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US institutional investors, asset managers, and asset owners have shown a higher commitment to implementing a variety of measures to address climate change and reach their net-zero goals than previously, according to a new report from Cerulli.

The change comes as US ‘culture war’ battles become more heightened ahead of the 2024 election. 

New 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.

In a January report, Morningstar said that the increasing political hostility around 'ESG investing' issues had translated into a loss of enthusiasm amongst many US asset managers when compared to their peers in other developed economies. This was according to its paper - Voting on ESG: Ever-Widening Differences, which said that while US companies were retreating from ESG, European asset managers had maintained a high level of support for ESG-related shareholder proposals.

With US attitudes changing, will industry change too?

In the new report, Cerulli Edge—U.S. Institutional Edition, it was revealed that while just 14% of asset owners have a formal net-zero commitment, another 25% plan to make one in the next 12 months.

In addition to institutions making broad commitments to net-zero goals, 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.

One of the key factors for this change was a divergence in municipal, state, and federal levels, which meant that various parts of the country were much more actively engaged than others. “Several US state agencies and their public pension systems are forging ahead with responsible investment policies and promoting ESG factors in investment decisions, with some building sustainability teams and hiring ESG-related staff,” said Cerulli.

Cerulli highlighted that recent attempts to take legal action against ESG in the US had failed, such as in Texas and Missouri, as well as at the federal level. Many asset owners and managers had kept their stance despite pressure from politicians.

“Despite these efforts, investors continue to face difficulties analysing and reporting on the carbon footprint of their underlying investment portfolios.”

The research also showed that half of institutions are either divesting (29%) or plan to divest (21%) from fossil fuels. When undertaking responsible investment strategies, institutions continue to prioritise addressing the issue of climate change (61%) as the top theme.

“Despite these efforts, investors continue to face difficulties analysing and reporting on the carbon footprint of their underlying investment portfolios,” said Cerulli. “The lack of data standardisation across third parties and publicly available tools makes it challenging for investors to get a clear picture of exposure and ensure alignment with their climate change commitments.”

This issue was highlighted by Natalia Back, Associate Director, ESG Regulations, Private Markets, Manulife Investment Management, who spoke to Fund Operator in late 2023. “Investors are interested in sustainable products but from the operational perspective, when we want to create new solutions to meet investor demands, we have to develop products within a specific strategy that will meet certain sustainable investing criteria,” she said.

“The asset class, strategy and type of investments will determine the data and disclosure requirements that are necessary to measure and report on the sustainability performance of this new product,” Back added.

She said that these requirements were a main concern because transparency in financial services was key to building trust with clients. “As sustainability regulations continue to evolve, investment firms like ours need to understand these developments and incorporate them into product development and the regulatory-related requirements that come with our investment strategies.”

She added that building on this momentum was important. “With more pressure from the public - and more compliance and regulatory frameworks being laid down by authorities places for companies that are not changing policies in investment is becoming trickier,” she said. “This will slowly feed into investment management companies operations. Therefore, companies that are not yet looking at this in their strategy are likely behind the curve.”

Further industry strengthening

As more investment teams in the US begin to embrace ESG concerns and techniques, there are more resources popping up to provide services as the lack of cohesiveness has created gaps.

“[We anticipate] an increase in industry partnerships with current disclosure platforms to enhance consistency and provide managers and investors with the data they need."

Cerulli said that new platforms, including the Net-Zero Data Public Utility (NZDPU) database, were expected to come to market to establish more reliable, accessible, and comparable climate data across various industries for investors, which would help those in middle and back-office roles be able to make better decisions for businesses. The NZDPU described itself as “a centralised repository of global company-level greenhouse gas emissions data,” which will be free and transparent for all users.

“The development of such platforms will provide investors with more complete information about their exposure to climate-related financial risk,” said Gloria Pais, Analyst, at Cerulli. “Looking ahead, [we anticipate] an increase in industry partnerships with current disclosure platforms to enhance consistency and provide managers, investors, and other industry professionals with the data they need."

Whether these trends continue or fizzle out will be something investment and fund operations teams will need to continually monitor.

 

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