It will be hard to top 2021 when it comes to ESG news, but 2022 promises to be equally busy, with more regulation and increasingly active institutional investors.
For investors, climate change will continue to dominate ESG priorities in 2022 as they ramp up efforts to decarbonize portfolios and embrace opportunities in the transition to clean energy. Other issues like biodiversity, boardroom and workforce diversity, and human capital management will also be on many investors’ radars.
In November, the United Nations’ climate change conference, COP26, in Glasgow captured the world’s attention with the enormity and urgency of the climate crisis. It also sent the message to institutional investors that meaningful progress depends on them more than ever.
Many pension funds and asset managers are taking that to heart, moving even faster to reach net-zero emissions in their portfolios by 2050 or sooner. Groups like the Net-Zero Asset Owner Alliance, with a collective $10 trillion in assets, and similar ones for asset managers and consultants, have made that pledge. More than half of its members, including the $500 billion California Public Employees’ Retirement System, Sacramento, have pledged 25% cuts or more by 2025, and similar pledges keep rolling in.
To reach their net-zero goals, pension funds like the C$114 billion ($89 billion) Ontario Municipal Employees’ Retirement System, Toronto, will spend the coming year calculating their portfolios’ total carbon footprint to come up with net-zero plans.
Early in 2022, more asset owners and managers will also be producing individual climate action plans, predicted Rev. Kirsten Snow Spalding, senior program director of the Ceres Investor Network in Berkeley, Calif., whose 200-plus institutional investors manage more than $47 trillion in assets. That will place more emphasis on accountability, she said. “It is not enough to have targets without plans. You’ve got to hold everybody accountable,” Ms. Spalding said.
Asset owners’ net-zero plans are making them more aggressive with the companies they invest in, or increasingly, divest from. On Dec. 20, the same day the £20 billion ($26.8 billion) National Employment Savings Trust, London, committed to a 30% reduction by 2025 in the carbon footprint of its portfolio of publicly traded stocks and bonds, it sold holdings in five energy companies it did not see working fast enough to address climate risk.
The $267.8 billion New York State Common Retirement Fund, Albany, has pledged to divest energy companies without a plan to cut emissions and transition away from fossil fuels. In December, the pension fund confirmed that it will internally manage a $2 billion passive fund pegged to an FTSE Russell climate-change risk index.
A perceived lack of progress on energy transition plans led the €523 billion ($591.3 billion) pension fund Stichting Pensioenfonds ABP, Heerlen, Netherlands, to pledge to spend 2022 divesting all its holdings in fossil-fuel companies, worth €15 billion, and reinvest that in renewable energy strategies. Other pension funds, like three public ones in Baltimore, are being told by legislators to divest from fossil fuels.
COP26 also brought good news for investors that global standards for climate disclosure in financial markets are in the works. The International Sustainability Standards Board, unveiled by the global accounting body International Financial Reporting Standards Foundation, is aiming to issue some standards by mid-2022 that local jurisdictions and public or private companies could adopt voluntarily.
“That is a very important and positive development. Alignment around what is relevant to investors and how to measure it is everything,” said Ken Mehlman, co-head of KKR Global Impact in New York and partner and co-head of global affairs at KKR & Co. Inc. KKR Global Impact invests in scalable commercial solutions to solve critical global challenges.
KKR helps lead a Ceres private equity working group helping general partners and limited partners address the impacts, risks, and opportunities of climate change in alignment with Paris Agreement goals.