Pressure is mounting for alternative funds to act, writes Bradley Davidson, ESG Lead at RBS International.
The climate emergency is the greatest challenge of our time. The answer is simple, we must reduce global carbon emissions, but delivering a sustainable future requires us all to work together towards a common goal. From government bodies to consumers, everyone has a part to play as we take meaningful action to decarbonise the economy.
Alternative investment funds (AIFs) recognise their crucial role and have begun placing science-based targets (SBTs) at the core of business strategies.
Are SBTs a way forward?The Science-Based Targets initiative (SBTi) was launched in 2015 to provide a framework for businesses to set science-based targets and benchmark the pace of greenhouse gas emissions reduction. The SBTi aims to mobilise the private sector to take meaningful climate action and outline sector frameworks that can be followed by entities across the world.
Targets are defined as ‘science-based’ if they follow the latest science and are in line with the ambitions of the Paris Agreement: limiting global warming to well below 2°C while pursuing efforts to limit further, to 1.5°C above pre-industrial levels.
It is vital that corporations and financial institutions implement SBTs as a pillar of wider environmental, social and governance (ESG) strategies, with success crucially being determined by the delivery of these commitments.
Not only do SBTs provide businesses with a clear pathway to transition, but the framework introduces a new lens to assess the climate-related financial risk and opportunities present. Furthermore, SBTs are a powerful articulation of ambitions which can be used to engage with investors, improve a company’s reputation and potentially gain a competitive edge.
Why now?Although the dust may have settled on COP26, the Glasgow summit underlined the investment gap in climate initiatives and called upon banks and other financial institutions to invest in the transition to net zero.
The alternative investment industry plays a key role in this effort towards decarbonisation, and pressure within the industry is mounting for fund managers to act. However, the question is, are funds prepared for the challenge?
Through our latest research report, RBS International set out to address this question and better understand the extent to which AIFs are implementing SBTs, as well as the barriers to doing so.
Between February 2022 and March 2022, we surveyed 125 key influencers on decisions relating to investment strategy in AIFs and interviewed six industry experts across a range of sectors.
The sample covered funds domiciled across five jurisdictions (the UK, Jersey, Luxembourg, Guernsey, and other Western Europe) and five sectors (real estate, private equity, infrastructure, renewables, and private debt).
Conducting this research was crucial to help those working within the industry identify where they sit in their journey towards SBT adoption whilst also identifying a clear path ahead.
Pressure is increasing for funds to actAs pressure mounts on fund managers to scrutinise their investment activities, SBTs are poised to become the leading framework in the alternative funds space. This is reflected in the results of our report: almost three-quarters (74%) of survey respondents agree that the financial sector must set clear targets for achieving net zero, and 35% believe that regulatory pressure is the primary driver for adopting SBTs.
However, despite this pressure, according to the research, fewer than half (42%) of AIFs currently have set SBTs and have had them verified. Many feel as though they are behind the curve when it comes to setting climate targets, with 70% stating that net-zero targets so far have been more focused on corporates than funds.
Although AIFs are clearly facing challenges in setting targets, the pressure to adopt SBTs is intensifying, with 76% of respondents saying that investors are looking for clear evidence that funds are setting SBTs.
Even though setting SBTs is voluntary, peer pressure and net-zero initiatives are also huge drivers to adoption. Almost a quarter (23%) of respondents say this influenced their decision to implement targets.
Bank/lender pressure is another crucial factor (18%), as many institutions have made public commitments to exit customers who fail to decarbonise or set robust net-zero targets. This factor will likely become more urgent in the future, with the inability to set measures potentially limiting access to financing at the right cost.
This means funds that hesitate to implement measures to combat climate change could potentially experience both reputational risk and competitive disadvantage.
Stumbling blocks: what stands in the way of setting SBTs?Despite the current demands in the market and the clear disadvantages of not setting SBTs, take-up remains relatively low.
Although many AIFs see benefits from setting SBTs, the results reveal that a lack of in-house skills or expertise is a key obstacle for funds – almost half (49%) rank this within their top-three barriers to setting SBTs within their firm. Therefore, investing in the right resource, whether internal or external, will be crucial to the successful adoption of SBTs.
The time taken to implement (48%) and measurement difficulties (46%) also appear in the top-three barriers.
The need for support was cited as another main cause of inaction: all respondents would value third-party support, as less than half (42%) plan to implement SBTs via their internal ESG team. The survey found that most (58%) are also looking to seek expertise outside of their organisation, whether from a consultant (32%) or another third party (26%), including their lenders.
The path aheadThere’s clearly an appetite for adopting SBTs, but the need for support in implementing them and overcoming barriers is universal.
As a financial institution, we face many of the same challenges as funds. That’s why we’ve embarked on our own sustainability journey and recognise the part we play in supporting our customers’ journeys to net zero.
If we want to reduce carbon emissions and tackle global warming, it’s time for us all to take action. By working together and setting meaningful targets like the SBTs, we can address the climate emergency, unlock new opportunities and help to make our planet cleaner and greener.
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