Net zero emissions - LCP’s views on best practice for investment managers
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LCP urges investment managers to signal the importance of addressing climate change.
Net zero emissions through investment management
Read nowWe encourage investment managers to support making net zero emissions by 2050 more achievable by:
- Allocating capital
- Engaging actively with portfolio companies
- Engaging actively with policymakers and others
- Signalling importance
Read more below
Our views on best practice:
We encourage investment managers to support making net zero emissions by 2050 more achievable by:
Allocating capital
Direct investment toward businesses and assets that are better aligned with the transition to net zero.
Engaging actively with portfolio companies
Encourage companies to set and meet stretching emission reduction targets.
Engaging actively with policymakers and others
Encourage the creation of the right conditions for decarbonisation.
Signalling importance
Send a clear message to the wider market that climate change is a priority for capital allocators. Encourage your clients to give you the mandate to act.
We appreciate that other stakeholders have a role to play, and investment managers’ actions may be contingent on other parties. In particular, the political context matters and has changed in recent years; and all actions managers take must be consistent with client mandates and financial objectives. We encourage investment managers not to be passive in accepting these circumstances, but to take actions to influence and persuade these stakeholders.
What does this mean in practice?
Action should aim to reduce real-world emissions.
Reducing only the emissions attributed to a portfolio — for example, by selling high-emitting holdings — does not on its own help the overall financial system or the environmental system that underpins it.
We have set out more details of specific actions that we think demonstrates best practice.
Why this matters
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Long-term financial consequences - Climate risk is financial risk. Failure to address climate change is likely to damage financial interests for all investors over the long term.
- True cost of action is modest – we recognise these actions have an up-front cost, but they are investments in a common resource – the climate – that are likely to have a positive value over the longer term. Some meaningful actions can be delivered with low cost, and minimal effect on a portfolio’s expected return and risk.
This is in our clients’ long-term financial interest – not in conflict with it.
Because it matters, we hold managers to account. Our ratings for investment management products and client recommendations reflect performance against our best-practice standards.
We understand the importance of the role of the end investors. Investors play a critical role in driving change – through capital allocation, engagement with managers, and signalling that tackling climate change matters.
What specific actions can investment managers take?
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Join the Net Zero Asset Managers initiative to support investing aligned with the global goal of net zero greenhouse gas emissions;
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Speak out publicly in support of the Paris Agreement and net zero, for example by publishing relevant research and thought leadership, calling on governments to provide a supportive policy and regulatory environment for investors and companies, and publicly disclosing actions taken on climate grounds (such as voting and divestment actions);
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Encourage all clients to give you the mandate to act by educating them on the importance of achieving net zero emissions, offering products that are managed in line with this goal, and encouraging them to include a net zero target in segregated mandates.
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Seek rapid real-world reductions in emissions, focusing on alignment of holdings with net zero pathways rather than overly focusing on reductions in portfolio emissions;
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Minimise, where possible, primary investments in assets that are expanding fossil fuel production or infrastructure, or facilitating their expansion;
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Assess alignment of holdings using the alignment maturity scale in the Paris Aligned Investment Initiative (PAII)’s Net Zero Investment Framework which categorises holdings as achieving net zero, aligned, aligning, committed to aligning, or not aligned;
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Seek to increase the proportion of assets under management which are invested in climate solutions (supporting both mitigation and adaptation goals), including these assets within individual mandates as appropriate;
- Invest and engage in a way that supports a just transition and nature-positive outcomes.
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Use effective voting (where applicable) and robust engagement with investee entities to encourage achievement of net zero emissions at a pace that is appropriate for the entity's sector and countries of operation (including through the use of appropriate incentive structures), encourage management of physical climate risks, and discourage anti-climate lobbying and fossil fuel lock-in;
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Set clear objectives for each engagement, track progress, and follow a pre-agreed escalation process if you are not making sufficient progress with an engagement;
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Undertake policy advocacy in support of net zero global emissions by 2050 and adapting effectively to temperature rises, advocating for system-level changes that increase the chances of achieving these goals;
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Collaborate with others to increase the effectiveness of engagement and develop suitable net zero methodologies for use across the investment industry.
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Provide high quality portfolio-level reporting to all clients at least annually, that includes alignment of assets, investments in climate solutions, data on the portfolio's scope 1, 2 and 3 emissions intensity, attribution of changes in these portfolio emissions intensities over time (for example, the split between changes in emissions intensity due to changes in emissions, changes in EVIC, new data coverage, trading in the portfolio), progress of holdings against their individual emissions reduction targets, engagement examples, and progress against your engagement milestones;
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Work with investee entities to improve the quality and coverage of climate-related data.
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Set net zero emissions targets for your firm’s own operations;
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Keep any use of emissions offsets to a minimum, in relation to both assets under management and your firm’s own operations, and follow high quality, recognised principles for any carbon offsetting;
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Publish and adhere to a climate action plan for meeting the commitments made.
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