Introduction

From ambition to action

In recent years, assets under management (AUM) of funds that promote or target sustainable investments have grown rapidly⁴. This reflects growing demand from institutional and retail investors, increasing investment opportunities, and investment managers’ own net zero or low carbon commitments.

During COP26, 236 investment managers with $57.5 tn in AUM committed to supporting the goal of net zero GHG emissions by 2050⁵. The commitments were made under the Net Zero Asset Managers (NZAM) Initiative, part of the Glasgow Financial Alliance for Net Zero (GFANZ). Under the NZAM initiative, investment managers plan to set interim targets, review these at least every five years, and publish their progress.

The scale of the change required is immense. Here we have set out some example actions investment managers will need to take to achieve their transition plans:

reduce emissions across their own operations, and consider how their strategy aligns with national strategies, such as the UK’s, to ensure that their actions are additive to national efforts;

review all the assets they manage and consider how to align them to their commitments. This is particularly challenging for passive funds, funds which don’t target or promote climate considerations, and mandates where the client may not share the same climate ambitions as the investment manager;

work with clients in relation to their climate ambitions and/or preferences, for example, institutional investors may need to deliver on their own net zero strategies;

allocate resources to and undertake stewardship activities to encourage investee companies to adopt credible net zero transition plans and hold them to account for the delivery of their plans;

understand their clients’ evolving priorities and develop a range of climate-specific products and solutions, which channel investment to net zero or low carbon economic activities, or to environmental solutions (e.g., climate mitigation or carbon capture);

integrate climate considerations into investment decision-making;

integrate climate risk into the risk management framework and ensure that the risk management framework supports the transition plan;

develop a robust climate data strategy, data governance and target operating model to source varied, current and forward-looking data on climate risk and emissions across own operations and investee companies; and

update systems, policies, and controls to support execution of the transition plan, climate disclosures and risk management.

There has also been a step change in regulatory expectations in relation to transition plans. Firms will need to ensure alignment between the net zero strategy and accompanying plans, the business strategy, climate risk management, and climate disclosures (at both product and entity level).

A joined-up approach will enhance the ability of investment managers to harness the opportunities and mitigate the risks of the transition to a more sustainable economy, do justice to their climate commitments and meet the expectations of their stakeholders.

While there will be new responsibilities across the three lines of defence, this report focuses on Risk and Compliance functions. It looks first at regulatory developments on transition plans applicable to investment managers and then focuses on how Risk and Compliance functions can support the journey to net zero, both through supporting the execution of the transition plan and by helping to mitigate conduct risks which may arise because of the transition.

Throughout the report, we focus on climate considerations, as opposed to broader Environmental, Social and Governance (ESG) considerations. Where we reference products or funds which promote or target climate considerations, these products might also promote or target broader environmental or ESG considerations. Likewise, we will refer to climate data and focus on regulatory requirements or supervisory expectations in relation to climate, although investment managers may consider their broader ESG data strategy. Many regulatory requirements or supervisory expectations include broader environment or ESG considerations in their scope.