Expert view: Investment consultants can play ‘catalytic’ role in tackling climate change

Simon Hallett, head of climate strategy at Cambridge Associates and soon-to-be co-chair of the Net Zero Investment Consultants Initiative, discusses the key role of advisers in the transition to a low-carbon economy

A year ago, 12 investment consulting firms, responsible for advising on roughly $10trn of institutional assets, launched the Net Zero Investment Consultants Initiative (NZICI), formalising their commitment to supporting the goal of global net-zero greenhouse gas emissions by 2050 or sooner. 

Cambridge Associates (CA) is one of initiative’s backers, and their head of climate strategy Simon Hallett will shortly be taking over as co-chair of the steering group.

“A group of investment consultants came to realise that the initiatives undertaken by asset managers and asset owners were still leaving a gap,” he tells Impact Investor. “The advisers needed to be brought on board.” 
 

Hallett has spent 17 years at CA as a client-facing adviser. He became increasingly interested in sustainability. “About five years ago, the data became so convincing that I realised the scale and the urgency of environmental issues meant I could no longer park this problem. I realised we were woefully behind, and a group of us at Cambridge connected to collectively address this and get buy-in internally.” CA created a cross-functional net-zero think tank and asked Hallett to chair it.  

“Our role can be catalytic. We can unblock decision making and accelerate progress,” Hallett continues. “The most basic building block is to encourage reporting transparency with respect to climate change. Dashboard information often helps people sit up and recognise what they need to do to achieve their goals. 
 

CA’s default advice aims now to always be Paris-aligned. At a high level, this means seeking to ensure emissions have been halved by 2030 and that net zero is achieved by 2050. “At CA we believe the only net zero that matters is achieving change by 2050 in the real world economy. Fixating on portfolio missions is a secondary consideration. Our initiative is designed to drive real world change.”  

Real world impact

Therefore, he explains, voting, engagement and active ownership are vital. We understand that it is our clients’ money, so they ‘own’ their policy but we can educate and advocate, share best practice and hopefully create momentum.”  

CA aims to integrate this activity into their entire process, including how they think about asset allocation, manager selection and the way the report on managers and review their progress.  

Hallett continues: “There are many reasons why managers might be excluded, and we are still working through this and developing our policy.”  

He explains there are two particularly important areas of scrutiny. Firstly, they may exclude managers who they think are inadequately thorough in addressing climate risks and opportunities and fail to demonstrate knowledge and commitment in this area. “This is easy to rationalize since it indicates weak fundamental investment skills, which is the last thing we want in a manager.” CA are mindful of context however, and climate issues may be more relevant for some asset and strategies than others. “We never invest in or avoid managers based on mechanical tick box criteria.” 

Secondly, the team focuses on the assets that managers are investing in and devote special scrutiny to high-emitting assets. They believe without a credible transition plan such assets risk being ‘stranded’ by regulatory, tax of demand changes and thus impaired or worthless.  

“Obviously, I should be specific that we do believe there are some long-lived carbon assets that we do have to deal with. The LNG supply chain is an example of this. Some high emitting assets are essential for energy transition and of course energy security has assumed greater importance in 2022. But we need managers to understand those transitions and be encouraging portfolio companies down that path.” 

“This would be especially true if our investment would be funding exploration for new fossil fuel reserves, since we know that the world already has much more existing reserves than it can safely burn.” 
 

Hydrogen 

In contrast, CA are great believers in the potential for hydrogen. “Essentially, we believe there are four important pillars to energy transition. Decarbonising the electricity grid, electrification, changes in land use, and the adoption of hydrogen to decarbonize heavy industrial processes.”  

CA are searching for private equity managers who will provide the scale of investment necessary to take hydrogen to the next stage. Selecting private equity managers to help in this revolution. Ideally, those with strong operational and execution capability and a long history of working in multiple jurisdictions.  

According to Hallett, the US Inflation Reduction Act puts in place tax incentives that are helpful. “We’re dealing with an industry where a lot of investors…are concerned whether demand will be there. There is something of a bridge argument to where we want to get to.” 

Data challenges

Hallett says his main challenge is data. “World change will come through individual companies across numerous portfolios, getting a clear view across the playing field is very difficult.” The problem is not so much emissions today but about their forward path – the transition plans of companies and their credibility. “I fear there is good data for only roughly one third of public companies and very little on privates.” 

CA are talking to a number of organisations about ways in which this could be improved but believe “it’s very important for a consistent reporting method to be developed across the industry. It is ideal that managers develop this consistency between and among themselves.” 

In looking to the future, Hallett welcomes the fact that “any endowment or family office that we discuss these issues with are quick adopters. Sustainability has rocketed up their agendas”. He also sees this interest globalising. In the past there have been some suggestions that Asia is behind. “But the good news is Asia is catching up fast.” 

“We have moved very fast to set up the goals and targets for ourselves, and for the clients we advise. What I’m most interested in watching is the acceleration in the proportion of our client base adopting what we are trying to do. I expect this to expand exponentially in the next three years.”