Alliances and initiatives can be powerful. Consider NATO, arguably the strongest, most important political alliance in the world. Global health initiatives are successfully combating diseases from AIDS to malaria to tuberculosis around the world. In the fight against climate change, a wide range of alliances and initiatives have been formed. In this article, we focus on alliances and initiatives in the financial industry that seek to reduce carbon emissions using their clout as stewards of investors’ capital and providers of other critical financial services.
No shortage of sustainability alliances.
The Glasgow Financial Alliance for Net Zero (GFANZ) was founded in April 2021 to expand the number of financial institutions committed to net-zero emissions goals, and to create a forum to address challenges associated with the net-zero transition in the financial sector. The GFANZ is an umbrella organization that includes the Net Zero Asset Managers initiative (NZAM), the Net-Zero Asset Owners Alliance (NZAOA), the Net Zero Banking Alliance (NZBA), the Net Zero Insurance Alliance (NZIA), the Net Zero Financial Service Providers Alliance (NZFSPA), and last but not least, the Net Zero Investment Consultants Initiative (NZICI).
To be clear, the financial services industry is not the only one with net zero initiatives. It is not a stretch to say that just about every industry, from construction, to food and beverage, healthcare, retailers, even attorneys, has one or more organizations dedicated to fighting climate change. The alliances under GFANZ all have similar missions to “support the goal of net zero greenhouse gas emissions by 2050, in line with global efforts to limit warming to 1.5°C.”
Focusing on the asset management industry, signatories to NZAM, in pledging “to support investing aligned with net zero emissions by 2050 or sooner,” make a number of commitments affecting all assets under management. Here is a subset of what NZAM requires of its members:
- Provide their asset owner clients with information and analytics on net zero investing, and on climate risk and opportunities;
- Implement a stewardship and engagement strategy (with clear escalation and voting policies) consistent with the goal of achieving net zero emissions by 2050 or sooner;
- Engage with rating agencies, auditors, stock exchanges, proxy advisers, investment consultants, and data providers to ensure that products and services available to investors are consistent with the goal of global net zero emissions by 2050 or sooner;
- Ensure any relevant direct and indirect policy advocacy undertaken is supportive of achieving global net zero emissions by 2050 or sooner;
- Publish TCFD disclosures, including a climate action plan, annually, and submit them to the Investor Agenda via its partner organizations for review to ensure the approach applied is based on a robust methodology, consistent with the UN Race to Zero criteria, and action is being taken in line with the commitments made here.
We think this list is commendable, but it’s a heavy lift, even for large asset management firms. In the name of transparency and accountability, signatories must provide NZAM with a great deal of information about how they will meet the requirements, along with regular updates.
As of December 2022, NZAM has 301 asset manager signatories with USD 59 trillion in AUM. This is impressive, and indicates the importance of sustainable investing. Still, without in any way casting a shadow on the NZAM alliance, the requirements are likely to dissuade some firms from pursuing membership, rather than running the risk of being tossed out of the organization for failing to meet some of the commitments.
Concerns & Controversies
Disclosure and transparency requirements can pressure financial institutions that join one of these alliances to make positive changes. While there is no financial penalty for failing to uphold the requirements, the threat of being kicked out and the potential impact on a firm’s reputation and credibility is meaningful. As the CEO of ESG Book, whose firm is working with the Net Zero Asset Owners Alliance on a “gold standard” for measuring net zero, notes, “these are voluntary groups. The only power you have is reputation.”
However, late in 2022, Vanguard withdrew from NZAM, saying it wanted to clarify its role as an index fund provider. In explaining its decision, the company said that, “Such industry initiatives can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms…particularly regarding the applicability of net-zero approaches to the broadly diversified index funds favored by many Vanguard investors.”
Given that index funds are passive investors, by definition, we can appreciate that it could be difficult for Vanguard to meet the NZAM requirement regarding engagement. However, many see Vanguard’s decision as a reaction to politically-motivated “anti-ESG” campaigns in the U.S. One of the founding groups of NZAM, Ceres, noted that “it is unfortunate that political pressure is impacting this crucial economic imperative and attempting to block companies from effectively managing risks — a crucial part of their fiduciary duty.”
What does “accountability” mean here?
Net zero alliances raise awareness, which is generally good in and of itself. However, they aim for accountability, and that is easier said than done. Measuring reductions in a company’s GHG emissions is not like stepping on a scale to assess whether or not a weight loss program is working; it is subject to interpretation. A report recently published by ESG Clarity found that many asset managers’ net-zero commitments may not have much real-world impact. For example, should carbon credits based on forests in a land trust that would never have been harvested for timber “count” as reducing emissions?
ESG Clarity questions the effectiveness of net-zero alliances, stating that membership is “easy to attain but holding those companies accountable is difficult.” This statement seems to conflict with NZAM’s detailed membership requirements, although ESG Clarity quotes the CEO of Amati Global Investors as saying, “It’s very enticing to sign up, as a manager, because there is not a particularly high barrier to do so.” Still, ESG Clarity also points out that most net zero alliances are only a few years old and it may not be fair to expect too much progress yet.
In February of 2023, GLS Bank left the Net-Zero Banking Alliance. This German bank, which specializes in ethical practices, was a founding member of NZBA. In explaining its decision, GLS said, “It has come to our attention that some large NZBA member banks continue to finance new fossil-fuel infrastructure projects on the African continent,” but it declined to name the specific banks whose actions it found to be unacceptable.
In a separate article, ESG Clarity quotes the CEO of Green Century Funds as saying that Green Century does not participate in any net zero initiatives, including NZAM, because while net zero commitments may lead companies to reduce emissions, there are questions about how net zero is calculated. Measuring GHG emissions related to investments asset managers hold can be challenging. And using science-based targets may not be feasible if information about things like Scope 3 emissions are unreliable or unavailable.
Is setting a high bar the right approach?
There is an understandable concern that joining NZAM might be done primarily to boost an asset manager’s sustainable investing “bona fides.” However, if membership requires an asset manager to reduce or divest its holdings in companies that are not reducing their carbon footprints fast enough, that may be inconsistent with a manager’s strategy. For example, a “green” fund that relies on a “best-in-progress” ESG approach may hold positions in fossil fuel companies that would appear to run counter to NZAM’s goals.
We believe industry initiatives to reduce carbon emissions can make a meaningful impact. They provide a place to share insights about how to achieve emission reduction targets, and can apply moral suasion to bring about change. Pushing for accountability and transparency must be a part of this if these initiatives are to have any teeth, but that requires more data disclosure across every industry. Contact us to learn how OWL ESG’s comprehensive ESG data can help your organization assess progress in sustainability efforts in every industry.