Australian Asset Owner Mandates Omit Climate

Only a “small number” issuing specific decarbonisation or net zero requirements; IGCC urges investors to “translate aspirations into action”.  

Most Australian asset owners and managers are not embedding climate requirements in most institutional investors’ policies and agreements, says a report by the Investor Group on Climate Change (IGCC).

The report from the IGCC – a collaboration of Australian and New Zealand institutional investors focused on the impact of climate change on investments with AUD 3.6 trillion (USD 2.4 trillion) in funds under management – collected responses from 25 asset owners and 28 asset managers with AUD 30 trillion (USD 19.8 trillion) in AuM, representing approximately 60% of the total AuM in Australia.

Despite 70% of institutional investors having made public targets for net zero emissions by 2050, and 35% setting whole-of-portfolio interim decarbonisation targets, the report said most asset owner mandates do not specify requirements relating to net zero or decarbonisation, suggesting that these “tend not to reflect the appetite for a net-zero emissions future.”

Duncan Paterson, Director of Investor Practice at the IGCC, told ESG Investor that “asset owners have traditionally avoided being too prescriptive on these issues in mandates”, instead relying on references to ESG management or reporting.

Missing mandates 

Of the 25 asset owners who responded to the survey, 40% indicated that they did not yet specify requirements relating to portfolio decarbonisation in any mandates. A further 20% said they included this in only a small portion of mandates.

According to the report, actual investments in climate solutions remain “relatively low, despite growing incidence of target setting”, with most mandates from asset owners not requiring asset managers to invest in climate solutions.

Just three asset owners said they include climate in most mandates, while other asset owners claimed that they focus on engaging with managers on their net-zero strategies, but do not specifically include it in mandates yet.

Nearly half (46%) of the surveyed asset managers reported that only a small number of asset owner clients have specific requirements relating to decarbonisation or net zero. This “may reflect that asset owners prefer informal methods of engagement with managers rather than incorporating net zero or decarbonisation references into mandates”, according to the report.

Paterson said asset owners had opted to focus on “engaging with service providers in an effort to improve climate practices more generally, although this is changing, with a number reporting that they are planning to introduce specific metrics in future mandates”.

Only 16% of the surveyed asset owners said they require carbon emissions data from most or all managers, with “significant proportion” indicating they either do not currently request this information or only request it from a small portion of managers.

Paterson noted that some asset owners have built mandates that require service providers to provide information on climate reporting, indicate alignment with net zero goals, and surpass relevant benchmarks in terms of climate performance, including superannuation fund HESTA.

He recommended to improve progress on decarbonisation targets asset owners use the Paris Aligned Asset Owners initiative, and asset managers the Net Zero Asset Manager initiative. “IGCC’s latest strategy objectives highlight the importance of accelerating action on net zero including the establishment of strong targets, but also through implementation of leading practices and engagement with policymakers and companies, all areas where IGCC is working with our members,” Paterson said.

The report concluded that “while asset owners’ climate aspirations continue to grow, more work is needed to translate aspirations into action by aligning mandates with net zero commitments”.”

Addressing regulatory uncertainty 

In 2021, 70% of investors highlighted policy uncertainty as a key barrier to investment in Australia, a number that has fallen to 53% this year. The report accredits the Australian climate bill’s passage, which includes Australia legislating its Nationally Determined Contribution, and other climate policy reforms with “starting to address policy and regulatory uncertainty for investors in Australia”.

Economic modelling for IGCC has shown that Australia could create as much as A$63 billion (US$41.7 billion) in new investment opportunities over the next five years through the strengthening of climate targets and policies looking to net –zero emissions by 2050.

An IGCC spokesperson told ESG Investor that “having mandatory climate disclosures that are aligned with international standards, helps investors streamline their climate reporting into the multiple markets many operate in.”

“Investors need to see regulators signal that they are going to enact mandatory standards aligned with the ISSB. [We’re] happy that’s happening in a growing number of markets,” the spokesperson added.

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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