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Top asset owners’ US$23 trillion key to unlocking net zero
Giant funds' allocations and trickle-down influence will drive positive change in investment industry
24 Nov 2021 | The Asset

Assets under management (AUM) of the world’s 100 largest asset owners reached US$23.5 trillion in 2020, up 16.4% from the previous year, a new study finds. But there are only three accredited organizations committed to achieving net zero in the top 20 and 14 in the top 100.

“This relatively small group of investors are right on the front line of the investment community’s fight to become net zero, and their power is even more concentrated among the top 20, which are responsible for nearly US$13 trillion,” says Roger Urwin, co-founder to the Thinking Ahead Institute (TAI).

Jayne Bok, head of investments, Asia, at Willis Towers Watson, adds: “Over US$8.3 trillion is concentrated within the top 20 APAC asset owners, making it a hugely impactful sum of capital to be used for positive change. Leading APAC asset owners have the power to drive change in the investments industry and hold the keys and the pathways to net zero. By thinking about the investment ecosystem as a whole, and collaborating across it, this group can have even greater impact than their large asset size implies.”

Pension funds remain the single biggest group of asset owners globally, accounting for 58.1% of assets, followed by sovereign wealth funds (34.7%) and outsourced chief investment officers (OCIOs) and master trusts (7.2% combined), according to the TAI report, “The Asset Owner 100: The most influential capital on the planet”.

Largest fund

The Government Pension Investment Fund (GPIF) of Japan remains the world’s largest asset owner, with AUM of US$1.7 trillion. Norges Bank Investment Management of Norway (AUM of US$1.3 trillion) comes in second and China Investment Corporation (AUM of US$1.0 trillion) is third.

Asia-Pacific accounts for 37.0% of total AUM in the ranking, making it the largest region in the study. Pension funds continue to dominate in the region where they represent 58% of assets, followed by 42% of assets invested in sovereign wealth funds.

APAC funds have allocated assets almost equally between fixed income (44.3%) and equity assets (44.7%) with an 11% share in alternative assets.

“While the pledges from Glasgow Financial Alliance for Net Zero (GFANZ) organizations are critical, the largest asset owners hold the ‘keys to the castle’,” Urwin notes. Their allocations, ownership muscle and trickle-down influence will be important in opening the door to net-zero pathways.

Collaboration framework

But to successfully manage the complexity and challenges of sustainable investment and net-zero pathways, asset owners will need to develop enhanced governance and investment sophistication.

“The Glasgow COP summit has highlighted how asset owners can work together as part of a wider collaboration framework to produce better long-term outcomes for the whole system,” he adds.

According to the research, the development of systems-leadership practices – those that acknowledge the size and interconnectedness of the climate challenge – will support much-needed innovation and collective action. However, asset owners will need to face up to and overcome numerous impediments, including narrow interpretations of fiduciary standards, that have pushed them to maintain established practices.

“The research highlights how some asset owner groups have attempted to overcome these impediments by ‘maturing’ their governance, investment and sustainability models and revamping their organisational purpose. As part of this they have built their capacity to innovate in readiness for the imminent transformational change, and other asset owners should take note,” Urwin says.

Key themes

The new research also identifies other key themes for asset owners to address, including: 

  • Lower future expected returns driving funds to adapt their investment model
  • Broader stakeholder management becoming a much bigger task to address
  • Diminishing reliance on the networks of external asset managers
  • A rise in regulatory requirements as a factor influencing their practices, particularly in ESG and stewardship
  • Building more robust technology platforms to transform over-abundant data into value-adding intellectual capital

Bok says: “Lower future expected returns have been a challenge in Asia as well. With rates in many Asian countries now at their lowest levels, the need to work the portfolio harder is really coming to the fore. At the same time, Asia is now catching up on ESG practices and climate issues are now front and centre for most Asian funds. We expect this trend to continue.

“The challenges that asset owners face are therefore immensely broad and deep. We are concerned that the resources will be stretched by having so many strands to cover. The need for a clear-eyed strategy has never been more important.”

Urwin adds: “This is a defining moment for asset owners and it’s decision time. They can stay in their narrow mandates or step up with a systems-leadership mindset to play a galvanizing industry role that unleashes a torrent of net zero aligned capital.”

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