Arisaig Q&A: Net-zero targets may be ‘riskier’ for EM managers

Director for impact assessment and engagement explains how the group is tackling the challenge of gathering reliable emissions data

ESG Clarity is exploring the decarbonisation targets set by Net Zero Asset Managers’ initiative (NZAM) firms as well as talking to individual fund groups about how they are finding the journey to net zero.

See also: – ESG Clarity’s Net Zero Database

Here, Lilian Wang, research director for impact assessment and engagement at Arisaig Partners, talks about what works and what does not work for decarbonising an asset manager focused on emerging markets, and the risks around 2050 net-zero targets.

Can you tell us how Arisaig’s journey to net zero started and how it’s going now?

Arisaig Partners has been certified carbon neutral in terms of our operations since 2010. We’ve also been measuring and reporting our greenhouse gas (GHG) emissions since then. We became one of 30 or so founding members of the NZAM in 2020.

While it is still early days in terms of our journey to net zero, it is already having impact on how we engage our holdings. One of our interim net-zero targets is for 100% of AUM to reach Transition Pathway Initiative (TPI) Level 2 by 2023. This means essentially they at least need to report Scope 1 and 2 emissions and make an emissions reduction commitment. Our strategy is to engage companies which are not currently meeting the target to encourage them to improve, rather than divest (which we believe would have minimal real-world impact).

We’ve therefore engaged with over half of our holdings in the last 18 months in relation to this climate change target. We have seen some progress already – for example, about 15% of our holdings increased their TPI score last year – and our engagement efforts will continue to intensify as we get closer to the target deadline date.

Are you finding any companies at TPI level zero? How do you engage them on climate?

Yes, some of the companies in our universe are newly listed and operating in markets which are still catching up with regards to climate change regulation. TPI Level zero companies are our highest priority targets for engagement.

Our strategy for engaging with these companies is to be supportive and co-operative. Improving climate change management capacity will be to the mutual benefit of the company and us as shareholders, and try to convey this to the company. Once we have established initial trust and interest, we follow up with materials from our TPI engagement pack, which includes:

  • An introduction to the TPI and why we believe this a valuable tool
  • A step-by-step roadmap a company can follow to go from TPI Level zero to TPI Level 3 or 4 within three to four years
  • A list of consultancies that can support companies at Level zero to reach at least Level 2, and indicative pricing for this
  • Detailed case studies of two of our holdings that have reached TPI Level 3, including challenges and estimated costs/resource requirements

Our internal engagement tracking system monitors engagement progress against six milestones. Where an engagement has stalled (e.g. no progress in 12 months), we have established escalation procedures including voting against management at AGMs and, as a last resort, divestment.

You’re using the International Energy Agency’s 1.5°C-aligned net-zero emissions pathway for emerging and developing markets. It sounds like the best fit out of a number of suboptimal pathways for your emerging market investments, what would be ideal?

We would ideally like more granular pathways to take into consideration specific countries, as not all countries in the emerging markets should be on the same path. It would also be ideal to have pathways that cover a broader range of industries – current net-zero pathways are focused primarily on high carbon intensity sectors which we do not have exposure to.

Can you give a couple of examples of how you are bringing the emissions intensity of your portfolios down? Does this require selling certain holdings?

The emissions intensity of our portfolios has been falling since 2019. Generally, this is due to changes in position sizing within the portfolio rather than falling emissions intensity among our holdings as most are still very early in their own net-zero journeys. For continued progress, our strategy is to engage holdings to set emissions targets and reduce emissions intensities rather than divesting, as we believe the latter leads to minimal real-world impact.

What has been the biggest challenge in decarbonising your portfolio?

So far, the greatest challenge has been on obtaining reliable GHG emissions data from all our holdings. While we are able to obtain third party estimates for the majority of companies, these is not a reliable way to measure progress as they are based on sector-level (and often quite old) data. This is why we have set an ambitious target for 100% of our AUM to reach TPI Level 2 by 2023 as this will mean we have primary data from all holdings on their Scope 1 and 2 emissions.

There do not seem to be many emerging markets focused asset managers in NZAM, why do you think that is?

There are a number of factors that may be contributing to this. For example, the carbon intensity metrics for emerging market indices tend to be higher than for developed market counterparts, suggesting it will be harder and more expensive for them to decarbonise, an issue that is exacerbated by uncertainty over climate funding.

Climate regulation and policy in emerging markets are also playing catch-up, which means that investors have less of a “stick” to rely on. For example, China and India’s net-zero commitments are for 2060 and 2070, respectively. Collectively, this suggests net zero by 2050 targets for emerging market focused asset managers might be riskier and more difficult to meet.

However, ignoring emerging markets in net-zero efforts will result in global failure, so it is imperative that asset managers do what they can now to engage their investments to act early and decisively on climate. Moreover, emerging markets can be a source of inspiration. India, for example, is mandating that the top 1,000 listed companies will all be required to report Scope 1 and 2 emissions from 2023.

How does Arisaig embed decarbonisation into its daily operations?

As a firm, we are committed to reducing our operational emissions intensity (in terms of Scope 1 to 3 GHG emissions – excluding portfolios – per full-time employee) by 46% by 2030 compared to a 2019 baseline, which is consistent with a 1.5°C pathway.

Business travel has consistently accounted for 75-85% of Arisaig Partner’s footprint and is therefore what we must manage most carefully. In addition to reducing business travel by using video conferencing, we have updated our travel policy so there are carbon budgets per department. Also, we promote lower carbon travel (train journeys within Europe) and standard policy of flying economy for short-haul and day flights.

Finally, we have various commitments relating to electricity procurement, waste management and IT procurement which will also help us to meet our GHG emission reduction targets.