Net zero: Our new
minimum expectation for managers

Our viewpoint

From 1 April 2022, LCP will require any asset manager we research to have signed up to the Net Zero Asset Manager Initiative (NZAMI) in order for the products or pooled funds they manage to get a “buy” rating from us.

NZAMI requires managers to commit to working towards net zero emissions for the assets they manage, and take various supplementary steps to help meet this commitment, rather than just state a target that is not backed up by action.

Setting NZAMI as a minimum standard is a fairly bold move, and it does mean that many funds will have their overall rating downgraded from 1 April 2022. But we believe this move will better protect our clients’ investments from the risks associated with climate change, and encourage the wider investment industry to move at the pace that is needed to mitigate the potentially devastating effects of climate change on the economy and wider society.

Does this mean I should disinvest from managers that are not signed up?

The short answer is no – our new requirement does not mean that we are recommending our clients disinvest from every manager that has not signed up the NZAMI.

Although there may be some circumstances where disinvestment is appropriate, we believe that a better first step is for clients is to engage with their managers to understand why they have not yet signed up to the initiative, and encourage them to do so.

Why is net zero so important?

Net zero is all about reducing overall global greenhouse gas emissions to zero by 2050, which is required in order to limit the overall warming of the planet to 1.5°C. If this does not happen, the physical impacts on the planet are expected to be devastating, and this will inevitably have a massive knock-on impact on the economy, and hence our clients’ investments.

To achieve this, companies need to reduce emissions and replace greenhouse-gas emitting production processes with non-emitting ones, where this is possible. Investors and investment managers have a role to play by engaging with companies to encourage these changes and limiting the capital available to those companies that are not taking steps to transition their businesses.

By committing to invest in a way that is consistent with a net-zero economy, investment managers can help manage the shorter-term investment risks and the longer-term systemic risks of climate change.

Right, so net zero is important – but why do managers need to sign up to the NZAMI to do it?

Some investment managers say that they are choosing not to sign up to the initiative but are still planning to achieve net zero emissions. We believe it is important they sign up to the NZAMI, because:

  • Managers who sign up to the initiative are required to report publicly on their climate action plans, which means there is additional transparency on what they are doing to actually meet their target. It is one thing for managers to say that they are going to achieve net zero emissions, but an entirely other thing to have to report on and make clear what they are doing to get there.
  • It includes a range of supporting important commitments that help to reduce overall real world emissions such as engagement, collaboration and policy advocacy, rather than just focusing on reducing portfolio level emissions. The NZAMI therefore seeks to address the wider impact of climate risk on the economy – something that is necessary to reduce systemic risk as climate change is not something that investors can simply stock pick their way out of.
  • It is the only global initiative specifically focused on asset managers getting to net zero.

My manager hasn’t signed up to the NZAMI, why is this, and is their reason good enough?

Below we’ve set out some of the reasons that managers have given for not signing up to the initiative and explained why we do not believe those reasons are good enough:

  • “Investing in line with net zero could compromise financial returns and so wouldn't be in our clients' best interests.”

Achieving net zero is vital for long-term investors to reduce the most serious physical climate impacts and ensure that investment markets remain functioning in the longer term. It will only be achieved with widespread support from governments, companies and investors.

We believe that investing in line with net zero is therefore in our clients’ best interests over the longer term.

We believe it will also help to manage climate-related risks and realise opportunities in client portfolios over the shorter term, given the widespread government and corporate commitments to support the transition to a low carbon economy.

  • “We're not willing to sign up until we’ve worked out how we can achieve net zero.”

We agree that achieving net zero will be hard and it is not entirely clear how the world will achieve it. There is, however, analysis that shows we can reach net zero globally, giving comfort that net zero commitments are at least feasible.

The NZAMI does not ask investment managers to commit absolutely to net zero investment, it commits them to support the goal of net zero emissions by 2050. That implies a commitment to working out how they can achieve it.

We think committing to working on the problem is the first key step that all managers can and should be able to sign up to.

  • “Signing up to NZAMI will constrain me from accessing higher-emitting assets that may be important for aiding a climate transition.”

We recognise that holding high-emitting companies may be appropriate and believe it is consistent with the NZAMI. The commitment does not constrain the assets held explicitly. Instead it encourages focus on reducing real-world emissions, for which it may be better to hold high-emitting companies and support them in playing their part in reducing emissions and facilitating the transition.

What happens now?

We will continue to work and engage with the managers in our investment universe to sign up to the NZAMI and to address climate risk appropriately. However, when it comes to driving forward the changes necessary to manage this systemic financial risk, the more voices that are united behind a common goal, the more powerful our actions can be.

Setting a net zero target is just the first step for managers, so we will also be assessing managers’ progress towards net zero though our fund research, as well as assessing their more general climate credentials.

We encourage you to find out whether your managers have signed up to the NZAMI and ask them why not if they haven’t.