How are you aligning your goal-setting with the asset classes in your portfolio?
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There are two interpretations of ‘net zero’
The point at which the total emissions of a portfolio’s assets match the amount of carbon they are taking out of the atmosphere
It is extended to mean that the assets are negating prior emissions
But according to either interpretation, your ability to decarbonise before 2030, 2040 or 2050 will depend on the asset make-up of your portfolio.
The ways to decarbonise equities, for example, have been well documented. There is some data available to guide decisions on the most effective methodology and its likely impact. Asset managers can also engage with companies and provide you with a holistic assessment of an investee’s transition scenarios after urging them to optimise governance, strategy, disclosures, and emission reduction target-setting.
But at the end of 2020 just 10% of portfolio assets held by private sector pension funds were in equities.
Private debt, real estate, securitised assets, and private equity all come with less sophisticated decarbonisation approaches and need to be considered individually. Unlisted infrastructure and real estate assets, for example, present complex issues around the measurement of carbon and transition methods.
Net-zero buildings come with guesswork
Nina Reid, Head of Responsible Property Investment at M&G Real Estate, says there is still a lot of uncertainty about what constitutes a net-zero building.
“You could source green energy and operate it without gas – make it energy-efficient that way,” she says. “But the other piece is embodied carbon, which is harder to tackle. You could approach that through design, using lower-carbon materials, or through replacement, in the short term the only way to achieve net zero whole life carbon is with a degree of offsetting.”
This uncertainty is compounded by the guesswork involved in anticipating how different market standards will evolve. Reid suggests that asset owners need to commission a building audit.
“You've got to predict how many buildings you will have, where the low-carbon refurbishment is most needed, and therefore what the impact of that will be on your investment performance,” she says. “If you’re aiming for net zero by 2030, you obviously don't want to get caught out in 2028 with a load of buildings that need to be improved very quickly.”
"If you’re aiming for net zero by 2030, you obviously don't want to get caught out in 2028 with a load of buildings that need to be improved very quickly.”
Nina Reid
Head of Responsible Property Investment, M&G Real Estate
Portfolio lifecycles affect targets
Another consideration in setting goals for net zero should be the impact of future rebalancing of asset classes in the portfolio as beneficiaries’ risk-return profiles mature. LCP’s Claire Jones says that strategic reallocation will influence the impact of a decarbonisation strategy.
“The greatest climate risk in many investors’ portfolios is from equities,” she says. “But our clients, which are often defined benefit schemes, are transitioning out of equities during the lifetime of the portfolio. So the asset with the greatest climate risk today will be less important to the portfolio in a few years’ time.”
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