IN FOCUS6-8 min read

So you have set your net zero target – what now?

Setting net zero targets is the easy part for asset owners and fiduciaries. Meeting them can be more of a challenge. We seek to answer the five questions that they are grappling with now.



Lesley-Ann Morgan
Global Head of Pensions and Retirement
Ben Popatlal
Multi-Asset Strategist

Many asset owners may have now set their net zero target for 2050 - and maybe an interim one for 2024 or 2025 - as they seek to decarbonise their portfolios.

But how can they actually make sure their assets deliver?

We’ve identified five of the most pressing questions they’re asking to ensure that they stay on track, and provide some thoughts on the answers.

My target is set - will achieving it be a straight line?

Your path to decarbonisation will not be a straight line; many things could pull you off the path. For example, some assets may not reduce carbon as expected. Or a change in asset allocation could replace one asset with another that has a worse carbon score, such as shifting from developed market debt to emerging market debt.

Alternatively, you might do better than expected due to technology innovations or a change in manager. It is also worth remembering that your ability to decarbonise is also reliant on the supply of sustainable assets.

Wiggles in the path are inevitable. Take the war in Ukraine, for example. This shocked everyone, but we know that such unpredictable events can always happen and may affect your ability to decarbonise.

Missing your carbon target may have a reputational cost to you, so it is important to manage expectations about how often you will measure, publish and re-evaluate your strategy.


What if my return target and carbon target are incompatible in the short term?

Over the long term we believe that investing in sustainable assets will be rewarded with superior returns. However, there may be short-term periods when holding assets with weaker carbon credentials could be beneficial to returns. For example, oil and commodities have recently been major contributors to returns.

Ultimately, this comes down to setting your philosophy clearly at the outset. If you have stated that you will not invest in these types of assets, you are effectively putting carbon above return. We don’t see the majority of asset owners doing that today, but we have seen it with thermal coal. In time, it may also come with other non-clean energy.


Should asset managers be handed a carbon target each year?

Yes, we think it is important to set targets for asset managers. But what you do if they miss them is key.

One client wanted us to set a target for one of our portfolios of 50% less carbon exposure than the index. However, we pointed out to them that this would result in considerable tracking error relative to the index and that this would not necessarily help with transition at this point in time. As a result, they decided to improve their ongoing due diligence to better understand what we were doing to improve the carbon score over time.

If a manager were to miss their carbon target one year, this would probably not be a sackable offence. Just as most clients would probably not fire a manager for missing a return target over one year.

In just the last few years, we’ve had one year with an almost complete global shutdown of economic activity, and another year with an all-out sovereign war in Europe. During that time, the price of oil has fluctuated between -$38 and +$124. Only by analysing the trend over multiple years is it possible to determine if a manager is serious about reducing carbon in their portfolio.

It’s important to improve your governance of managers to understand how they are engaging to reduce carbon.

Will cutting the carbon levels in my portfolio help the planet to decarbonise in the long term?

If you want to just quickly get your carbon score down, disinvestment is probably the answer. However, this doesn’t ultimately help the planet. Someone else will buy those assets with high carbon scores. It’s better for the planet to encourage and engage with companies.

In terms of timing, it depends what is important to you as asset owners and fiduciaries. It may be that today you care most about the impact of climate on your portfolio and investing to manage these risks, or to take advantage of the opportunities (‘inward materiality’).

Some others may have a balance between that and improving the planet (‘outward materiality’). Or you may decide that improving the planet is something you want to do, but that’s your next step. It comes down to your philosophy again.


Asset allocation adjusted for climate trends tends to penalise the hotter developing countries. So should we all stop investing in emerging markets or should we allocate more capital to them to help them transition faster?

Again, the answer to this is about both inward and outward materiality. By avoiding emerging markets you might avoid elevated investment risks (such as rising sea levels or adverse weather). But it could also mean missing out on investment opportunities in those countries.

For an asset owner that is also concerned with the climate impact (‘outward materiality’) of their investments, the allocation of capital to developing countries will help towards their decarbonisation goals in the long run.

To ensure that money is going to projects that make a difference to climate, asset owners should be considering ‘adaptation based green bonds’. These are sovereign bonds where the capital is specifically earmarked to raise money for climate and environmental projects.

These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers' other debt obligations.​



Lesley-Ann Morgan
Global Head of Pensions and Retirement
Ben Popatlal
Multi-Asset Strategist


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