Net Zero Investment Consultants Initiative (NZICI)

Hymans Robertson was engaged by a new client that wanted support in understanding their current portfolio’s emissions baseline, the setting of a net zero target, the potential trajectory of their strategy and the alignment of investment objectives to help achieve their net zero target. They also wanted to develop a Climate Transition Action Plan (CTAP) to document their objectives and actions in accordance with their net zero ambition.   

Hymans Robertson designed a series of three workshops to support the client in understanding more about climate change and net zero, how this related to their current positioning and the methods that the client could use to achieve net zero. The focus of the workshops was to provide education and training on net zero, the allocation of capital to different types of climate solutions and the importance of engagement.   

The first workshop provided education and training to support knowledge-building of how net zero targets are situated in the broader global context of climate change risk and net zero goals. Consideration for the current baseline position was also assessed here, with in depth discussion on engagement vs divestment and exclusion.   

The second workshop took a more granular approach to ideas about policy provisions based on the initial workshop’s discussion. Greater focus was placed on understanding how different trajectories could result in the achievement of different net zero targets at different dates.   

The workshops were highly collaborative and contained many open-ended discussions to gather the client’s thoughts on various mechanisms to implement net zero and how Hymans Robertson could support in forming these ideas into a coherent plan. The workshops’ participants included the Committee, the Pension Board, and other stakeholders such as employee representatives, which helped generate a broader viewpoint.   

The final workshop presented a summary of the ideas discussed at the first two workshops, in the form of a finalised Net Zero Policy and CTAP, which was presented to the client for review. Once any proposed changes were discussed, Hymans Robertson implemented the changes and issued a final draft. The aim is for the policy to be revised on an ongoing basis and be formally reviewed and monitored annually.  

Adapted from ‘Being Better Stewards: UK Stewardship Code Review of the year ending 31 December 2023’, Hymans Robertson  

Frontier Advisors undertook a lengthy process to establish a carbon emissions/climate reporting service for small to medium sized clients who typically did not have access to such services due to a lack of direct access to relevant data, limited internal resources, and cost constraints for each individual asset owner.  

The scope of the reporting service extended to listed equities and corporate debt. Frontier Advisors was mindful that coverage needed to extend to other asset classes, particularly unlisted property and infrastructure, but also private equity and private debt. Many of their clients have significant exposures to these asset classes and are also exposed to sectors of the economy that have a pivotal role to play in real-world decarbonisation.  

Frontier Advisors recognises the complexity of measuring and estimating carbon emission metrics across these asset classes and the need to report metrics that are accessed via a standardised methodology that will satisfy industry conventions and regulatory requirements. Frontier Advisors is emphasising to clients that they need to have access to climate data that is decision-useful.  

Adapted from ‘The Net Zero Investment Consultants Initiative – Frontier Advisors Annual Report’, Frontier Advisors  

WTW launched an in-depth climate course for clients in 2023 designed to give pension scheme trustees the understanding of climate change they need to fulfil their fiduciary responsibilities. The course drew on WTW’s breadth of climate expertise across its Climate practice, Investments, Retirement, Covenant and Employee Experience teams.   

As climate change increasingly presents significant risks and opportunities to pension schemes, WTW recognised that trustees need to understand enough about the topic to make informed decisions and to challenge advisers. WTW therefore created a syllabus which builds a foundation of knowledge about key climate concepts and then focuses on the key considerations for UK pension schemes. The varied course content ranged from understanding the causes and impacts of climate change and considering the intersection with nature and biodiversity, to investment considerations and practical actions, including disclosure requirements, metrics and stewardship.   

At the time of publishing this case study, a UK-based independent trustee group was undergoing the course, having enrolled all staff which are responsible for more than 470 appointments, supporting schemes which collectively represent over 10 million members.  

Adapted from ‘2023 UK Stewardship Code: Full Report’, WTW  

When supporting clients with climate-related scenario analyses, Cardano typically used Climate Value at Risk (CVaR) or the estimated financial loss of warming scenarios at 1.5°C, 2°C and 3°C. In 2023, Cardano spent more time going into detail with clients about the drawbacks of relying on quantitative data for climate decision-making. These models give counterintuitive results that seem to underestimate risks particularly in hotter scenarios. Cardano believes a major reason for this is a failure to properly capture the full systemic effects of climate change on overall markets. This may include effects on growth, productivity and inflation. There are also limitations in the reporting on all asset types.  

As a result, Cardano carried out an extensive exercise to better support clients to adopt qualitative scenario analysis from 2024 reporting and onwards. They found that this approach brought the key issues to the fore in a way that the quantitative data does not. It encouraged active discussion and provided a more comprehensive assessment of the potential climate-related risks for a portfolio. Cardano are encouraging clients to adopt this approach and become less reliant on quantitative analysis.  

Adapted from ‘The Net Zero Investment Consultants Initiative: Progress Report 2024’, Cardano  

XPS had a client that wanted to be market-leading in their commitment to climate change and wanted to establish a net zero strategy.   

XPS helped design a comprehensive framework for implementing the net zero strategy while considering the nuances of the client’s mandate and their manager’s capabilities. The framework included an ambition to reach net zero by 2050, with interim targets to reduce emissions by 50% by 2030 with a 7% year-on-year absolute reduction, and is aligned to the Institutional Investors Group on Climate Change (IIGCC) Net Zero Investment Framework. A specific client requirement was that the net zero target should be future proof, so XPS worked with investment managers to agree wording and targets to capture this. Managers are required to report formally against the carbon reduction target and exclusion policies.   

The client implemented their net zero strategy into their mandates with a clear understanding of how the emissions profile should change over time. In addition, the client is clear how this will be managed alongside other objectives, and how this new strategy drives the investment managers’ and the client’s own investment decisions. The client monitors progress of the carbon emissions against the defined pathway annually.  

Adapted from ‘Net Zero Investment Consultant Initiative Progress Report’, XPS Group  

bfinance had a client interested in allocating to sustainable infrastructure. A range of thematic diversified funds and renewables-focused strategies were assessed. While it would have been logical for the client to allocate to renewables, bfinance helped the investor to partner with a manager with a strong transition mindset and capability. This required dedicated knowledge transfer to get the client comfortable with transition-focused opportunities (which may have a high footprint in the short term) as well as thorough due diligence to assess the manager’s authenticity in delivering the intended outcomes.   

Bfinance enabled their client to participate and contribute to real-world decarbonisation of existing legacy assets. Through this and other similar engagements bfinance has demonstrated a commitment to supporting investors to allocate capital with genuine impact.  

Adapted from ‘2024 Report: Net Zero Investment Consultants Initiative’, bfinance  

Redington worked with a large UK endowment to develop a net zero strategy that was ambitious, achievable, and, crucially, nature-positive. Redington started with detailed training on the inter-relationship between nature and climate, and the need to consider both in tandem on the road to a net zero world. This included, among other things, the regulatory environment, net zero in the real economy, the key drivers of nature loss, the importance of natural carbon sinks, and also an introduction to some of the metrics available for investors to start identifying nature-related risks within portfolios.   

Redington then proceeded with an in-depth climate and nature analysis of the endowment’s portfolio, baselining the portfolio on a variety of metrics and highlighting any specific companies, funds and sectors particularly exposed to climate and nature risk.  

Redington took this analysis one step further and worked with the client to set ambitious and robust nature-positive net zero targets. The firm also developed a Net Zero Dashboard to ensure monitoring of progress against the stated targets (see page 36 here). The endowment’s chosen targets center around forward-looking climate objectives and deforestation-oriented engagement objectives to respond to the nature challenge.   

Redington continues to work with the client to ensure accurate monitoring of progress against these nature-positive net zero targets.  

Adapted from ‘Sustainable Investment and Impact Report 2024’, Redington  

Barnett Waddingham enhanced the way they rate and report on managers, including reviewing and adding additional metrics to their questionnaire. This included asking about:   

• any changes to stewardship and sustainability processes over the period;   
• the availability of voting services (such as voting choices),   
• use of carbon offsets; and   
• how they voted in terms of a selection of a number of key votes.  

Barnett Waddingham produced a public insights research report on their findings, with key learnings as follows:  

Comparing apples with pears: due to characteristics specific to each asset class, comparing carbon data across different asset classes is not advised. In addition, caution should be taken when comparing year-on-year data for the same asset class, as methodologies and / or data coverage may have changed, meaning apparent trends can be misleading.   

Words are not yet actions: whilst Barnett Waddingham found a significant uptick in the number of managers signing up to net zero initiatives, this was generally not at that stage resulting in managers integrating net zero commitments within their funds and providing better quality climate data.   

Voting tug of war: climate and environmental management and stakeholder resolutions are increasingly divisive. Barnett Waddingham observed a large divergence in voting practices of asset managers.   

Alignment of stewardship considerations: Barnett Waddingham found that asset managers were generally aligned with what investors are most concerned with when setting their stewardship priorities.  

Adapted from ‘Sustainability Report 2023’ and ‘Investment Insights: asset managers’ sustainability disclosures - words vs. actions’, Barnett Waddingham  

Cambridge Associates engaged with a manager investing in small-cap buyouts. The manager was at an early stage of their ESG and climate journey, with limited ESG integration in its investment processes.   

Through meetings and email correspondence with the manager, Cambridge Associates discussed ESG in deal processes, ESG reporting, and climate risk integration, and sought clarifications about investments with potentially controversial elements.   

Cambridge Associates shared ESG guidelines and best practices, including for client reporting as well as tools for assessing climate risk and de-carbonising investments. Cambridge Associates also provided input about current market standards held by European clients.   

The manager was open to considering the materials and recognised a need to improve sustainability practices and reporting at the firm. They stated they would consider annual ESG reporting, and participation in the ESG Data Convergence Initiative following their fundraising period.   

The manager received Cambridge Associates’ feedback positively, making firm-level and portfolio-level ESG and emissions reporting available to Limited Partners upon request. Cambridge Associates will monitor the manager’s progress.  

Adapted from ‘2024 Net Zero Investment Consultants Initiative’, Cambridge Associates 

JANA developed a proprietary framework to assess the investment teams and strategies in which JANA clients invest. The aim was to check alignment to the global goal of net zero emissions by 2050, and to help clients understand their managers’ alignment to their own net zero commitments and plans.   

JANA’s framework was adapted from the Institutional Investor Group on Climate Change (IIGCC) criteria for assessing Paris-alignment of companies and augmented with learnings from a series of meetings with managers that JANA deemed to have best practice ESG integration capabilities. The framework is designed to discern whether the strategy has a credible focus on the decarbonisation of the investment portfolio that is consistent with the required real economy changes, or whether the strategy facilitates increased investment in the range of required climate and transition solutions.   

JANA’s Research Teams collected information from around 400 investment strategies across all asset classes. The research revealed the multitude of approaches that may support net zero objectives in investment portfolios and provided JANA with clarity around what can be considered a credible net zero plan in each asset class at this point of the global net zero journey. JANA’s assessments confirmed a number of known knowns while also revealing new useful insights. For example, it is clear that private markets are further developed and have higher quality data and initiatives to support their net zero commitments and plans. This observation is exemplified by many leading property and infrastructure managers having net zero commitments much sooner than 2050, in part due to having a higher degree of direct ownership in the assets and being closer to the social license and cost benefits of making improvements in line with the net zero transition.   

A new insight was the high level of understanding of net zero investment approaches exhibited in all asset classes, paired with the willingness and capability of a large proportion of asset managers to implement a client-directed net zero objective via a mandate or separately managed account. The takeaway being that the power to greatly lift the net zero alignment of portfolios is very much in asset owners’ hands, once they have determined their net zero objectives and approach.  

JANA’s research found that there were a number of managers not part of collaborative industry initiatives that had developed innovative and credible plans to support the net zero transition. JANA also found that, based on the finding above, many managers are willing to implement net zero targets once directed by their clients.  

Adapted from ‘2024 NZICI Progress Report’, JANA Advisors  

LCP has been working with regulators for several years to try and ensure that regulations and policy evolve to enable and promote a transition to a low carbon economy. They considered how to involve their clients in this process to add weight to the discussions, which led to the development of a set of climate policy asks. With the support from clients who have signed up, LCP refers to these policy asks and the support behind them when they engage with policy makers, to help drive change. In particular, LCP is urging regulators to focus on real-world actions that facilitate the net zero transition and enable asset owners to invest to support the transition.  

LCP’s policy asks are:   

1. Climate regulations for investors should aim for real-world impact, not just disclosure   
2. It should be easier for DB and DC pension schemes to invest in climate solutions, including growth and/or illiquid assets   
3. Climate action needs to match the scale of the risk, removing the current disconnect between the levels of policy ambition and implementation  
4. Governments should set clear, credible, consistent net zero plans, which are nature friendly and socially just, so investors can invest in the net zero transition with confidence   
5. Pension trustees’ fiduciary duty should be reinterpreted to have a longer time horizon and include macro (impact) as well as micro (risk) considerations .

Adapted from ‘Net zero investment progress report’, LCP