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Institutional investors weigh climate investing trade-offs

The use of climate-related investment practices is seeing a sharp fall among the global institutional investor set, while more than half of them are worried about achieving the best returns while delivering emissions reductions targets.

Over half of the respondents to Ninety One’s Planetary Pulse survey are worried about achieving emissions-reduction targets while delivering the best possible returns. That’s despite a reported appetite for high-risk/high-return investments from half of the 300 senior asset owner professionals surveyed, with many seeking to invest in high emitters with “innovative or ambitious decarbonisation plans”.

“Asset owners need to maintain balanced and diversified portfolios, while managing risk, including climate-related risks,” Hortense Bioy, global director of sustainability research at Morningstar, said in the report. “As the world transitions to a low-carbon economy, asset owners should know exactly how the companies they invest in plan to adapt their business models, their operations and their products and services.

Companies should have credible transition plans with science-based targets, and if they don’t, then asset owners need to engage and put pressure on them to disclose one. Transition plans are becoming mandatory in some countries, like in the UK.”

  • But the study also shows that use of climate-related investment practices has decreased year-on-year “across the board”. Respondents viewed positive screening as the best practice for lowering real world emissions, but the number of them actually using it has fallen by 11 per cent – 33 per cent in 2023 from 44 per cent in 2022.

    Active engagement and climate-related thematic investment also saw a greater than 10 per cent fall in use, while negative screening – usually discarded by asset owners in favour of engagement as their sustainable investing approach evolves – is actually on the rise, with 37 per cent using it today from 29 per cent in 2022.

    Some of these massive falls can be attributed in part to local politics. In North America, use of 2022’s top choices – factor integration and positive screening – has “plummeted”. Cited by 52 per cent in 2022, they are now used by only 25 per cent and 45 per cent respectively. That’s down to “the whole rhetoric playing out around ESG”, according to one (anonymous) US-based sustainability leader.

    “It’s hitting a lot of asset owners and more directly around pension funds. Certain states aren’t so fond of this concept of ESG, and there’s actually some impact that state legislators or attorneys general can have over how state funds are invested.”

    Staff Writer

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