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Major asset managers still like to invest in fossil fuels despite net-zero pledges: study

22 April 2022 Max Tingyao Lin

While more than 200 investment firms have made decarbonization pledges via the Net Zero Asset Managers (NZAM) initiative, a study led by French nonprofit Reclaim Finance found the largest among them are failing to live up to their promises.

The study, which focused on 30 companies with $42.5 trillion in assets under management, including 25 NZAM signatories, concluded that most major asset managers maintain significant investments in fossil fuels and have not yet established clear phaseout policies.

The 30 asset managers have outstanding investments totaling $82.5 billion in 146 companies engaged in coal production expansion. They also have $468 billion invested in 12 energy majors involved in oil and natural gas expansion, according to the study published by Reclaim Finance and nonprofits Urgewald, Re:Common, and the Sunrise Project earlier this week.

"Not a single one of them has set the expectation that companies in their portfolios should quit developing new coal, oil, or gas projects in line with climate science," said Reclaim Finance, an affiliate of Friends of the Earth France.

The findings were shared amid repeated calls from prominent climate and energy researchers, including those on the UN's Intergovernmental Panel on Climate Change and from the International Energy Agency, that public and private financial institutions should stop funding the expansion of fossil fuel production in order to cap global warming at 1.5 degrees Celsius above pre-industrial levels.

Launched in December 2020, the NZAM initiative has its signatories commit to net-zero emissions in their portfolios by 2050 and set interim targets for 2030."The headline commitment … is conceptually very clear. However, it provides for a shift to net-zero portfolios over time rather than immediate transformation and does not stipulate a specific rate of change," said Kate Levick, associate director for sustainable finance at thinktank E3G.

"As a result, it is not surprising that performance to date is uneven, and that analysts focused on the urgency of the climate change challenge feel that change is not yet coming fast enough," Levick told Net-Zero Business Daily by S&P Global Commodity Insights.

The four nonprofits involved in the study took particular aim at the Glasgow Finance Alliance for Net Zero (GFANZ), a network composed of the NZAM plus banks, insurers, asset owners, financial services providers, and investment consultants with similar net-zero pledges.

In a letter to Mark Carney and Michael Bloomberg, the GFANZ co-chairs, the nonprofits warned that the alliance is "at risk of becoming a smokescreen to hide the finance sector's foot dragging on decarbonization" without strong leadership.

While acknowledging that Carney and Bloomberg had made an "impressive contribution" to "the cause of decarbonizing finance," they wrote that there have been "very few indications that the major members of GFANZ are serious about withdrawing financial services from the fossil fuel industry, despite … the stark illustration of the link between fossil fuel dependence and brutal authoritarianism given by Putin's invasion of Ukraine."

Energy prices have been higher than of late and volatile since Russian President Vladimir Putin—whose country is one of the world's largest producers of fossil fuels—ordered the invasion in February, prompting many countries to prioritize energy security over decarbonization in their policymaking.

"Until very recently there was no private sector business case for coal investment and the finances of oil and gas investments were looking increasingly less attractive," Levick said. "The long-term market dynamics for these sectors have not changed, but the world is seeing short-term turmoil in energy markets as a result of the Russian invasion of Ukraine, which has created short-term supply gaps and political distractions.

"This temporary market confusion makes it all the more important for major financial actors to send a clear signal by setting out their plans for transition of portfolios to net zero by 2050, including specific interim targets to be met before then," she added.

BlackRock questioned

Reclaim Finance also sought to highlight what it perceived to be the "hypocrisy" of US-based BlackRock, the largest sustainability funds provider and green bonds buyer in recent industry estimates.

Of the $468 billion provided to energy majors involved in oil and gas expansion, BlackRock is responsible for $133 billion in bond holdings and shareholdings, more than any other asset manager in the study. Vanguard is No. 2 with $130 billion in such investments.

As for coal, BlackRock is the largest holder of bonds issued by coal companies with expansion plans, with its total holdings reaching almost $2.71 billion. Allianz Group, the second largest, holds $1.99 billion.

Lara Cuvelier, a campaigner at Reclaim Finance, said BlackRock "most embodies the hypocrisy of too many asset managers" while "being the biggest member of the NZAM."

BlackRock and the GFANZ did not respond to Net-Zero Business Daily requests for comments on the study.

Weak restrictions

The study also suggested major asset managers' investment policies and guidelines tend to have "vague criteria" and are "too flawed" to achieve a portfolio-wide net-zero status, despite many of the managers vowing to restrict funding for fossil fuels.

Of the 30 companies in the study, 17 asset managers have a coal policy and 12 have an oil and gas policy. Vanguard, State Street Global Advisors, and Allianz's asset management branch PIMCO are among the big names without any fossil fuel policy.

Only seven of the asset managers with policies are restricting investments in companies developing new coal projects, the study shows. None limit investments in companies developing new oil and gas production. 

In addition, none of the 30 asset managers apply their existing fossil fuel restrictions to all their "passively" managed assets, which are generally index-tracking funds.

This is "particularly concerning," considering passive investments keep growing and represent 46% of the assets managed by the companies, according to the study.

"The nine biggest 'passive' asset managers within our sample of 30 are also among the biggest holders of companies developing new coal projects. This is due to none of them applying robust coal criteria to their 'passive' funds," the study said. 

The findings can be compared with what thinktank Common Wealth concluded in a separate study, which suggested passive funds represented over 40% of all fund ownership in UK-listed fossil fuels companies.

Levick admitted it could be a challenge for asset managers to limit fossil fuel exposure in passive funds, saying that they may need to use new benchmarks that aim for alignment with the Paris Agreement's climate goals.

Looking at the sector from another perspective, S&P Global's ENR Director for Climate and Cleantech Conway Irwin suggested that an asset manager could establish a carbon intensity or absolute emissions threshold and divest the holding whenever a passive investment exceeded that threshold.

The way forward

To help counter climate change, asset managers should ask their investment targets to scrap expansion plans in fossil fuels, escalate action against those who fail to meet this demand, and be ready to divest from them after a short deadline, according to the study.

"Asset managers that provide fresh cash to companies that are ignoring climate science are purely and simply pouring more fuel in the fire," Cuvelier said.

The nonprofits involved in the study called on asset managers to vote against coal, oil, and gas expansion plans during the coming annual general meeting season. But others suggest this approach has its limits.

"Self-regulation alone will not suffice, and financial regulators will also have an important role to play alongside shareholders," Levick said. "Management of climate impacts and transformation of business strategy for net-zero is increasingly now being driven by governments, for example, through new disclosure requirements being set in the UK and the EU, including mandatory publication of climate transition plans."

For asset managers to enact effective net-zero policies and enforce them, national regulators might need to establish baseline carbon accounting standards for different industries, according to Irwin. That's one of the impacts of new regulations proposed by the US Securities and Exchange Commission earlier this month as part of its intent to improve climate risk disclosure by public companies.

"Until and unless national-level regulation enacts consistent standards across industries, there is no real authority to ensure that asset managers can develop [net-zero] programs," Irwin said. "GFANZ needs to be backstopped by clear regulatory guidance."

Posted 22 April 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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