The CFA Institute’s recent report, ‘Net-Zero Investing: Solutions for Benchmarks, Incentives, and Time Horizons,’ offers essential insights for asset managers committed to aligning investment strategies with net-zero goals while balancing fiduciary responsibilities. As sustainability becomes a cornerstone in financial decision-making, the report addresses the pressing challenge of integrating climate risk mitigation and emissions reductions into traditional investment frameworks.
Asset managers navigating this transition face a complex web of objectives, risks, and incentives that need careful recalibration to support both financial and net-zero targets. This report advocates for a systems approach to investing, emphasising that successful net-zero programmes must integrate benchmarks, incentives, and time horizons thoughtfully.
Below, we explore some of the key takeaways for asset managers and asset owners looking to drive climate progress without compromising financial returns.
The report underscores that net-zero investing should support – rather than detract from – financial performance. According to the CFA Institute, a well-executed net-zero strategy should enhance traditional risk-return outcomes by reducing exposure to climate risks and capitalising on emerging low-carbon opportunities. However, many asset managers face obstacles in using current risk management tools, which are not fully equipped to assess evolving climate risks. Thus, asset managers should start with practical steps to assess portfolio exposures, such as evaluating high-emitting holdings or applying industry-specific carbon benchmarks.
The CFA Institute recommends that asset managers adopt new metrics and benchmarks to capture both financial returns and net-zero progress. One solution is a “scorecard” approach, which combines financial metrics with emissions-related indicators, enabling managers to evaluate a portfolio’s overall performance against both climate and financial targets. Traditional indexes are often inadequate for measuring progress toward net-zero, prompting some asset managers to explore climate-specific or customised benchmarks that better align with their net-zero strategies.
However, the report cautions against over-reliance on decarbonising benchmarks, which may lead to sector biases or unintended risk exposures. While these benchmarks can be a helpful first step, they may not fully capture the real-world emissions reductions required for net-zero outcomes. Managers should be transparent with clients regarding the limitations of these benchmarks and consider a multi-metric approach that supports both climate goals and financial resilience.
The traditional compensation structures in asset management often prioritise short-term financial performance, a model that is misaligned with the long-term nature of net-zero objectives. To drive progress, the report suggests incentive structures that encourage climate engagement, portfolio decarbonisation, and investments in sustainable solutions. For example, asset managers might incorporate climate targets into long-term compensation plans or offer incentives tied to the achievement of both financial and climate milestones.
For asset managers seeking to create impact through active engagement, dedicated “engagement fees” can help cover the additional resources needed for impactful dialogue with high-emitting companies. External and internal managers should be encouraged to adopt longer time horizons for climate-related investments and engagements, reflecting the slow but necessary transition to net-zero.
A typical three-to five-year performance evaluation period often fails to capture the long-term impacts of net-zero strategies, which may take decades to manifest fully. Recognising this limitation, the CFA Institute advocates for minimum five-year evaluation periods for net-zero programmes, which provide a more realistic timeframe to measure the success of climate investments and engagement efforts.
Achieving net-zero by 2050 requires interim targets across various time horizons. Many asset managers are encouraged to set ambitious short- and medium-term targets for emissions reductions, ensuring alignment with long-term goals. The report highlights the importance of interim milestones, as they enable asset managers to make adjustments along the way, maximising both impact and performance in a constantly changing regulatory and market landscape.
As the world grapples with climate change, the investment community plays a pivotal role in driving the transition to a low-carbon economy. The CFA Institute’s latest report offers a comprehensive roadmap for asset managers to incorporate climate risk management into their traditional investment strategies without sacrificing financial performance. By setting tailored benchmarks, aligning incentives with climate goals, and adopting appropriate time horizons, asset managers can lead the way toward a sustainable financial future.
The journey to net-zero is complex, but with deliberate action, asset managers can help build a resilient and climate-conscious financial system.
