Opinion Fund management

The banking approach to net zero is just claptrap

The numbers are hokum, the clients are left in the dark and the real world
impact is negligible anyway

STUART KIRK

A night view of the Green Zone in Sharm el-Sheikh where the COP27 climate summit is taking place © Mohamed Abd El Ghany/Reuters

Stuart Kirk NOVEMBER 11 2022

The writer is a former head of responsible investment at HSBC Asset Management and
previous editor of Lex

Of all the claptrap forced upon me as head of responsible investment at a global asset
manager, the most egregious was net zero targets. Indeed, my industry’s response to the
immense challenge of decarbonisation is one of the dumbest things I’ve seen in almost
thirty years in finance.

Before I explain why, some background. From the 2015 Paris Agreement emerged the idea
that investors must play their part in the energy transition. Damn right. From there came
the concept of financed emissions — that providing funds to a belcher of carbon is basically
akin to polluting itself, and hence capital should have net zero targets too.

Clearly there is a problem of knowing where to stop. Should accountants who audit dirty
finance be net zero? What about the headhunters who recruited them? Even so, a
framework where the owners and allocators of capital emulate real world objectives — and
in doing so help to achieve them — appears logical and worthwhile.
Hence why almost 400 asset managers and owners — responsible for some $70tn — have
rushed to join the Net Zero Asset Managers Initiative and its asset owner equivalent.
Signatories promise to reduce financed emissions by some percentage by a particular date.
Robeco, for example, has committed to a 30 per cent reduction by 2025, and aims to reach
50 per cent by 2050.

That the numbers are hokum, which I’ll show in a moment, is bad enough. So is the fact
that pledges are made without many clients’ knowledge or permission. Big institutions
know what’s up. But retail investors probably do not. Thought you were buying a European
small cap fund? Sorry, you’re now saving the planet. Except you’re not. What rankles most
is the claim that these initiatives help reduce emissions. No distinction is made between
financing and trading. Sure, private equity assets can align with net zero goals, likewise
direct loans or venture capital — you just stop giving money to polluting companies. But
such primary sources of funding only make up a fraction of most manager and owner
assets.

Mostly they own secondary market securities. Permanent capital such as equity cannot be
withdrawn, it only changes hands. Real world impact: zero. And with traded asset classes,
the Institutional Investors Group on Climate Change’s demand for total industry alignment
is a fallacy. If I’ve sold my oil shares, the buyer of them is now misaligned.

So these initiatives are pure virtue signalling. A bigger worry for some investors is that
making money seems increasingly an afterthought too. The Net Zero Investment
Framework Implementation Guide is clear that financial objectives are to be
“supplemented” with half a dozen climate change objectives. The word “return” only
appears twice in 30 pages.

Back to the numbers. What does it mean when an asset manager commits to a 30 per cent
reduction in financed emissions? Nothing. Signatories can choose what assets to include in
their calculations. Money market funds? Too hard. Multi-asset? Let’s worry about it later.
Government bonds? No data, so exclude. Robeco, in the example above, is only subjecting
40 per cent of its assets to net zero alignment.

Headline-grabbing pledges are a fraction of a fraction, therefore. But it gets worse. Take
equities, which account for the bulk of the assets aligned with net zero. How is it decided
that, say, the financed emissions of US stocks will fall 100 per cent by 2050? Everyone has
their own approach. One well-known asset manager argued that given the US government
is committed to this target, then by extension all American companies will reach it too.

Other managers simply take a firm’s public commitment at face value. A 25 per cent fall in
emissions by 2025, says Coca-Cola? Good enough for us. To be fair, many are trying to
calculate net zero pathways themselves. But there are so many assumptions behind these
forecasts that comparisons between pledges are impossible.
 Climate Capital Last year, for example, you might have modelled
a European utility’s transition from coal to gas
to renewables, estimating the likelihood that it
would reach net zero by 2030. Now that
governments want energy security, these
forecasts may be wide of the mark. Similarly, net
zero pathways are hostage to pricing,
competition and regulators. A large carbon tax
Where climate change meets
would change the picture completely.
business, markets and
politics. Explore the FT’s coverage
What is more, financed emissions not only
here.
reflect the decarbonisation efforts of the
Are you curious about the FT’s underlying companies, but their change in
environmental sustainability value, as targets are a function of asset under
commitments? Find out more
management. If technology stocks rebound, say,
about our science-based targets
their lighter emissions mean that a portfolio’s
here
net zero alignment improves, even if a fund
manager does nothing, and emissions stay the
same.

You know an idea is flawed when it also makes sense the other way round. Why shouldn’t
capital go to the companies that need help with transitioning the most — that is, the high
polluters? Perhaps a net zero misalignment of portfolios should be under consideration in
Sharm el-Sheikh.

Letters in response to this article:

Britain requires a green taxonomy to hit net zero / From Ingrid Holmes, Executive
Director, Green Finance Institute and Chair, Green Technical Advisory Group, London
EC1, UK

Even children in Italy know ‘lo spread’ matters / From Riccardo Rebonato, Professor of
Finance, EDHEC Business School, London SW1, UK

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