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A new report has revealed that 84% of listed companies including numerous asset managers, investment firms and other financial services companies, are “not aligning” with net-zero, making it the least mature of five alignment categories established by the Net Zero Investment Framework (NZIF).

The report, by the MSCI Sustainability Institute, defined “not aligning” as that they are yet to make a commitment to decarbonise in line with achieving net-zero, it specified.

“The misalignment of listed companies with a net-zero pathway differs little between companies in sectors deemed “high impact” by the NZIF and those in other sectors,” it said and added that 83% of companies in high-impact sectors and 85% of companies in low-impact sectors are not aligning with net-zero, as of June 2024.

The battle for fund managers and other institutional investors to get on board with net zero initiatives both for their internal operations and their asset portfolio has been a long-running issue.

In February, it was revealed that US institutional investors, asset managers, and asset owners had begun to show a higher commitment to implementing a variety of measures to address climate change and reach their net-zero goals than previously, according to a report from Cerulli.

The change came as the US ‘culture war’ battles became more heightened as the country headed into an election year. However, many net zero goals are now a mainstay for most consumers and investors.

Surveys showed that 72% of Americans believed climate change was real, with a majority believing that policies should restrict or punish companies that are high carbon emitters.

This could mean a push for the US investment industry to begin adopting more net zero and ESG policies that have already become the norm in other markets.

The February report said that while just 14% of asset owners have a formal net-zero commitment, another 25% plan to make one within the next 12 months. Though, some of the reasons for this are well-known. Asset manager Ninety One’s Sustainability Director, Daisy Streatfeild said earlier this year in the paper “Net Zero: Searching for returns and real-world change” that “More than half (53%) of asset owners expect it to get more difficult to achieve emissions reduction targets, while delivering the best possible returns”.

“A shrinking investment universe that reduces portfolio emissions will exclude industries and sectors that have the potential to transition to low-carbon business models, as well as deliver strong financial returns,” she said. “In addition, strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks.”

In addition to this, institutions are making broad commitments to net-zero goals, and the data showed that many are taking other actions related to carbon, sometimes overlapping or tangential to the net-zero goal. “Nearly one-third (30%) of institutions are investing in strategies that support transition to a carbon-neutral economy, and another 36% plan to over the next 12 months,” said Cerulli.

Numerous other net zero (and wider sustainability-related) investment operational frameworks and guides have been launched over the past few years in order to make the task more streamlined and easier for companies. Earlier this year, The Standards Board for Alternative Investments (SBAI) published a set of guidelines: the Principles for Greenhouse Gases (GHG)-Emission Accounting in Alternative Strategies, which expands on existing frameworks already developed by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Partnership for Carbon Accounting Financials (PCAF).

And, of course, this year saw the UK regulator - the Financial Conduct Authority (FCA) - launch its Sustainability Disclosure Requirements (SDR) and investment labels scheme.

The SDRs announcement was beset by postponements and myriad back and forth with the industry.

All of these could help keep companies more able to track their own net zero needs and operational concerns.

Not aligned enough with net zero

Some of the details in the new MSCI report backed up the earlier assertions by Cerulli. The report added that the world’s most-valuable companies tended to be more mature in their alignment than their counterparts. “Still, among the 100 largest companies by market capitalisation, 43% were not aligning, based on the NZIF maturity scale, as of June 24, 2024, followed by just under a third (30%) that were “committed to aligning,” the second least-mature category,” it said.

In the “Financials” sector of the companies that were surveyed, MSCI said that 6% were “strongly misaligned” with another 29% “Misaligned” with the 1.5°C pathway in the Paris Agreement, while 42% were “2.0 aligned” and 24% were “1.5 aligned”.

As a total for all companies surveyed, 38% were classed as “Misaligned” and 24% as “Strong Misaligned”.

As well as this, the total number of companies setting science-based climate targets has ticked up but the “overall share remains low”, said MSCI.

Just over one-fifth (22%) percent of the world’s listed companies have set a decarbonisation target. The targets aim to reduce their financially relevant greenhouse gases (GHG) emissions to net-zero by 2050 in line with a science-based pathway. The 2024 number was an increase of eight percentage points from a year earlier.

All of this will mean that there is a lot more work for fund operators to do to drive net zero operations in their firms as well as within their portfolios, both of which will receive an ever-increasing amount of scrutiny.

 

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