ESG is the industry buzzword currently and in the ETF market in particular with decarbonisation and low carbon companies a big focus for asset managers. Europe is more developed with the US a bit slower but likely to catch up once the success of the European offerings take hold.
The ETF market tends to lead the way on innovation with ESG perhaps the biggest current focus. Almost all indices used in ETFs will end up with ESG screens as standard and low carbon and decarbonisation strategies are playing their part. However, these actions do not address the problem that the target of carbon neutrality by 2050 is too late or could be missed.
Impact investing is still nascent in the ETF market and while it is more developed in wider asset management, it still is not mainstream. Activism and voting are happening, but not on a large scale. Many of the biggest asset managers are often conflicted – if they push too hard on one side of their business, this can have a detrimental impact on others. To really move the needle these big players, need to become activists. Impact investing in the mainstream could put the world back on track.
One action the asset management industry can take quickly and relatively easily is to transparently calculate the carbon intensity of investments which investors could use as a metric in risk analysis, like calories on the side of food packaging.
There is more the industry can do to make investments carbon neutral through carbon credits and carbon offsetting. They are not perfect but they are actionable.
Carbon offsets are environmental projects set up to create a positive environmental impact to help neutralise people’s or an organisation’s carbon impact. They can be used for investments.
Projects are usually in developing countries and need to demonstrate an impact that wouldn’t happen without them. They can apply to a specific activity through to an entire carbon footprint. Most people will have seen carbon offsetting when they pay for a flight and the airline offers to offset it by planting a number of trees. The offset industry has grown exponentially and is now sophisticated enough to support carbon neutral outcomes for investment.
Carbon offsets do have detractors who say reducing carbon is preferable to offsetting which can be seen as a way to neglect the real problem. However, low carbon or reducing carbon still results in a negative carbon impact and having an offset mechanism must be considered worthwhile. Carbon offsetting is scalable and implementable now. I would even advocate it should be built into all asset management products complementing a focus on low carbon and decarbonisation investments.
We aim to push hard to get the industry to adopt offsetting as a common feature and issuing the products is an excellent step forward to show proof of concept. It will rely on end investors seeing the benefits and understanding the concept but most importantly the industry needs to understand the power it has to drive change. End investors need to put their purchasing power behind this and tell asset managers they want carbon offsetting as a must have and not an option.
The world cannot afford to miss the 2050 targets, and it’s arguable that even 2050 is too late. It looks like the powers that be are moving too slowly and 2050 will be missed by some margin. Governments are conflicted by politics and industry.
We need action now. Asset management is pushing hard on ESG related strategies but can be more ambitious and do more. How great would it be if the industry en masse carbon offset all the carbon impact of their products, services, and their own business. It could be done in years, not decades, so let’s do it!
Hector McNeil is co-CEO of HANetf
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