So not only must the investor’s investment managers meet that percentage target, but they would also be wise to increase weightings in companies which have set fairly aggressive net zero emissions targets. However, this narrow focus on Green House Gas (GHG) emissions may not extend to covering other legitimate ESG targets such as over extraction of water in manufacturing or micro plastics pollution.
However, if as an investment manager you go beyond these highly-focused remits into other ESG- related targets that are not a priority for the asset owner and that are perceived to limit investment returns, you risk losing your mandate. It’s a balancing act for asset managers – you cannot afford to make too many changes too quickly.
Asset managers must move at the pace of the investors, working with their changing ESG priorities. However, it’s critical to be able to tailor ESG measurement systems to investors’ bespoke demands and focus areas.
What this means is that, over the next decade or so, there will be less and less capital moving to companies that don’t change their behaviour in line with the Paris Accord and other ESG targets. The key will be to ascertain which risky areas to divest from this year, and which need to be tackled next year and so on. A divestment road maps might need to be built by investment managers covering the next 10 years or so, and this must be signed off by the investors.
Saints or Sinners: all relative?
ESG risk analysis will need to consider also whether it’s about the level of GHG emissions that a company is putting out today or the degree of reduction intended or achieved. One also has to consider how material emissions are to the business a company operates in.
For some companies like BP or Shell, the scale of the task is clearly massive. So, arguably they should be rewarded for meeting or exceeding their emission reduction targets and diverting resource into clean energy projects successfully.
These are arguably the companies whose efforts to go green will yield the most positive results in terms of global GHG emission reductions because their impacts are the most material. But are GHG emissions an absolute sin or a relative one?
Investors will need to decide therefore if they are puritans or pragmatists. In other words, do you decarbonise your portfolio of investments aggressively, come what may, potentially leaving some of the worst offenders with no direct incentive to complete their emission reduction programmes?
