In the first of a series of conversations on environmental, social, and governance (ESG) issues that Callan will host, Mark Wood of our Global Manager Research Group spoke with Wendy Cromwell of Wellington Management about the newly formed Net Zero Asset Managers Initiative. The two were featured in a recent “Research Cafe,” which are half-hour events sponsored by the Callan Institute to highlight topics of interest to the institutional investing industry.
Under the initiative, Ms. Cromwell explained, asset managers work with the companies they invest in to set targets to reach net zero emissions by 2050. The goal, she said, is to make sure investment managers are incorporating climate science and aligning portfolios with the warming objectives outlined in the Paris Agreement.
Ms. Cromwell, who is vice chair and director of sustainable investment at Wellington, said that 30 firms signed on to the Net Zero Initiative at launch, with approximately $9 trillion in assets under management (AUM). Signatories commit to work with asset owner clients on decarbonization goals, aiming to reach net zero emissions by 2050 or sooner across all AUM; set an interim target for the share of assets to be managed in line with the goal; and review the target at least every five years, aiming to increase the proportion of AUM covered until 100% of assets are included.
The asset manager signatories also agreed to review the internal target at least every five years, with a view to ratcheting up the proportion of AUM covered until 100% of assets are included.
Mr. Wood, a senior vice president at Callan, then asked, “How is this going to impact the day-to-day management of client assets?” Ms. Cromwell said her firm was focusing first on engaging with companies to adopt credible energy transition plans. These companies, she said, “would like us to buy their securities rather than sell them. We have a potential for good, constructive dialogue.”
Mr. Wood and Ms. Cromwell also discussed the growing number of organizations—and acronyms—focused on ESG issues broadly and climate change in particular (the “alphabet soup,” as Ms. Cromwell put it), highlighting the differences between the initiatives.
A critical organization, she said, was the Science-Based Targets initiative (SBTi), which evaluates how a corporation plans to navigate its path to net zero emissions. The number of companies working with SBTi has grown exponentially, she noted, because as one company sets out its targets, that also means its suppliers need to develop their own decarbonization goals.
Another important entity is the United Nation’s Principles for Responsible Investment (PRI), on whose board Ms. Cromwell sits (both Callan and Wellington are signatories to this initiative). The PRI, she said, “is meant to support the principles of responsible investment, which really means acknowledging the fact that beyond what is reflected on income statements and balance sheets, there are characteristics of firms that influence how they perform over the long term.”
Another U.N.-supported effort is the Sustainable Development Goals (SDGs). There are 17 SDGs that over 100 countries are seeking to achieve by 2030. “Those goals are very high-level and aspirational,” she said, but underlying them are some very specific targets. And the goals are becoming increasingly prevalent in the investing industry, with a growing number of asset managers announcing that their portfolios align with the SDGs and developing reporting to map portfolio holdings to achieving specific SDGs.
As they finished their conversation, Mr. Wood and Ms. Cromwell discussed the future of the asset management industry and how ESG issues will factor into the way firms operate and work with their clients. “The best investors are drawn to areas that are changing rapidly where there’s a lot of evolution,”’ said Ms. Cromwell. “And they seek new lenses to look through in order to get a differentiated perspective on the securities that they may invest in. Sustainable investment and climate research offer all of that in spades.”
She encouraged peer investment managers and institutional investors to focus on this area. “It’s something that could be really important and exciting for your investment portfolios.”