Los Angeles Times

Do investment fund pledges really cut emissions?

As global warming takes its toll, financial firms’ climate action commitment­s appear inconsiste­nt at best.

- By Frances Schwartzko­pff Schwartzko­pff writes for Bloomberg.

As global warming leaves a trail of wildfires, drought and human loss across much of the Northern Hemisphere, there’s fresh evidence that the financial pledges needed to protect the environmen­t may not be fit for purpose.

“I hope that what we’re seeing will accelerate action, but it’s not necessaril­y the case,” said Jean-Xavier Hecker, co-head of environmen­tal, social and governance, or ESG, research at JPMorgan Chase & Co., in an interview.

Commitment­s to slash greenhouse gas emissions by the world’s biggest asset managers are at best inconsiste­nt, with analysts at Morningsta­r Inc. and JPMorgan seeing significan­t difference­s in how firms like Vanguard Group and State Street Corp. explain their net-zero emissions goals.

But with the latest bout of extreme weather underscori­ng the need for urgent action, there’s little time for the finance industry to experiment with different models for calculatin­g their carbon footprint.

“The longer we spend talking about methodolog­ies and data, the longer we delay action,” said Hortense Bioy, global head of sustainabi­lity research at Morningsta­r Inc., which is calling for greater standardiz­ation of net-zero methods. “The

window of opportunit­y to take any meaningful climate action is rapidly closing.”

Some of the biggest fund managers remain heavily invested in the fossil-fuel industry. According to analysts at Bank of America Corp., Europeanba­sed ESG equity funds have been increasing their holdings of energy companies such as Shell, Repsol and Aker BP in recent months. While many asset managers have yet to align the bulk of their assets with

carbon-neutrality goals, some large investment firms have adopted varied netzero strategies, making it hard to compare results and measure real-world impact.

The Net Zero Asset Managers initiative, which represents firms with $61 trillion of assets, allows members to choose among three methods for calculatin­g how much of their portfolios are aligned with a netzero goal. The thinking is that managers need flexibilit­y to accommodat­e different operating models.

The result is a patchwork of outcomes. Axa Investment Managers has committed 65% of its assets to net zero and set a carbon intensity target — a measure of emissions relative to revenue — of 50% by 2030. BlackRock Inc., the world’s biggest money manager, uses a different gauge and says it expects “at least” 75% of corporate and sovereign assets to be invested “in issuers with science-based targets or equivalent” by the end of the decade, according to an NZAM report in May.

“BlackRock’s formulatio­n stands out because it’s not a pure commitment but more of an expectatio­n” for achieving net zero, said Hugo Dubourg, co-head of ESG research at JPMorgan. It relies mainly on BlackRock’s investee companies hitting their targets first.

NZAM members are also free to decide how much of their portfolios to commit to climate neutrality goals. That means they can exclude high-polluting industries.

“For this reason, membership of the initiative alone shouldn’t be interprete­d as proof of a credible pledge,” said Katie Stewart, senior research officer at

ShareActio­n, in an email.

NZAM said in an email that its approach acknowledg­es the finance industry needs time to adapt. “These initial targets are just the asset managers’ individual starting points,” the group said. NZAM’s plan is to offer more guidance on how to report, particular­ly on private equity, derivative­s, infrastruc­ture assets and indexlinke­d products.

On paper, BlackRock is way ahead of State Street and Vanguard, with 77% of its assets closely aligned to its net-zero goal. That compares with 14% of assets for State Street and 4% for Vanguard, according to NZAM data.

The difference for the three firms that are best known for their index-tracking funds lies in their netzero methodolog­ies. “It doesn’t make — at the outset — any intuitive sense,” said Carlo Funk, an ESG investment strategy head at State Street, in an interview.

State Street’s goal of hitting net zero by 2030 rests on its ability to cut financed Scope 1 emissions intensity (from direct operations) and Scope 2 emissions intensity (from purchased energy) by half, with cuts to Scope 3 emissions intensity (linked to the broader value chain) to be phased in later.

BlackRock’s net-zero goal for 2030, meanwhile, is based on how its investee firms are expected to perform, namely the share that have set science-based targets. BlackRock declined to comment. Previously, it has stated that clients with investment­s worth $3.3 trillion have already made net-zero commitment­s, which will help BlackRock achieve its net-zero goal.

Vanguard limits the scope of its net-zero ambitions to actively managed funds. It aims for at least half the funds’ market value to come from companies that target net zero. It chose that approach to ensure targets are accountabl­e over the long term, according to a company spokesman.

 ?? Charlie Riedel Associated Press ?? SOME OF THE biggest fund managers remain heavily invested in the fossil-fuel industry. Above, emissions from a coal-fired power plant in Kansas City, Mo.
Charlie Riedel Associated Press SOME OF THE biggest fund managers remain heavily invested in the fossil-fuel industry. Above, emissions from a coal-fired power plant in Kansas City, Mo.

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