Net-Zero Portfolio Shift Gains Speed Among Large Asset Owners

In March, the University of Michigan announced that it would eliminate carbon emissions from its $12.5 billion endowment’s investment portfolio by 2050. Officials also said the endowment will divest from most fossil fuel companies and increase its holdings in renewable energy and other sustainable investments.

Michigan is said to be the first American public university to commit to a net-zero investment portfolio, though it surely won’t be the last. Indeed, nearly every week brings news of another asset owner, asset manager, corporation or government committing to net-zero or otherwise decarbonizing their holdings and operations in the coming years.

It’s all very welcome news, of course, as long as these commitments are upheld, though much more is needed if the world is going to get on course to hold global warming to 1.5 degrees Celsius. While it’s unclear if that will happen, there’s no doubt that there has been a shift in momentum in recent years.

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“Even just two or three years ago, it would have been almost inconceivable to see the scope and scale of commitments we’re seeing these days, from asset owners and asset managers,” says Max Messervy, responsible investment consultant at Mercer.

It’s only fairly recently that most institutional investors have started looking at the carbon emissions of their total portfolio, Messervy says. Now many, if not most, are “taking a very close look at where emissions are coming from,” he says.

“A lot of investors are focused on carbon,” Messervy says. “That’s going to lead to some difficult challenges as they hone in on a net-zero target.”

Michigan’s Net-Zero Plans

Different asset owners are coming up with different solutions, and different timelines, to meet those challenges. Michigan’s new plan calls for its investment portfolio to be net-zero by 2050; divesting from many — though not all — fossil fuel companies as a key part. That will include selling off the largest coal and oil and gas companies, though the school says it doesn’t have any direct investments in such companies now.

Michigan says it will also “discontinue investing in funds whose primary focus is oil reserves, oil extraction or thermal coal extraction.” Endowment officers had temporarily stopped fossil fuel investments early last year ahead of a study that led to this year’s divestment decision.

The endowment will shift its investments away from natural resources and into renewable energy, “including infrastructure and services that support energy efficiency and emerging technologies that support the transition to a carbon-neutral economy,” the school says.

The university started on that path by approving $140 million in new investments this year. Those included $30 million to D.E. Shaw Renewable Investments, which develops and operates solar and wind projects; $50 million to Aplomado Partners, which helps solar developers build utility-scale projects; and $60 million to Cresta Energy Sustainable Infrastructure, which focuses on infrastructure, transportation and carbon sequestration.

Net-Zero at Ontario Teachers

Earlier this year, Ontario Teachers’ Pension Plan (OTPP) also set a target of a net-zero investment portfolio by 2050. The C$221 billion pension ($175 billion) didn’t give a lot of details, but said it would be “establishing concrete targets for portfolio emissions and our investments in climate solutions” over the next few months and would report on its progress toward those targets each year.

Among the steps the pension will take are boosting its holdings in “climate-friendly investments and solutions,” which will include using the proceeds of its recent green bond offering to fund such investments. OTPP says it will also “ensure” that its portfolio companies “manage and report their emissions annually.”

One thing it doesn’t intend to do, though, is divest from fossil fuel companies.

“It is easy to divest,” CEO Jo Taylor wrote in a recent blog post. “But divestment does not fix the problem, it just passes it onto someone else.” Instead, she wrote, OTPP “believes in working with our partners to solve problems and build better, more sustainable businesses.”

The Ontario pension isn’t alone in that approach. Despite pressure from activists to divest, many institutional investors are still committed to engagement — with oil companies, and with companies in other sectors as well.

“Many US asset owners, especially public pension funds, are very much incorporating engagement into their tool kit,” Messervy says.

This includes Wespath Benefits and Investments, the $28 billion pension fund for the United Methodist Church. Wespath is committed to engagement, rather than divesting from the high carbon emitters in its portfolio, CIO Dave Zellner said at CleantechIQ’s Managing Climate Risk Forum in September.

“We have to achieve net zero by essentially investing in the same companies and by convincing those companies that they need to transition their operation to net zero by 2050,” Zellner said.

To Divest or Not to Divest?

Investors and managers across the board are grappling with the question of divesting. It’s a hard question with no easy answers. Holding on to fossil fuel companies runs the risk of owning stranded assets. But it also runs the risk of missing out on market gains, either as oil prices rise or as companies transition to renewables.

Officials at pensions and endowments, who are managing assets for retirees or their schools, have to consider a broader set of facts than an individual investor must, Messervy points out. “As a fiduciary, can you just divest and leave potential gains on the table?”

New York City has made its decision on that: in January, three of the city’s five public pensions — the New York City Employees’ Retirement System, the New York City Teachers’ Retirement System and the New York City Board of Education Retirement System — voted to divest from fossil fuel companies, a move that will net the pensions about $4 billion. City officials say it will be one of the largest divestments out of fossil fuels by any institutional investor and is intended to “address the significant financial and environmental risks that these fossil fuel holdings pose to the funds and to our planet.”

More recently, in late March, officials overseeing the five-pension system said they will more than double their investments in “climate change solutions,” to more than $6 billion in all. Those investments will go toward “companies that generate revenue from climate mitigation, adaptation and resiliency such as renewable energy, energy efficiency, sustainable waste management, green buildings, and pollution prevention,” the city says in a statement.

Slow and Steady?

New York City had actually set a goal to divest back in 2018. The fact that it took three years to formally start the process underscores yet another challenge: the near-glacial pace it can take some large assets owners to make decisions and take action on those decisions.

The Oregon State Treasury, which oversees $112 billion in public pensions and other investment funds, is beginning to consider the climate transition and related topics, said Anna Totdahl, investment officer for ESG and sustainability, speaking in a fireside chat at a CleantechIQ digital workshop on decarbonization for asset owners in March. But it’s a slow process.

“We are starting with education sessions to get everyone up to speed on what is happening in the industry,” Totdahl said. “We don’t expect that everyone will become climate scientists, but to learn that we have tools at our disposal to facilitate some of those conversations. And to recognize that there are tangible financial impacts to our investments that we need to be aware of at the minimum.

“Then we can have conversations about what to do about it.”

Among the early steps the Treasury has taken is hiring climate consultants to measure their portfolios on an ongoing basis.  “We are very keen to evaluate the transition scenarios,” she added.

Also, she added, “We’ve recently gotten ESG language added to our [board of trustees] statement of investment beliefs, which was a big step and very exciting.” The new policy specifies that ESG factors “should be integrated into staff’s evaluation of investment risks and the value of a particular investment opportunity.”

Asset Managers, Too

It’s not just asset owners that are looking at decarbonizing. In late March, nearly four dozen asset managers from around the world signed on to the Net Zero Asset Managers Initiative, declaring their support to decarbonize their own investment portfolios by 2050. Among the signatories were BlackRock, Vanguard and Invesco, among many other blue-chip asset management houses.

In his annual letter to business leaders earlier this year, BlackRock CEO Larry Fink had pushed companies to adopt their own net-zero-by-2050 goals or risk BlackRock not investing in them.

“I am encouraged to see the increasing momentum towards net zero across the public and private sectors,” Fink said in the announcement of BlackRock joining the Net Zero Asset Managers effort.

There are now 73 asset managers signed on to the initiative, with a combined $32 trillion in assets under management — more than a third of total assets under management worldwide.

That’s just one of an increasing number of signals that the move to net-zero or decarbonizing portfolios is only going to continue. Another one came at the CleantechIQ workshop in March, when we asked attendees their timeline for announcing a net-zero goal. Of the 26 respondents, 12 — just shy of 50% — said they’ll do so in the next 12 months. But, underscoring Oregon’s experience, another six said they need more education or resources before they’ll make such a commitment, while another five said they’re not considering such a move right now.

Much More Work to Be Done

That wasn’t a scientific survey, of course, but it shows a clear trend — and it also shows there’s still a lot of work to be done.

“It’s remarkable how much has changed over the course of five years, Oregon’s Totdahl says. “It’s a paradigm shift. It’s new and it takes some getting used to.”

That goes for both asset owners and managers, and the companies they invest in, who will face increasing pressure to decarbonize their own operation and products. That pressure is crucial for investors to hit their net-zero targets, and for the world to keep global warming below the 1.5 degree Celsius threshold.

“Companies need to know that investors want this, so investors have to continue to show that they are demanding this,” Mercer’s Messervy says. “Investors have to keep up the scrutiny very regularly with companies, and continue to push them in that direction.”


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