How can asset owners achieve real-world impact and financial returns?

When asked how their organisation can achieve the greatest positive, real impact on climate while also achieving return objectives, asset owners gave the following responses:

Long-term planning and flexibility

Many organisations emphasised the importance of both long-term planning and flexible time horizons to balance climate impact and return objectives. Transition finance investments won’t bring only environmental benefits, they will also improve the earnings value of a business, but investors need to consider the longer time horizon required for these investments, says Risilience’s Andrew Coburn. “Modern financial rules discount 30-year returns at a much heavier rate than potentially they should. So, some tolerance around the time horizons of the returns is probably an important part of the thinking,” he notes.

Data-driven decision making

‘Robust data’ was frequently mentioned as critical to supporting decisions that align with climate goals and returns. Morningstar’s Bioy underscores the importance of forward-looking metrics. “To complete the narrative and assess the full impact of an investment, asset owners need more forward-looking information from companies and governments. This will give asset owners the confidence they need to finance the transition,” she says.

Collaboration and partnerships

Collaboration with investee companies, experts and teams is seen as essential to achieving climate and financial objectives. Engaging with companies directly to create a credible transition plan with science-based targets, for example, will help asset owners manage risks and returns. PME has successfully engaged with high-emitting companies in its portfolio, Spaargaren says. “We’re seeing a credible change at these electricity and utilities companies, which now have a coal phase-out plan and are investing in renewables to make solar and wind a bigger part of their energy mix,” he says.

Cost-effective, risk/return approaches

Organisations frequently stress the need for cost-effective solutions and maintaining profitability while pursuing climate initiatives. “We think that there shouldn’t be a trade-off between sustainability and returns, they should go hand in hand,” says Spaargaren. “Our policy owners are going to need that money 20 years from now or whenever they need it,” echoes the US-based sustainability leader. “It’s important to make sure that we understand what the returns and risks look like in managing our portfolio.”

The need for financial innovation

For asset owners to create a diverse and balanced portfolio, they require new, widely accessible targeted products. “A lot of the pension funds fall below the segregated mandate threshold to structure portfolios tailored for their sustainability objectives and trustees of large asset owners don’t necessarily have an opportunity to sit down and conjure up a product, so they’re quite reliant on what the market offers,” Dhlamini stresses. “We haven’t seen sufficient products that allow institutional and retail asset owners of different sizes to be crowded into financing climate-related initiatives. The fund-management industry needs to innovate in such a way that it addresses all asset owners’ needs.”

Conclusion

Asset owners have the capital and influence to invest for both impact and return. This research shows there is material recognition among asset owners of certain opportunities and risks presented by transition finance. It also shows there is meaningful divergence of how asset owners view the effectiveness of established net-zero frameworks and their ability to support decarbonisation in the real economy.