Lessons from COP27: How to make a difference

Sponsored by Mercer

Tackling the impact of climate change remains a key topic of discussion within asset managers, but research shows more needs to be done to put ambition into action

The agenda at the 27th United Nations Climate Change Conference, or COP27 is clear: more needs to be done to tackle the impact of climate change. But how can we move past words and into action?  Mercer conducted a survey prior to COP27 to gauge how global asset managers are actually engaging with climate change targets and what these developments look like. As part of a larger report, entitled ‘Advancing Transition Potential: Global Asset Manager Survey 2022’, here are some of its main takeaways.

Where we are today

Across the industry, global asset managers are accelerating their efforts to fight change with a flurry of net-zero agreements signed in recent months. This only tells half the story, as this comment in our report indicates: ‘Yet our findings evidence that climate commitments and approaches adopted by asset managers, both at policy level and in investment strategies, continue to vary widely. Managers are at different stages in their climate transition, but many are yet to define and set climate targets.’

In some emerging markets, enhanced levels of transparency and disclosure may take years, even decades, to develop. Unfortunately, the climate transition will not wait for frameworks to be honed and perfected.

We found 59 per cent of asset managers have policies that explicitly reference how climate change or net-zero targets will be incorporated into their portfolios. However, this percentage falls to 48 per cent of managers with below $2 billion in AUM.

Unfortunately, nearly three-quarters (73 per cent) of managers are yet to set their own climate transition targets with only 36 per cent intending to do so within the next two years. Further, there remains a lack of consensus around what targets should be pursued. Of the managers that have set targets, 19 per cent have opted for science-based targets while the rest concede their targets are not based on science.

Where we are going

Emerging and frontier markets play a crucial role in the transition. Improving capital flows to economies most vulnerable to climate change is a core component of implementing climate transition across the global economy.

However, our research reveals that many investors still recognise barriers ahead. The vast majority of those we surveyed (91 per cent) cite transparency and company financial disclosure failings as the main barriers to increasing allocations. This is closely followed (89 per cent) by concerns around transparency and disclosure around companies’ ESG factors, with 85 per cent raising concerns around modern slavery exposure.

‘In some emerging markets, enhanced levels of transparency and disclosure around company reporting and ESG may take years, even decades, to develop,’ commented our report’s analysis. ‘Unfortunately, the climate transition will not wait for frameworks to be honed and perfected.’

Though global asset managers may prefer to wait until they have full visibility over these issues, avoiding these markets risks hindering the progress required for climate transition.

Moving the needle 

Capital is increasingly flowing in the right direction, but significant headway has yet to be made.

An agreed-upon international standard for sustainable reporting was the primary factor chosen by respondents, with 82 per cent of global asset managers we spoke to identifying this as vital to supporting greater allocation to emerging markets.

At the same time, 69 per cent of our respondents wanted to see greater regulation around ESG factors with 68 per cent seeking more regulation requiring transparency around their peers in these markets.

This is what makes the discourse at COP27 so important; where policymakers can work together towards greater standardisation in a bid to encourage asset reallocation. Our report adds: ‘A significant step change in the robustness of data, and in transparency and disclosure around company reporting and ESG factors, is required for investors to overcome current barriers. Commitments made at COP27 may help deliver the policy certainty required for this step change.’

To read the full report visit – mercer.com or contact us at mercerinvestmentsolutions@mercer.com.

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