Looming deadline of 2030 signals the need for examination of managers' climate management endeavors

In the rapidly evolving landscape of climate action, companies and investors are facing increased urgency to align their strategies with the goal of achieving net zero emissions.

One key area of focus is the relationship between asset owners and fund managers. This partnership is being redefined, moving away from a traditional "carrot-stick" approach, towards a more collaborative and strategic alliance.

Asset owners, such as pension funds and insurance companies, are prioritising capital expenditure, financial statements, and lobbying as tests of a company's net zero commitment. They are also looking for a more systematic approach to voting, targeting director accountability, given the urgency of the net zero transition.

In response to this tension, fund managers are introducing new stewardship offerings. For instance, The People's Pension, a UK-based pension scheme, has implemented net zero voting guidelines as part of its Responsible Investment Policy, holding fund managers accountable for their actions.

The Net Zero Asset Owner Alliance's climate stewardship expectation documents serve as a good illustration of the evolving role of asset owners in shaping stewardship propositions. These documents provide a framework for fund managers, routed in a robust theory of change, that delivers maximum value for beneficiaries.

However, the ever-evolving complicated industry landscape on climate requires a more thorough assessment of fund managers' resilience in these areas. An underinvestment in the stewardship function could hinder the transition to a net zero economy. Therefore, fund managers need to have robust escalation processes in place for climate issues, using various stewardship levers.

Collaborative initiatives and frameworks are being prioritised to exert greater influence and embed necessary efficiencies in engagement activities. In the UK, investor associations coordinating expectations of asset managers on climate stewardship include initiatives like the Green Growth West Fund linked to Bristol’s public-private partnerships. These collaborative efforts aim to mobilise substantial investment and serve as examples of current climate finance coordination.

As the pressure on investors grows due to ESG backlash, asset owners are expected to register their dissent as a fundamental part of that partnership approach, should their expectations not be met, especially regarding climate stewardship.

Creating strategic partnerships with fund managers is believed to create better value for beneficiaries. WTW (wtwco.com) emphasises the importance of stewardship resources matching investor ambitions.

Moreover, for sectors linked to agricultural-linked commodities, scrutinising their approach to tackling deforestation is essential for achieving net zero. All asset owners should take industry-led guidance documents into account in their monitoring processes for embedding climate stewardship into their decision making.

In conclusion, the relationship between asset owners and fund managers is undergoing a significant transformation. Prioritising the mining and the demand side of fossil fuel reliance in industry engagement activities, ensuring the social and physical impacts of climate change are incorporated into the approach, and demonstrating an appropriate evolution over time are all crucial steps in this transition. The ultimate goal is to create a sustainable, net zero economy that delivers value for all beneficiaries.