Delegates talk during the UN Climate Change Conference
A number of initiatives were announced at COP26 to reduce emissions in investment portfolios © Reuters

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Passive funds will struggle to achieve net zero carbon emissions across their portfolios, according to the chief executive of one of Japan’s largest asset managers.

Akira Sugano, president and CEO of Asset Management One, said passive funds would “of course” find it more difficult to reach net zero targets than active managers.

Policymakers and regulators have upped pressure on asset managers in recent years to channel their investments into companies that do not harm the environment. The COP26 climate summit at the beginning of November saw a number of initiatives being announced to reduce carbon emissions in portfolios.

AMO, which runs 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 per cent of its assets under management in passive funds.

This article was previously published by Ignites Europe, a title owned by the FT Group.

“With passive you cannot divest, you need to engage with all the companies in the portfolio,” said Sugano.

However, he said engagement with every company in the portfolio was not feasible due to the sheer number of companies that could be contained in an index.

“It is not practical to engage with every company,” he said.

Jonathan Doolan, a managing partner at asset management consultancy Indefi, agreed saying there was also a “challenge” for passive groups in how they “credibly” act as an ESG investor.

Doolan said it was difficult for passive funds to “build a shareholder activism or engagement team that can talk to every single company you own”.

“How many people would you need to support a Russell 3000 benchmark, and talk to every single company you own and every finance team,” he said.

Sugano said AMO picked a selection of companies from the Topix, the Japanese stock price index, and encouraged them to improve the environmental impact of their operations.

Engaging on ESG issues with companies such as Toyota that 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 were unlikely to ever meet net zero obligations due to the nature of their activities.

He said asset managers would instead have to deploy the “trick” of using carbon offsets, which allowed institutions to finance initiatives that cut carbon emissions in order to make up for emissions somewhere else.

Green campaigners have called for 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 that asset managers should band together to “ask index providers to identify and exclude coal laggards from main standard indices”.

Cuvelier added that passive funds could expose clients to “stranded asset risks” by not removing environmentally harmful companies from their portfolios.

Additional reporting by Ed Moisson, Ignites Europe

*Ignites Europe is a news service published 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.

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