Planetary Pulse: Targeting effectiveness

Africa highlights

A plurality of Africa-based respondents favours active engagement (45%) and the adoption of climate-related themes (45%). These results are relatively stable compared to 2022 (at 44% and 41%, respectively). Although a high proportion (66%) have over one-quarter of their AUM invested in portfolios with climate-related instructions or objectives, African respondents are the least likely (28% vs 41% across regions) to state that financial institutions have a responsibility to fund the decarbonisation of high emitters in emerging markets.

A plurality currently sets targets (mainly emissions reduction) at whole-portfolio (45%) or asset-class level (45%) and, against the global trend, are planning to continue setting targets at asset-class level (48%). When it comes to frameworks, Africa is the only region where the Task Force on Climate-Related Financial Disclosures (TCFD) is most closely followed (55%). Interestingly, African respondents are most sceptical about the efficacy of frameworks, with 38% agreeing that using established climate-related target-setting frameworks prevents their investments from making a real-world impact on emissions.

The totality of African respondents consider transition finance to contribute strongly to lowering real-world emissions, and 75% say the same about negative screening. A strong disconnect is found here, as transition finance is implemented by a meagre 7%, although negative screening seems more popular, at 41%.

Asia Pacific highlights

The deployment of climate-related practices appears somewhat stronger in Asia-Pacific than in other regions, with climate-factor integration (54%, up from 40% in 2022) and portfolio construction (42%, down from 45% in 2022) the most commonly implemented practices; 58% have at least one-quarter of their AUM invested in portfolios with climate-related instructions or objectives.

APAC-based respondents cite climate risk (assessed using metrics such as Value-At-Risk) as the most used climate-related target (54% vs 43% globally). While a plurality sets targets at asset-class level (42%), respondents in APAC are the most likely across regions to be planning to set targets at individual fund level over the next 12 months (54%). As with US-based respondents, their preferred framework is SBTi (56%).

Climate-related factor integration, the most used investment tool, also scores highly on contribution to portfolio decarbonisation (54%) but it scores on the low side for its contribution to real-world emissions (38%). However, the most surprising disconnect relates to the adoption of climate-related themes: used by only 21%, this practice is nonetheless viewed by 80% as contributing strongly to real-world emissions reduction, by far the highest score for any practice across all regions.

APAC-based respondents are most likely to have current investments in transition finance (46%). While they are slightly less likely to view emerging-market transition finance as a major commercial opportunity for asset owners (44% vs 51% across regions), they are the most likely to agree that, without greater investment in emerging-market transition finance assets, organisations and governments globally will not be able to meet the Paris Agreement climate-change goals (50%).

Continental Europe highlights

As early adopters of ESG integration, European asset owners’ commitment to climate-change mitigation remains strong, with 53% stating they have at least one-quarter of their AUM invested in portfolios with climate-related instructions or objectives. They are the most likely across regions to agree that financial institutions have a responsibility to provide investment capital to fund the decarbonisation of high emitters (59%).

Currently, a plurality (37%) set climate-related targets at asset-class level, with a view to begin setting these at individual fund level (46%) over the next 12 months, as required by the EU’s Sustainable Finance Disclosure Regulation (SFDR).

The top choice in 2022, climate-related factor integration, is again the most common practice (36%), although this proportion has decreased sharply, year on year (from 54% in 2022). However, there is a disconnect between practices and both decarbonisation and emissions-reduction intentions. Positive screening is viewed as contributing significantly to portfolio decarbonisation (60%) AND real-world emissions reduction (63%) but only 25% of respondents have implemented the practice.

European respondents appear confident of the relevance of their net-zero frameworks (59%), yet a majority (51%) favours a custom/hybrid target-setting framework, which takes elements from various prominent frameworks and adapts them to meet their organisations’ specific requirements.

European respondents have high expectations of transition finance in emerging markets: 67% say the practice contributes to real-world emissions reduction and 54% believe that emerging-market transition finance represents a major commercial opportunity for asset owners.

North America highlights

At regional level, commitment to climate-related investment practices in North America (NA) has decreased, year on year, with 2022’s top choices — climate-related factor integration and positive screening — both of which saw adoption of 52% in 2022, falling to 25% and 45%, respectively. The proportion adopting climate-related themes has decreased from 48% to 33%. There has been a backlash against ESG in the US. The level of assets under management (AUM) invested in portfolios with climate-related instructions or objectives is lower in North America than globally.

While emissions reduction (45%) is still the most commonly applied climate-related target type, and 53% currently set climate-related targets at asset-class level, our research shows the global trend of intention to move to fund-level targets over the next 12 months is also present in NA (49%). The majority (55%) follow the Science Based Targets initiative (SBTi) as a guiding framework. However, almost half (47%) believe industry players are given too much discretion when it comes to selecting climate-related targets.

Interestingly, NA-based respondents are the only ones confident that their decarbonisation strategies are leading to actual emissions reduction. For example, the same proportion (57%) says transition finance is contributing to portfolio decarbonisation AND to real-world emissions reduction. Similar numbers say active engagement contributes to portfolio decarbonisation (60%) and real-world emissions reduction (55%).

Concerns over future returns are as strong as in other regions. More than half (55%) say they expect it to be increasingly challenging to achieve emissions-reduction targets while delivering the best possible returns.

United Kingdom highlights

At 69%, UK-based respondents are the most likely across regions to have at least 25% of their AUM invested in portfolios with climate-related instructions or objectives.

More than half of respondents (54%) use emissions reduction as a target, with 46% applying it at whole-portfolio level. UK respondents (who, since Brexit, no longer need to abide by the EU’s SFDR regulation) are the least likely across regions to apply specific targets at individual fund level within the next 12 months (23% vs 45% globally).

UK respondents are the most confident of the relevance of their net-zero frameworks, with 69% claiming that established climate-related target-setting frameworks ensure real-world emissions reduction. The most-followed guideline (50%) is the Target-Setting Protocol (TSP) developed by the Net-Zero Asset Owner Alliance (NZAOA).

Investments in the UK are structured with portfolio decarbonisation outcomes in mind, rather than real-world emissions reduction. Climate-related factor integration, the practice most widely implemented in the UK (62%), is viewed as contributing strongly to portfolio decarbonisation (63%), but only 50% say the practice contributes to real-world emissions reduction. Moreover, portfolio construction, viewed by 82% as the practice contributing the most to real-world emissions reduction, scores only 36% on its contribution to portfolio decarbonisation.

While there is relative pessimism regarding returns on climate-related investments, with nearly half (46%) believing they offer lower returns than conventional investments, future opportunities in transition finance for emerging markets are met with enthusiasm: 65% believe this sphere represents a major commercial opportunity for asset owners.