Investors should be looking to increase emerging market allocations, supporting sustainable economic growth and reducing emissions.

“By focussing on portfolio purity (a reduction of their own portfolio carbon emissions), without delivering real-world carbon reduction, asset owners are not stimulating the kind of change needed to tackle the climate crisis.”