There is no one size fits all solution to creating a net zero portfolio

While reducing carbon emissions in an investment portfolio is key, it is not the only one component in combatting climate change. To make impact in the real economy, it requires a multi-pronged approach that comprises robust proprietary ESG frameworks, additional investments in green solutions, influencing investee companies and sovereigns through engagement or voting, and finally phasing out what cannot be changed. NN Investment Partners (NN IP) believes that there is a no one size fits all solution or quick fix to addressing climate change, and that investors should adopt a more tailored perspective.

Although regulators and policymakers have taken several positive steps towards tackling global warming, investors need to look beyond regulation to define their role and play a bigger part to help the transition to a low carbon environment.

Adrie Heinsbroek, Chief Sustainability Officer, at NN Investment Partners comments: “Investors need to define their role in combatting global warming and to acknowledge how climate change affect investments. They need to be more active through engagement with companies to drive change and futureproof their business. It is important to sit down, discuss and reflect with companies about what actions they need to take.”

NN IP looks at climate through a broad lens, incorporating a broad range of developments including, but not limited to, biodiversity, water and social aspects such as the “Just” transition which focuses on the real-world impact of the shift to net zero.

A recent engagement illustrates NN IP’s consistent work with investee companies, both as an individual investor and as part of a collective. NN IP has co-led the Climate Action 100+ engagement with Polish power generation company PGE for several years¹. Ongoing discussions recently led to an important milestone, with PGE phasing out coal from electricity generation and its transition to a more renewable energy mix.

Heinsbroek adds: “It is important that companies feel supported by investors, rather than hindered, in the journey to a low carbon economy. At the same time, it is vital to engage on a wider basis with societal organisations and government representatives to ensure that investors have the maximum impact on ecosystems, whether they be ecological, societal or economical.”

Adopting a tailored approach

As asset owners themselves continue to make pledges to commit to net zero emissions in their portfolios by 2050, there is an increasing need for asset managers to develop solutions that enable them to achieve these ambitions.

Edith Siermann, Head of Fixed Income & Responsible Investing, at NN Investment Partners shares: “It is crucial to note that not only do asset owners have different ambitions and requirements, but also different starting points. Clearly, if an asset owner already integrated ESG or had climate targets in their portfolio then shifting to net zero will likely be simpler than if they did not. Successful outcomes rely on investors establishing targets in partnership with the client and developing a methodology that is right for them and will have true impact.”

In transforming an asset owners’ entire portfolio to a net zero strategy, NN IP works together with its clients to focus on making an impact in the real economy, rather than only divesting assets with high carbon emissions. This results in a multifaced approach centred around increasing positive allocations in new investments in green solutions, identifying the world’s biggest polluters and seeking change via engagement. Finally, assets that cannot be influenced, can be divested and excluded.

Siermann adds: “We believe in setting ambitious but realistic targets together with our clients, for example by defining interim reduction targets like a 25% CO2 reduction by 2025 and 45% by 2030 as appropriate for the portfolio. Looking ahead, it is critical that we continuously assess the makeup of a client’s portfolio and read-just where appropriate to ensure we not only meet our targets but also our intended, real world impact over time.”

Focus on fixed income and the growing green bond market

In terms of capital allocation, there is an increasing focus on investing in fixed income, particularly green bonds, to achieve long-term, positive environmental impact and to support the transition to a net zero economy.

NN IP has a well-established framework for assessing bonds and issuers to ensure that the right companies and projects are chosen to achieve climate-related goals. This involves engagement as well as internal and external issuer sustainability ratings, flagging any controversies and ensuring the instruments truly merit the green la-bel. Based on NN IP’s ESG framework, only around 70% of the now EUR 1 billion (as of end of April 2022) plus global green bond market meets these standards, further illustrating the need for investor scrutiny.

Bram Bos, Lead Portfolio Manager Green Bonds, at NN Investment Partners: “As the green bond market is essentially self-labelled, it is another great example of how investors cannot simply take things on face value alone or adopt a ‘quick fix’ approach to building a greener portfolio. There are data challenges, and investors need to look beyond the headlines.”

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