14 November 2024
In a rapidly changing climate, system-level investors are leading the way toward net-zero goals by adopting innovative tools and strategies to mitigate climate risks while achieving long-term investment success. A recent CFA Institute report, "Tools used by System-Level Investors in Their Net Zero Initiative" co-authored by Jon Lukomnik and William Burckart from Columbia University’s Sustainable Investing Research Initiative, dives into the framework used by these investors to drive climate action in the financial sector.
System-level investors — large asset managers, pension funds, and long-term investment institutions — recognize that their financial returns are inextricably tied to the broader environmental, social, and economic systems. They understand that without a stable environment, sustainable economy, and strong societal framework, capital markets may fail to deliver reliable returns. This holistic perspective has led many of these investors to integrate net-zero objectives directly into their investment processes, setting a precedent for the industry.
Key Tools and Strategies for Net-Zero Success
The report outlines several tools and methodologies that have proven effective in moving toward net-zero goals, including:
1. Investment Belief Statements: Many system-level investors, such as CalSTRS and HESTA, publicly declare investment belief statements that integrate climate considerations. These statements guide investment decisions and ensure that climate risks are central to investment policies and strategies.
2. Asset Allocation and Security Selection: Firms like PGGM, using its “3D” approach, are redesigning portfolios to include fewer, more impactful investments. By reducing reliance on benchmarks and focusing on securities that align with sustainable outcomes, they build portfolios that are both resilient and strategically focused on long-term value.
3. Manager Selection: System-level investors are increasingly prioritizing external asset managers who share their commitment to climate goals. Some, like Wespath and BlackRock, have collaborated to create specialized investment products such as the Transition Ready Portfolio, aimed at overweighing climate-conscious companies and minimizing exposure to carbon-intensive assets.
4. Stewardship and Engagement: Systemic stewardship goes beyond influencing individual companies to focus on broader market stability. Initiatives like Climate Action 100+ allow system-level investors to collectively engage with corporations, urging them to adopt more sustainable practices.
5. Policy Engagement and Thought Leadership: Recognizing that government action is critical, many of these investors actively participate in shaping climate policy. Institutions like the McKnight Foundation and UPP collaborate with policymakers, advocating for policies that align with climate goals. Additionally, leaders in the field, such as Jane Ambachtsheer at BNP Paribas Asset Management, advance climate-focused thought leadership, helping the industry adapt and prioritize sustainable investments.
6. Measurement and Impact Tracking: Despite the challenges of accurately measuring climate impact, many investors adopt a “directionally correct” approach to tracking progress. BNPP AM’s NZ:AAA methodology provides one model for assessing net-zero alignment and comparing it with traditional benchmarks.
A Commitment to Collective Climate Goals
These strategies underscore the collective commitment of system-level investors to effect positive change not only within capital markets but also in the real world. By integrating net-zero goals into their investment philosophies, they aim to strengthen the financial, environmental, and social systems that support long-term capital growth.
The report illustrates how these investors are shaping a new paradigm in finance, one that balances profitability with sustainability. The tools and strategies outlined demonstrate that achieving net-zero emissions isn’t merely a regulatory or ethical obligation for these investors — it’s also a practical approach to ensuring market resilience and generating stable, long-term returns.
For more insights into how system-level investors are transforming the investment landscape, this report is a comprehensive guide to the future of sustainable investing and climate action in finance.