17 Oct 2022
In our survey of senior executives from asset owners around the world, 60% of respondents say that fighting climate change is one of their fund’s strategic objectives. About half (51%) say their fund has emissions-reduction targets in place.
This is an encouraging picture at one level: it shows that the majority are doing something in response to climate-related risks and opportunities. But it is less positive when we look for real-world impact. Only about one in five (19%) say they use transition finance to any extent, and fewer still say that their fund invests in transition-finance assets in emerging markets (16%), the regions where emissions and populations are growing the fastest.
Emerging markets present an enormous challenge – and opportunity. But currently, asset owners with a climate agenda are more likely to be using other investment approaches.
Five of these stand out:
Portfolio construction / reweighting
Adoption of climate-related themes
Climate-related factor integration
Although about half (52%) of respondents believe that transition finance is a major commercial opportunity for asset owners, and 60% believe that transition finance will grow rapidly over the next three years, our research suggests that transition finance needs to grow much faster.
Despite more than half of the asset owners believing in the commercial opportunity, just 35% say that their organisation is likely to make transition-finance investments in the next 12 months, 20% say they are researching opportunities in transition finance, and only 8% are building their internal capabilities in transition finance.
We asked asset owners what proportion of their AUM is currently invested in portfolios with climate-related instructions or objectives.
In the diagram below, we show the distribution of responses in yellow, where the vast majority (nearly 90%) of asset owners indicate less than half of of their AUM includes climate-related instructions. Significantly, 46% have less than a quarter in these allocations.
Just over 10% of asset owners said more than half of their AUM was invested in portfolios including climate-related instructions. This includes less than one percent with more than three quarters.
Then we asked respondents to look forward to 2025 and provide their expectations on how these investments might change.
By 2025, respondents anticipate a material increase in the level of AUM with climate-related instructions. The distribution of responses shown in the diagram in grey, shifts to the right. Instead of 10% with more than half their AUM in these strategies, this could be more than 20% in 2025.
This type of shift is evident throughout with only a handful of respondents expecting to have less than a quarter of their assets with climate-related instructions.
Expectations in 2025 show a meaningful shift in the proportion of AUM allocated to climate-related strategies.