The key to maintaining $ 23 trillion from major asset owners to unlock net zero

The assets under management (AUM) of the world’s 100 largest asset owners reached US $ 23.5 trillion in 2020, up 16.4% from the previous year, according to a new study. But there are only three accredited organizations that have committed to achieving net zero in the top 20 and 14 in the top 100.

“This relatively small group of investors are at the forefront of the investment community’s struggle to become net zero, and their power is even more concentrated among the top 20, who are responsible for nearly $ 13 trillion,” said Roger Urwin, co-founder of the Thinking Ahead Institute (TAI).

Jayne Bok, Asia Investment Manager at Willis Towers Watson, adds: “Over US $ 8.3 trillion is concentrated in APAC’s top 20 asset owners, making it an extremely important amount of capital to be used for positive change. The major owners of APAC assets have the power to drive change in the investment industry and hold the keys and pathways to net zero. By thinking about and collaborating with the entire investment ecosystem, this group can have an even greater impact than the large size of its assets suggests. “

Pension funds remain the largest group of asset owners in the world, accounting for 58.1% of assets, followed by sovereign wealth funds (34.7%) and outsourced investment managers (OCIO) and master trusts (7 , 2% combined), according to the TAI report. , “The Asset Owner 100: The Most Influential Capital on the Planet”.

The biggest fund

Japan’s Government Pension Investment Fund (GPIF) remains the largest owner of assets in the world, with assets under management of US $ 1.7 trillion. Norges Bank Investment Management of Norway (US $ 1.3 trillion AUM) comes in second and China Investment Corporation (US $ 1.0 trillion AUM) is third.

Asia-Pacific accounts for 37.0% of total assets under management in the ranking, making it the largest region in the study. Pension funds continue to dominate in the region where they account for 58% of assets, followed by 42% of assets invested in sovereign wealth funds.

APAC funds split assets almost evenly between fixed income assets (44.3%) and equity assets (44.7%) with an 11% share in alternative assets.

“While the commitments of the Glasgow Financial Alliance for Net Zero (GFANZ) organizations are essential, the largest asset owners hold the ‘keys to the castle’,” notes Urwin. Their allocations, ownership strength, and spillover influence will be important in opening the door to net zero lanes.

Collaboration framework

But to successfully manage the complexity and challenges of sustainable investing and net zero trajectories, asset owners will need to develop improved governance and investment sophistication.

“The Glasgow COP summit highlighted how asset owners can work together as part of a larger collaborative framework to deliver better long-term results for the entire system,” he adds. he.

According to the research, the development of systemic leadership practices – those that recognize the scale and interdependence of the climate challenge – will support much-needed innovation and collective action. However, asset owners will face and overcome many obstacles, including narrow interpretations of fiduciary standards, which have driven them to maintain established practices.

“The research highlights how some groups of asset owners have attempted to overcome these barriers by ‘maturing’ their governance, investment and sustainability models and reorganizing their organizational focus. As part of this, they have strengthened their ability to innovate to prepare for the impending transformational change, and other asset owners should take note, ”said Urwin.

Key themes

The new research also identifies other key themes that asset owners need to address, including:

• Falling expected future returns push funds to adapt their investment model
• Wider stakeholder management becomes a much more important task to deal with
• Reduced dependence on networks of external asset managers
• A rise in regulatory requirements as a factor influencing their practices, particularly in ESG and stewardship
• Building more robust technological platforms to transform excess data into value-added intellectual capital

Bok says: “The decline in expected future returns has also been a challenge in Asia. With rates in many Asian countries now at their lowest levels, the need for more portfolio work is really getting to the fore. At the same time, Asia is now catching up on ESG practices and climate issues are now at the forefront for most Asian funds. We expect this trend to continue.

“The challenges facing asset owners are therefore extremely broad and profound. We are concerned that resources will be strained by having so many areas to cover. The need for a lucid strategy has never been greater.

Urwin adds: “This is a defining moment for asset owners and it is time to make a decision. They can stay within their narrow mandates or adopt a systems-leading mindset to play a galvanizing role in the industry that unleashes a torrent of zero-aligned net capital.