Net Zero porfolios not enough, says David Vickers in LGIM podcast

It is not enough for investors to target Net Zero across their portfolios, Brunel’s CIO said in a podcast interview hosted by Legal & General Investment Management: ‘What Net Zero means to Brunel‘.

“You have to reach Net Zero while aiming to achieve real-world reductions via setting objectives across scope 1-3 emissions, setting targets to increase the scope of revenues from solutions – not just avoidance – and ensuring effective policy advocacy,” said Vickers.

And real-world reductions, he argued, mean changing the broader economy – not just your own exposures.

“Is it better to own a company that has committed to run itself down to Net Zero – is that better for the world than it going into other hands?” said Vickers. “We believe in engagement but there comes a point where, if you are not having an impact, you disinvest.”

But the same size certainly does not fit all asset classes, he argued.

“If you disinvest in equity, it just gets picked up by the next person,” said Vickers. “But if you decline a debt offering, it lifts their cost of capital and may have implications for future rounds of fundraising too.”

New financial order still emerging

“This is the biggest economic transition in my lifetime – longer, in fact,” said Vickers.

But it is moving fast. And a major challenge for investors targeting Net Zero is how close to the frontier of change they need to position themselves in order to make real advances.

“The tracks are being laid just in front of us as we progress – there is no homogenous way of disclosing data, no clear definition of what the right data metrics are or how you should calculate them, or what the nuances are around the data,” he said. “Carbon metrics are a bit easier now but, once you get to scope 2 and 3 emissions, it’s much more difficult and companies don’t aren’t asking the questions – and aren’t always regulated to do so.”

That is why momentum and short-term targets matter so much, he argued. It’s also why Brunel asks its managers to achieve an annual 7% reduction in emissions across their portfolio. But Vickers also argued that better data is needed – and the Transition Pathway Initiative is already proving to be an important element in that journey.

“The increased funding for this initiative is massive, since it radically expands how many companies you can cover – and that enables proper comparison,” he said. “We also need to remove the friction of disclosure and the biggest change will be when it goes into IFRS and reporting standards, just as amortisation and so many other financial disclosures already have. And at that point, for investors, the data itself doesn’t give you all the answers – it then becomes about how you analyse it, how you think it sits with company pledges on Net Zero, how it compares with peers. But the uniformity of data gives you the starting point you need.”

But what about companies that do not want to change? Can they not get away with it – and make healthy profits into the bargain?

“Companies not transitioning will be left behind,” he said. “It will be punitive financially, if not by taxes and regulations and disincentives, then through pressure from the broader financial system.

“There’s also the other side. There are going to be so many opportunities in clean energy alone – by 2030, the IEA forecasts that the opportunity set in clean energy will be as big as it is in oil today.”

To listen to the podcast, visit the Legal & General Investment Management website