Asset owners need to focus on achieving real world decarbonisation rather than just focusing on numbers and targets that may only superficially decarbonise portfolios


Many asset owners around the globe are setting long-term net-zero targets and trying to steadily decarbonise their portfolios over the next few decades, and the companies they invest in are following suit.
 

However, well intentioned asset owners should avoid focusing too much on simply hitting quantitative targets for risk of disserving the complex climate web of considerations that no purportedly suite of metrics can claim to neatly capture.  Instead, they should use these science based targets as guiding a more holistic assessment of their portfolio’s climate transition possibilities and pathway with the intent to contributing to a meaningful real economy wide decarbonisation.
 

In a multi-asset diversified portfolio, the ability of different asset classes to contribute to decarbonisation varies, and each has a different starting point, so the task is not a simple one.
 

At Mercer, when we talk about net-zero and its implementation from a portfolio perspective, our intent is to stay focused on achieving real economic decarbonisation and alignment to the Paris Agreement. Our net-zero commitment sits at the total portfolio level and is not limited to any specific asset classes. We look at how all the different sectors and asset classes collectively equate to net zero through quantitative and qualitative considerations that are also expected to further evolve.
 

Beyond portfolio decarbonisation

While investors can achieve portfolio decarbonisation by divesting or screening high emitting assets, this alone may not meaningfully contribute to real economic decarbonisation. Further, it is achievable to optimise portfolios for reduced carbon exposure - 20% to 45% less carbon intensive than benchmark- whilst preserving risk return characteristics as a cheer win for being on track for targets. These are largely emissions based re-weightings that penalise companies with high emissions profile and can effectively contribute towards portfolio decarbonisation. However, solving for real economic decarbonisation and an orderly transition through managed diversified portfolios, requires a carefully designed approach that is capable of looking beyond simply reducing emissions quantitatively to hit net zero targets.
 

We work closely with our investment managers to constructively challenge and explore climate risk management strategies and new opportunities. We are open to looking closely at examples where high emitting companies of today can also have a strong case for investment looking out into future through climate lens, when qualitatively reviewing their transition readiness. 
 

Fossil fuels are often likened to tobacco until we understand that many fossil fuel intensive companies are in fact capable of changing spots, bringing about real economic decarbonisation as well portfolio decarbonisation. Asset owners play a privileged role in the investment value chain to effect influence that can be meaningful for real economy decarbonisation through tools such as advocacy, engagement and voting. 
 

We spend a lot of time sitting down with management to understand such asset-specific decarbonisation pathways. Complicated carbon calculations are only possible through engagement with managers and company boards. We harness this information to help our clients with their investment decisions.
 

Learning from the past

All climate labels are not sustainable, they also need to go through the same ESG due diligence. For instance, windfarms are great for decarbonisation, but care must also be taken not to impinge on the flightpath of migrating birds that are critical to the surrounding ecosystem. We must avoid creating a second problem while solving the first. Climate analysis should evolve to systematically include biodiversity factors as well as the social impacts of physical and transition risks.
 

We should also learn lessons from past ecological disasters. For example, the 2015 rupture of the Fundao tailings (iron ore mining waste) dam in a town in Brazil, which killed 19 people, polluted rivers and harmed agriculture. Carbon sequestration and storage are new climate solutions that we need to ensure for safety from leakage before fresh disasters unfold.
 

If we achieve Paris alignment, we have a better chance to protect portfolios and help to achieve better risk-adjusted returns. Asset owners can lead the ripple effect on asking the right questions along their investment value chain that’ll progress real economic decarbonisation.  Rather than just focusing on numbers and targets around net-zero, it is time to walk the talk if investors want to drive real change. 

Komal Jalan
Komal Jalan
Sustainable Investment Manager

Important Notices

 

References to Mercer shall be construed to include Mercer LLC and/or its associated companies.

 

© 2021 Mercer LLC. All rights reserved.

 

This content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity without Mercer's prior written permission.

 

Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax or legal implications.

 

This does not constitute an offer to purchase or sell any securities.

 

The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed.

 

For Mercer’s conflict of interest disclosures, contact your Mercer representative or see http://www.mercer.com/conflictsofinterest.

 

This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. Mercer provides recommendations based on the particular client's circumstances, investment objectives and needs. As such, investment results will vary and actual results may differ materially.

 

Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission or inaccuracy in the data supplied by any third party.

 

Funds of private capital funds are speculative and involve a high degree of risk. Private capital fund managers have total authority over the private capital funds. The use of a single advisor applying similar strategies could mean lack of diversification and, consequentially, higher risk. Funds of private capital funds are not liquid and require investors to commit to funding capital calls over a period of several years; any default on a capital call may result in substantial penalties and/or legal action. An investor could lose all or a substantial amount of his or her investment. There are restrictions on transferring interests in private capital funds. Funds of private capital funds’ fees and expenses may offset private capital funds’ profits. Funds of private capital funds are not required to provide periodic pricing or valuation information to investors. Funds of private capital funds may involve complex tax structures and delays in distributing important tax information. Funds of private capital funds are not subject to the same regulatory requirements as mutual funds. Fund offering may only be made through a Private Placement Memorandum (PPM).

 

Not all services mentioned are available in all jurisdictions. Please contact your Mercer representative for more information.

 

Investment management and advisory services for U.S. clients are provided by Mercer Investments LLC (Mercer Investments). Mercer Investments LLC is registered to do business as “Mercer Investment Advisers LLC” in the following states: Arizona, California, Florida, Illinois, Kentucky, New Jersey, North Carolina, Oklahoma, Pennsylvania, Texas, and West Virginia; as “Mercer Investments LLC (Delaware)” in Georgia; as “Mercer Investments LLC of Delaware” in Louisiana; and “Mercer Investments LLC, a limited liability company of Delaware” in Oregon. Mercer Investments LLC is a federally registered investment adviser under the Investment Advisers Act of 1940, as amended. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Mercer Investments’ Form ADV Part 2A & 2B can be obtained by written request directed to:  Compliance Department, Mercer Investments 99 High Street, Boston, MA 02110.

 

Certain regulated services in Europe are provided by Mercer Global Investments Europe Limited and Mercer Limited.

 

Mercer Global Investments Europe Limited and Mercer Limited are regulated by the Central Bank of Ireland under the European Union (Markets in Financial Instruments) Regulation 2017, as an investment firm. Registered officer: Charlotte House, Charlemont Street, Dublin 2, Ireland. Registered in Ireland No. 416688. Mercer Limited is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 984275. Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU.

 

Investment management services for Canadian investors are provided by Mercer Global Investments Canada Limited. Investment consulting services for Canadian investors are provided by Mercer (Canada) Limited.