Moderator: David Barks, Savanta Expert: Tim Smith, Lazard
Headlines:
- There are two approaches to implementing a net zero strategy into a portfolio, top down and bottom up
- Top down is the most important, but it is challenging due to forecasting and modelling complexity and labelling risk in trying to forecast emissions
- Targets and forecasts don’t have to be aligned on day one but they do need to bend in the right direction. The companies themselves are interested in seeing the forecasts and are becoming increasingly granular in their approach
- Bottom up is becoming like a credit rating for a company. And more companies are becoming familiar with this approach. It works best as a starting point for engagement with companies as it helps identify gaps in their net zero strategies. But this approach has issues because not all companies have the resources and specialisms to be able to disclose fully and accurately. Investors have to accept it is better to be roughly right than precisely wrong on these metrics.
Context:
There is no emergence of best practice yet in how to translate net zero approaches into understandable communication to clients. Some approaches can be basic and appear as green washing (e.g., equivalent flights saved per year) and many metrics are not credible and contradict each other.
A clear, regulated approach to measuring and communicating net zero targets, approaches and success are required to dispel concerns of greenwashing and help investors engage with companies in a meaningful way.
With more robust, true and fair metrics, we can move from the more qualitative and varied approaches currently employed.
Key Takeaways:
- A means of providing both accessible and accurate information has not yet been found
- The lack of regulatory set standards is making approaches more difficult to defend especially as labelling needs to be clarified
- Ultimately, real world solutions are required and capital can play a part in this, though it is unsure whether these net zero risk factors are already priced into markets
- There is also concern about the fiduciary duty of, for instance, trustees who have to invest for return in their remits, and may not be able to defend approaches to net zero that weigh towards risk management over shorter term return
- The industry needs to play a leading role in influencing the development of these to ensure that the end investors’ needs and criteria are incorporated
