COMMITMENT VS. ACTION COMMITMENT VS. ACTION

Commitment vs. Action

funds marketed as ESG that fall short of targets

Source: Harvard Law School Forum on Corporate Governance

70%

A growing number of asset managers have set high-level ambitions with regard to climate change, but many have struggled to follow through on those pledges. Others have chosen to take a more conservative path, developing methodologies and tools before making any public commitments. Unsurprisingly, this confusion is reflected in the market. InfluenceMap, a London-based non-profit, found in 2021 that 55% of funds marketed as either low-carbon, fossil-fuel free or green energy exaggerated their environmental claims. The group also estimated that more than 70% of funds promising ESG goals fell short of their targets.

Commitments vs Impact

Confusion around the meaning of climate transition

In fact, it may well delay and obfuscate its orderly transition. Being transparent and unambiguous about the objectives behind various green funds, investors can choose what strategies work for them.

Eliminating fossil fuels from portfolios does not necessarily create a fossil-fuel-free world.

Definitions of Green Investing

As the ESG world becomes more contested and political, public commitments may not tell the whole story. Investors should look beyond the pledges and determine what asset managers are doing in practice – what strategies, resources, and organizational structures they have in place to allow their clients to approach ESG with integrity.

These findings highlight that ESG commitments do not necessarily equal real-world impact. Likewise, a lack of public commitment should not be equated with having no interest in ESG.

financial assets committed to net zero emissions by 2050

Source: Glasgow Financial Alliance for Net Zero (GFANZ)

$130 tn

This eye-catching claim from the voluntary group Glasgow Financial Alliance for Net Zero (GFANZ) includes $57 trillion from asset managers. But what does this mean in reality? Revealed at the 2021 United Nations Climate Change Conference in Glasgow, otherwise known as COP26, the pledge drew criticism for not immediately stopping financing of fossil fuel. While the International Energy Agency’s (IEA) “Net Zero” scenario rules out any new fossil fuel projects, members of GFANZ warned that a complete moratorium could hasten a disorderly and unjust transition.

GFANZ Reception

Source: Tom.Gosling.com

While GFANZ was lauded for its ambition, it has also been charged by some critics as being a commitment without any guarantees of action, amounting to little more than greenwashing. Others have questioned how these align with their fiduciary duties. For some, GFANZ is not ambitious enough. For others, it oversteps its bounds.

The varying perspectives on what constitutes green investing has created an element of confusion for asset managers and asset owners alike. The strictest definition – one the “purists” of the ESG world would apply – might call on funds to prohibit any investments in fossil fuels and finance only alternative energy projects such as wind and solar farms, which is narrower than the GFANZ pledge. But there is a growing acceptance of a more pragmatic approach to decarbonization which supports a pathway to transition. ESG funds and tools have been built around this view, which include brown assets on a credible pathway or assets that facilitate a just transition to decarbonization. These investments might include cleaner fossil fuels such as natural gas, and mining that has ties to the battery supply chain. Minimizing carbon emissions allows for funds to manage risk, while benefits to the environment are created over time as the years-long transition to alternative energy moves forward. This approach also acknowledges the reality of today’s energy markets, with the majority of the world’s consumption dependent on oil, natural gas, and coal. Dropping fossil fuel investments may encourage the privatization of energy assets, rather than a transition to green energy. And it does little to influence the world’s largest suppliers of oil: state-run energy giants. Even if the supply of fossil fuels is curtailed, prices would likely rise in the face of global energy demand.

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