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Net Zero Asset Managers Initiative

by | Jan 31, 2023

The Net Zero Asset Managers initiative (NZAM) was established in late 2020 to support the goal of net zero greenhouse gas emissions by 2050 or sooner which is in line with efforts to limit global warming to 1.5°C and reduce the impact of climate change. The initiative has grown rapidly since 2020 and there are currently 291 NZAM signatories comprised of global asset managers representing 66 trillion USD in assets under management.  Sprucegrove became a signatory in 2021 and in 2022 we disclosed our initial interim NZAM targets.  Importantly, we view our participation in NZAM as a natural extension of our long-term focus and perennial consideration of ESG issues.  As such, while the initiative will put a lens on our company engagement and proxy voting activities, it will not change our time-tested investment philosophy and process. This is consistent with our fiduciary commitment to our clients, and we expect this will not hinder portfolio returns but could reduce exposure to regulatory and market risks related to the transition to a low carbon economy.

Creating Value

A component of our investment philosophy and process is based on the belief that evaluating an attractive long-term investment should include identifying potential opportunities and risks related to ESG. We reviewed the net zero commitments of our holdings as part of our evaluation before becoming a NZAM signatory. Based on our initial analysis, nearly half of our portfolio companies are either aligned, aligning or committed to aligning to net zero. This represents a good starting point and reinforces our assessment that our portfolios are comprised of quality companies which are managed by long-term focused management. Highlighted below are a few of our holdings that have made net zero and carbon neutrality commitments:

  • Holcim is the largest cement company in the world and the manufacturing of cement is a carbon intensive process. They are a leader of sustainability in cement production with its carbon emissions per tonne amongst the lowest in the industry. The business is focused on its 2025 Green Strategy which entails investing in lower carbon industries. It is also a market leader in green products with the first to market in green concrete and cement products. Holcim has pledged to be net carbon neutral by 2050.
  • Air Liquide is the world’s second largest industrial gas company. Air Liquide is pro-active on the ESG front in seeking to both decarbonise its own energy use through increasing its purchase of renewable power in conjunction with assisting its customers, particularly in the hard-to-abate sectors of cement and steel, in reducing their carbon footprints. The company has announced its goal of achieving carbon neutrality by 2050 and reducing its carbon emissions is included amongst its long-term compensation metrics.
  • Shell Plc is a leading global energy company. Shell has committed to becoming a net zero energy business by 2050 or sooner. The company also has several ambitious interim 2030 goals including producing enough renewable energy for 50 million households, operating more than 2.5 million EV charging ports and raising the amount of biofuels and hydrogen in its transportation fuels mix from 3% today to 10%. Shell is also investing significantly in the area of carbon capture and storage with a goal of having an additional 25 million tonnes of capacity a year in place by 2035.
  • Anglo American is one of the world’s largest mining companies. Anglo has pledged to become carbon neutral across its operations by 2040 and has an interim target to reduce greenhouse gas emissions by 30% by 2030. Anglo has a multi-faceted plan to achieve carbon neutrality which includes the application of smart mining technologies such as capturing methane from its mines and the development of the world’s first hydrogen fuel cell powered haul truck. Anglo is also in the process of developing on-site wind and solar farms and potentially pumped hydro storage. Eight out of fifty-six Anglo sites are already carbon neutral.

Our Collaborative Partners

Prior to becoming a NZAM signatory we were and remain members of Principles for Responsible Investing (PRI) and the Carbon Disclosure Project (CDP). PRI is the world’s leading proponent of responsible investment, and CDP works to promote an ongoing dialogue between institutional investors and corporations in relation to climate change. Additionally, to compliment our NZAM efforts we became members of the Institutional Investor Group on Climate Change (IIGCC) in 2022. IIGCC is the leading European membership body for investor collaboration on climate change and the voice of investors taking action for a prosperous, low carbon future.

Climate Action

In November 2022, we made our initial Target Disclosure for the NZAM initiative. Our aim is to have 50% of AUM in material sectors considered net zero, aligned, or aligning by 2030 and to have 100% of AUM in material sectors considered net zero or aligned by 2040. The 2040 date to reach 100% recognizes that, in order to be consistent with net zero by 2050, companies will have to have set targets and execute on plans to achieve the transition well in advance of the 2050 date.

Climate-related insights are critical to integrating risks and opportunities into our investment process. We have evaluated several third-party vendors and have decided to use Clarity AI’s Net Zero solution that supports Financial Institutions reporting their net zero alignment, in line with the Net Zero Investment Framework (NZIF) developed by the Paris Aligned Investment Initiative (PAII). Clarity AI’s Net Zero solution provides an Alignment Maturity Level for each company and underlying metrics such as Long-Term Ambition, Near-Term Targets, Temperature Alignment, Emissions Performance relative to targets, and Disclosure of material emissions.  The purpose of this platform is to assist us with tracking our portfolio alignment to net zero and identifying the top/worst contributors in order to engage with them. We recognise that realising real economy-wide decarbonisation is important and hence favour an engagement approach over divestment which is consistent with the NZAM prioritization of engagement. We will facilitate corporate engagements with our portfolio companies to reduce emissions in the short term and work towards zero emissions in the long term.

Prioritizing Engagement

Given our long-term approach, Sprucegrove has a history of constructively engaging with our portfolio companies on a range of issues. Going forward, we will be facilitating corporate engagements with all our portfolio companies to support their goals of reducing emissions in the short term and working towards zero emissions in the long term.  We encourage our companies to embrace environmental best practices and have a tangible, detailed decarbonization plan. Several management teams of our portfolio companies are vocal about taking the necessary steps now to ensure they can meet their net zero targets by 2050. As NZAM signatories, our hope and intention is to have a greater impact on building a more sustainable future while concurrently enhancing long-term performance results for our clients. For many of our companies that are taking a leadership role in the global energy transition, embracing a net zero future does not simply represent the fulfillment of an obligation, but rather, significant growth opportunities for years to come.

[1] Source:  Sprucegrove, MSCI, FactSet

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