Climate-focused targets: moving to a granular approach

Our research shows that, for nearly all asset classes, climate-related strategies are here to stay. Almost half of asset owners (48%) have between one-quarter and half of their assets under management (AUM) invested in portfolios with climate-related instructions or objectives, up from 40% in 2022. This rises to 75% for endowment funds, which typically invest for designated purposes.

A significant number of respondents say their infrastructure (45%), private equity (50%), private debt (44%), corporate debt (41%) and listed equities (36%) asset classes are within the scope of their climate-related objectives.

Emissions reduction is still the main target type

The climate-related targets and metrics that asset owners are using remain broadly the same as in 2022. Emissions-reduction targets were the most used in 2022, and this is still the case in 2023. Nearly half (49%) of asset owners have an emissions-reduction target in place for their fund, while 43% - rising to 54% in Asia-Pacific (APAC) – use Climate Value-at-Risk (VaR). In North America, the second-most-used target type is portfolio coverage/asset-level alignment (40%) and, in Europe, it is implied temperature rise (44%).

Nearly two-thirds of asset owners (61%, rising to 67% in North America) use the same climate-related target type for all asset classes and funds. Using the same type of target allows organisations to minimise risk, increase resource efficiency and build expertise while retaining control over outcomes, according to respondents.

Having a clear net-zero transition plan in place at company level allows all functions to “row in the same direction,” according to a US-based sustainability leader for a large insurance provider.

“We have a global strategy on ESG integration that sets out what we do or don’t invest in and how we engage with investors. The strategy very directly incorporates our climate plan and our decarbonisation targets for our portfolio, which are steered by our net-zero commitments and our membership of the Net Zero Asset Owner Alliance [NZAOA],” they say.

Fund-level climate targets

Although asset owners focus on the same type of target, they expect to adopt a more granular approach when it comes to the level of the structure to which the target is applied.

Currently, 43% set targets for whole asset classes within their portfolio, and 35% set targets at the top (whole portfolio) level. However, 45% say they plan to set specific targets for all individual funds within the next 12 months. This applies to both internally and externally managed funds.

Over the next 12 months, many expect to pivot from top-level to fund-specific targets

This more granular approach recognises that setting targets at whole portfolio level is no longer adequate. This also allows asset owners to acknowledge that the pace of decarbonisation will vary between asset classes, regions and sectors.

Daan Spaargaren, Responsible Investment Strategist at Dutch pension fund PME, explains that his institution has set an overall goal of reaching net-zero emissions by 2050³. “That is the technical aim overall, but we divide that into goals for specific asset classes, from equities and bonds to PE and real estate,” he says. “Because all these asset classes have different characteristics, different measurement systems, and different instruments to steer in order to achieve impact.”

³ PME Climate Plan.