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Passive funds will struggle to achieve net zero carbon emissions across their portfolios, according to the CEO of one of Japan’s largest asset managers.
Akira Sugano, president and CEO of Asset Management One, said passive funds would “naturally” find it more difficult to achieve net zero targets than active managers.
Over the past few years, policymakers and regulators have put increasing pressure on asset managers to channel their investments to companies that do not harm the environment. At the COP26 climate summit in early November, a number of initiatives were announced to reduce carbon emissions in portfolios.
AMO, which manages a number of Luxembourg-domiciled Ucits funds, was the first Asian fund manager to sign the Net Zero Asset Managers initiative and has about 60 percent of its assets under management in passive funds.
“With passive you can not withdraw, you have to enter into discussions with all the companies in the portfolio,” Sugano said.
However, he said linking with each company in the portfolio is not feasible due to the large number of companies that can be included in an index.
“It’s not practical to connect with every company,” he said.
Jonathan Doolan, a managing partner at asset management consulting firm Indefi, agreed, saying there was also a “challenge” for passive groups in how to act “credibly” as an ESG investor.
Doolan said it is difficult for passive funds to “build a shareholder activism or engagement team that can talk to every single company you own”.
“How many people will you need to support a Russell 3000 benchmark and talk to every company you own and every financial team,” he said.
Sugano said AMO had selected a selection of companies from the Topix, the Japanese stock price index, and encouraged them to improve the environmental impact of their operations.
Engaging in ESG issues with companies like Toyota that have had large supply chains could then have a “spillover” effect on other companies and sectors, he added.
Sugano added that there would be “a remnant” of companies in a passive portfolio that, due to the nature of their activities, would probably never meet net zero obligations.
He said asset managers would rather have to use the “trick” of using carbon deposits, which has enabled institutions to fund initiatives that reduce carbon emissions to make up for emissions elsewhere.
Green Campaign has called on passive funds to do more to challenge index providers to make their indices more climate friendly.
Lara Cuvelier, sustainable investment campaigner at Reclaim Finance, said asset managers should work together to “ask index providers to identify and exclude coal stocks from major standard indices”.
Cuvelier added that passive funds can expose clients to “stranded battery risks” by not removing environmentally damaging companies from their portfolios.
Additional Reporting by Ed Moisson, Ignites Europe
* Ignites Europe is a news service provided by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at igniteseurope.com.