Credible net zero plans

Actions for Risk and Compliance functions

Actions for Risk and Compliance functions

With investment managers facing increasing expectations in relation to the adoption, credibility and disclosure of transition plans, Risk and Compliance must now support the business in managing the associated reputational, conduct, regulatory and liability risks.

Credible net zero plans

The credibility and business implications of transition plans will face increasing stakeholder scrutiny – not just from supervisors and shareholders, but also from special interest groups and Non-Governmental Organisations (NGOs), which might bring class actions or otherwise seek to highlight poor ambitions, performance or disclosures.

The FCA found in an October 2021 report that while 75% of asset managers they surveyed had made a net zero commitment, only 38% had set any underlying targets²¹.

Under the NZAM initiative, targets will need to be underpinned by robust, science-based, and standardised methodologies, such as those developed by the Science Based Targets Initiative (SBTi), the Partnership for Carbon Accounting Financials (PCAF) Global GHG Accounting and Reporting Standard, and the Paris Agreement Capital Transition Assessment (PACTA) Methodology²².

Investment managers will need a Board-approved transition plan, with a detailed and resourced plan of actions. They will need to be clear on any plan assumptions and uncertainties.

It will be important for investment managers to reduce the emissions across their own operations, particularly from a reputational perspective. However, these emissions are dwarfed by investment managers’ emissions across investee companies, derived from their AUM (scope 3 emissions). Therefore, investment managers should focus on reducing scope 3 emissions, while maintaining diversified portfolios and delivering risk-adjusted returns.

In doing so, they will need to consider how they can use their influence and stewardship activities to effect change in the real economy, as well as develop products which help channel investments to activities which support climate mitigation. They will need to consider carefully their divestment policy, as divesting from companies means the investment manager will lose influence to make real economy change, but at the same time it will be a necessary last resort to hold investee companies to account.

Box B sets out some example actions for investment managers to reduce GHG emissions.

Box B: Example actions for investment managers to reduce GHG emissions
Own operations - scope 1 (direct emissions) and scope 2 (indirect emissions)	AUM - scope 3 (financed emissions)
Reduce business travel emissions.	Implement a stewardship strategy with investee companies and hold them to account, prioritising largest exposures and highest emissions.
Improve energy efficiency of properties.	Exclude investment in certain high-emitting companies or sectors.
Increase sourcing of renewable energy.	Develop and promote climate-specific products and solutions.
Switch to suppliers with net zero transition strategies and hold them to account.	Integrate consideration of climate risk into investment decision-making.
Take a robust approach to carbon offsets.

Actions for Risk and/or Compliance

Inform and advise relevant Committees and the wider firm on regulatory, supervisory and industry expectations and guidance on transition plans and their interaction with the broader sustainable finance regulatory landscape, for example, on product disclosures.

Engage actively with policymakers, regulators, standard-setters, and industry bodies. For example, the FCA intends to work with industry leaders and other regulators to develop indicators for the effectiveness of stewardship²³.

Support the development of the transition plan and create policies, procedures, and controls to monitor adherence to the plan on an ongoing basis, escalating concerns proactively. For example, there will need to be controls to prevent trading of stocks on exclusion lists, as well as clear deadlines to trade down positions on stocks newly added to exclusion lists. The business will also require a policy for how to measure emissions across long / short strategies. Risk and/or Compliance may also want to undertake deep dive assessments, for example, to ensure that the stewardship strategy holds investee companies to account, with clear objectives, key performance indicators (KPIs), deadlines, and policies on escalation and divestment, and that it is sufficiently resourced.

Consider reviewing the policies and controls in place by the business on the use of any carbon offsets, for example, looking at whether the business assesses if carbon offsets are subject to certification or third-party verification, that they support additional long-term carbon removal, and that there are limited viable alternatives.