Our Net-Zero Journey

Creating a Credible Commitment

02 December 2021
11 Minute Read

ESG in Action

Public commitments to a net-zero carbon emissions goal will be empty promises if they aren’t backed by a coherent plan. At AllianceBernstein, our journey to net-zero is rooted in an extensive analysis of the tricky issues related to climate change and investing, which informs our evolving efforts to develop and implement a strategic program that can deliver measurable results.

The Issue
Asset-management firms are joining global efforts to reduce carbon emissions, but many questions about how to reach net-zero remain unresolved.
The Investment Case
Climate-related issues will have a profound impact on future market share, cash flows and profitability for companies across sectors. Investors need a clear strategy and research tools to assess the risks and opportunities.
Engagement Goals
By engaging for action with company management, AB’s climate activities aim to promote positive changes in corporate behavior on climate issues that support shareholder returns and open clear paths to net-zero.
Author

Climate promises are not the same thing as climate action. At AllianceBernstein (AB), we believe that a credible commitment to reducing carbon emissions starts with exploring tough questions, developing tangible goals and integrating climate analysis across our portfolios before declaring a net-zero target.

In recent years, the asset-management industry has awakened to the urgency of global warming. Increasing regulation, growing investor awareness and more extreme weather patterns have made climate change a strategic imperative—for the world and for our business. But the path to achieving net-zero emissions is far from clear. Public commitments to a net-zero goal will be empty promises if they aren’t backed by a coherent plan. And there are many vexing questions about climate accounting for investors to wrangle with, while a comprehensive cultural shift is also required. That’s why our journey to net-zero is rooted in an extensive analysis of the tricky issues related to climate change and investing, which informs our evolving efforts to develop and implement a strategic program that can deliver measurable results.

What Is a Net-Zero Commitment?

Net-zero commitments are widely seen as an oath of allegiance to fight climate change. At COP26, the recent United Nations Glasgow Climate Change Conference, countries, cities and companies lined up to make net-zero pledges. Yet committing to net-zero doesn’t mean that greenhouse gas (GHG) emissions will be eliminated entirely. Net-zero means limiting future emissions and removing existing carbon to align with efforts to prevent global temperatures from rising by more than 1.5 degrees Celsius by 2050, as per the Paris Agreement of 2015. In general, this requires a reduction of an entity’s carbon emissions that is proportionate to the contribution of emissions.

Promises to reach net-zero emissions are usually made for many years in the future, often with a 2050 target date. Such long-term vows don’t ensure a commitment to action and accountability, according to Austin Whitman, chief executive officer of Climate Neutral, who was cited in a recent Financial Times article. “I think we are taking far too much comfort from the fact that companies are making these commitments for 2050,” said Whitman, whose nonprofit organization helps companies cut emissions. “There’s a reality that if you’re making a 2050 pledge you really don’t have to change anything today.”

For asset-management firms, a net-zero commitment applies to both a company’s operations and its portfolio holdings. However, since investment businesses don’t emit much carbon in day-to-day operations, about 95% of our GHG emissions are a product of the assets owned in our portfolios.

Across our industry, 128 investment firms with US$43 trillion in assets under management made a public commitment to net-zero emissions as of October 2021. That’s a 19% increase in AUM since March 2021, when only 34 firms had made a commitment. AB has not made a net-zero pledge. Yet even without a commitment, our extensive climate-related activities (Display) are aligned with almost all requirements of the Net Zero Asset Managers initiative, an international group of asset managers committed to supporting the goal to reach net-zero by 2050 or sooner.

AB’s Main Net-Zero Activities
Graphic with six circles, each listing one of AB’s main activities aimed at reaching net-zero carbon emissions over time.

For illustrative purposes only.
Source: AllianceBernstein (AB)

There are many different methods for achieving net-zero. The heart of our climate actions is focused on developing firmwide and portfolio-level metrics and targets while engaging with company management on key issues. Instead of resorting to widespread exclusions or divestment as the first option, we view divestment as one tool in our escalation strategy after engaging for action has failed. In many cases, companies that are part of the global climate problem are instrumental in the solution, and staying invested offers opportunities to influence corporate behavior for the better. Most importantly, we acknowledge that climate issues present many unknowns—and we simply aren’t equipped to deal with all of them in house. So we need to assess which issues can be addressed internally and which require external help.

Educating Investment Teams

All of our net-zero activities are rooted in education. In the past, at most investment firms, climate change research was the remit of energy analysts, as the sector was directly in the line of climate-related pressure. Now, every company in every sector and industry should be preparing for climate change. From healthcare to consumer staples to industrials, analysts who may not have focused on climate change issues in the past needed to be trained in the importance of climate to an investing thesis about portfolio candidates and holdings. This was a huge cultural challenge for our organization.

Companies that think about climate now—and put money toward solutions—will be better prepared to face the future in a market where competitors may develop lower carbon alternatives. Regulations are changing rapidly, so companies that don’t prepare might suddenly get hit with a carbon tax or new building requirements or equipment upgrades. And customers are changing their purchasing behaviors as climate awareness grows. These issues will all have a profound impact on future market share, cash flows and profitability. To incorporate these considerations in financial analysis, we first needed to train our investment teams in the underlying climate-related issues.

Educating our investment teams required expertise that we simply didn’t have in-house. In 2019, we formed an exclusive partnership with Columbia University’s Earth Institute, which is home to hundreds of climate change scientists and experts, to collaborate on developing a climate change course for investors. Since then, all our portfolio managers and analysts, as well as several members of our board, have participated in this climate change training.

The course covers the basic science and direction of climate change; the legal, public health, policy and regulatory implications; potential solutions; and how to translate climate change into financial analysis. We’ve also expanded the reach of the course to train clients and asset owners. By November 2021, more than 1,100 people from outside the firm had participated in the climate course. We’re now working with Columbia to develop collaborative projects that will leverage Columbia’s multidisciplinary approach to climate change in our investment processes. These include working groups on renewable energy, carbon accounting, salmon fisheries and synthetic biology. We believe this unique partnership between a distinguished scientific institution and our firm will provide distinct advantages in our ability to deepen a climate-aware investing approach and to engage more effectively with companies.

Engaging on Climate Targets

Divesting from companies is taking the easy way out, in our view. By withdrawing from a controversial industry or company, investors forfeit the opportunity to influence corporate behavior for the better. Bad actors with improvement potential are less likely to change their ways without activist investors pressing for change. Take deforestation as an example. One of our portfolios has holdings in Brazilian beef producers, which are big contributors to deforestation of the Amazon—a major environmental crisis.

Given the scale of the deforestation crisis, it might seem counterintuitive to invest in Brazilian. But the logic is actually clear. While avoiding or divesting from Brazilian beef producers would decrease our portfolios’ exposure to deforestation risk, it wouldn’t help reduce deforestation. AB’s holdings in Brazilian beef producers allow us to engage effectively with management teams on deforestation risks. Since 2012, we have studied each company’s practices and, in frequent engagement meetings, have pushed them to improve. By staying invested, we can encourage companies to adopt more sustainable practices, which is good for the environment as well as for business performance and shareholder returns.

Similarly, some investment firms might steer clear entirely of oil and gas companies. We think that is a naïve approach that doesn’t acknowledge the world’s need for hydrocarbons over at least the next decade as we transition to renewable energy. In this transition, some major oil companies are much cleaner operators than others, and some are playing important roles in building renewable energy infrastructure. If an asset manager decarbonizes a portfolio by selling all its oil and gas holdings, it has not made any contribution toward decarbonizing the world.

As active investors, engagement with company management is central to our philosophy on environmental, social and governance (ESG) issues. By engaging with executive teams, we aim to influence company behavior, which in turn can make a positive impact on investment returns. In 2020, we launched our first targeted ESG engagement campaign—focused on our largest equity holdings that didn’t have either carbon emissions reduction targets or ESG metrics in executive compensation, as defined by Institutional Shareholder Services and Bloomberg. We asked these companies to introduce such measures over the next two years and have been following up with those issuers in our 2021 ESG engagement campaign.

More broadly, we held more than 12,500 issuer meetings during 2020, including 835 engagements on ESG topics across 534 companies. Climate-related issues were the most prominent in these meetings, including 249 focused on carbon emissions, 74 on climate change vulnerability and 45 on opportunities in clean technology (Display).

AB’s Climate Change Strategy: Stewardship
Engaging for Insight and Action
Pie chart showing the number of AB’s engagements on environmental, social and governance issues during 2020.

For illustrative purposes only.
As of December 31, 2020
*Numbers will not sum to total as engagements frequently discuss multiple ESG topics across or withing pillars.
Source: AllianceBernstein (AB)

Meanwhile, we’ve made commitments to collaborative engagements with other organizations and firms. We are co-leads on three engagements through Climate Action 100+, an investor-led initiative to ensure the world’s largest corporate GHG emitters take action on climate change. Through this project, we’re engaging with Petrobras, Sasol and Eskom—some of the world’s largest emitters that have been resistant to change; all three companies have made improvements since our efforts began. We also work with regulators and governments around the world. For example, we’ve provided feedback to the US Securities and Exchange Commission (both on paper and in person) on the direction it should take on climate issues and ESG disclosure. We’ve also directly addressed a group of the world’s largest national oil companies on the importance of addressing climate change today.

Formalizing a Strategy

In 2020, we also formalized our approach to climate change by issuing a TCFD (Task Force on Climate-Related Financial Disclosure) statement. This statement forms the backbone of our strategy and explains how we are addressing climate risk in both our business operations and investment processes. As the climate commitment is a work in progress, so is the TCFD statement; we updated it in 2021 to reflect the evolution of our strategy.

The linchpin of our strategic efforts is the ability to understand and measure climate risk in our portfolios. In 2021, we launched pilot climate change scenario analysis projects for our portfolios, aimed at developing effective tools to assess our holdings. In consultation with Columbia faculty and scientists, we evaluated more than a dozen options and onboarded a specialist data service provider while developing our own internal climate modeling. The strategy aims to combine the best elements from external sources with the fundamental insights of our research analysts, who routinely engage with companies on climate risks and opportunities (Display). Our goal is to create insights for our teams to use in their investment processes and reports that highlight climate change implications to our clients.

Incorporating Climate Commitments into Fundamental Research Drives Better Outcomes
Graphic outlines the main research questions our analysts are asking about climate issues to help improve investment decisions.

For illustrative purposes only. There can be no assurance that any investment objectives will be achieved.
Source: AllianceBernstein (AB)

At the portfolio level, we can simplify the problem by separating our holdings into three key buckets: companies that have committed to net-zero and have a credible plan for getting there; companies that don’t have a plan but offer engagement opportunities to drive improvement; and companies that are laggards in reducing their carbon emissions. Over time, we want to migrate more holdings toward the companies that have actual commitments and a credible plan.

Another important plank of our strategy involves developing portfolios with purpose. We’ve developed several equity and fixed-income strategies with a climate-aware approach. These include sustainable portfolios that tackle environmental challenges derived from the United Nations Sustainable Development Goals by targeting companies that are playing leading roles in advancing climate solutions. We’re also developing goal-based portfolios that target specific responsibility goals, such as climate resilience.

Our journey to net-zero has already yielded a clear framework for decarbonizing our portfolios. All elements shown below are important, but as the inverted pyramid suggests, the upper levels are more effective methods of addressing climate change (Display). Engagement is the top priority, followed by voting at shareholder meetings to support change, especially when a company is not taking the necessary actions. We will also initiate shareholder proposals when appropriate. Carbon offsets are an option, but only for a residual portion of emissions that cannot be eliminated otherwise; offsets are not all created equal and sometimes may be used by companies as a way to avoid taking actions to reduce emissions from their own operations.

Proposed Investment Decarbonization Model
Focus on Stewardship and Active Allocation, Not Divestment
Inverted triangle graphic lists the key activities that underpin our net-zero efforts, in order of prioritization.

For illustrative purposes only.
Source: AllianceBernstein (AB)

Fostering a Cultural Shift

Throughout this process, one guiding principle is that we do not shy away from difficult questions. And there are many, from organizational questions related to embedding a climate-focused mindset across the firm to technical questions regarding portfolio and holding metrics. Examples include:

  • How do we get portfolio managers and analysts to take ownership of climate issues across regions and asset classes?
  • What can portfolio teams do to improve their understanding of climate exposure when data are often poor?
  • Is there a way to normalize carbon accounting across strategies while avoiding double counting of holdings in stocks and bonds? And what about sovereign bonds, which roll up everything at the country level?
  • Should the carbon accounting in short positions held be netted against long positions in the same companies?

We don’t have all the answers, and there is still plenty of work to do. We’ve made good progress toward sizing and attributing our carbon footprint, and are working on implementing carbon emissions data-tracking software. We're in the process of developing year-on-year carbon emissions targets and determining the emissions generated from our firm’s operations. It will take time to set decarbonization targets at the investment vehicle level.

Every stop on this journey throws up more complicated questions. But the process of discovering the answers will illuminate clearer and more convincing pathways with measurable climate objectives for reaching the ultimate goal of net-zero emissions over time.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.


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