Insight Investment's net-zero pledge | Insight Investment

As a signatory to the initiative, Insight agreed to:

• Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net-zero emissions by 2050 or sooner across all assets under management
• Set an interim target for the proportion of assets to be managed in line with the attainment of net-zero emissions by 2050 or sooner
• Review its interim target at least every five years, with a view to ratcheting up the proportion of assets under management (AUM) covered until 100% of assets are included

Insight's initial net-zero targets are on $475bn of our assets under management (AUM) as at 28 February 2022. This constitutes 77% of our physical AUM at that date². By asset class, this includes 100% of UK government bonds, and 75% of corporate bond and equity holdings managed in the UK.

The questions and answers presented below aim to provide greater detail of our net-zero commitment, alongside the necessary assumptions and methodological underpinnings. For more information on our efforts, please contact your Insight representative.

Why has Insight made a net-zero commitment?

Insight's mission is to offer investors a different approach to achieving their investment goals; one that prioritises the certainty of meeting their chosen objectives in contrast to a traditional focus on maximising return and minimising volatility. We do this by ensuring we act as responsible stewards of our clients’ capital and put ‘doing the right thing’ at the heart of all our decisions.

In this context, climate change is one of the greatest challenges for Insight to navigate. It is unique in terms of its complexity, uncertainty and scope for material value destruction and opportunities for value creation. It also divides people and societies, both culturally and intellectually. As a global business, we are aware that we need to be sensitive to the needs of our client base around the world and our policies need to represent them and their interests. Equally, we are cognisant that challenges like climate change cannot be addressed without institutions like Insight taking action.

Our rationale for making the net-zero commitment is based on the view that:

1. managing climate risk is a fundamental part of managing overall investment risk, both at an individual investment and systemic level, and
2. the world will look to decarbonise over the decades ahead; this will apply both to the entities in which we invest and to the asset owners who appoint us to manage investments on their behalf.

What interim targets has Insight set?

Insight's initial net-zero interim targets are on $475bn of our assets under management (AUM) as at 28 February 2022. This constitutes 77% of our physical AUM at that date.

By asset class, this includes 100% of UK government bonds, and 75% of corporate bond and equity holdings managed in the UK.

• For UK government bond holdings, we will use the Germanwatch Climate Change Performance Index (CCPI) scoring process and Climate Action Tracker as a basis for monitoring and advocating for progress in line with the UK government’s net zero targets.
• For corporate bond and equity holdings, we will seek to reduce the carbon footprint of the assets we manage over time and ensure a robust level of engagement coverage on higher emitting holdings, with a specific position being adopted regarding thermal coal investments.

Money market instruments, non-UK sovereigns, asset-backed securities, corporate bond and equity assets managed for US clients, and derivatives are not currently captured in the initial net-zero targets.

Asset classes such as asset-backed securities have nascent approaches to net-zero alignment which are not sufficiently evolved, in our view, or there is not enough data to disclose to an adequate standard.

Also, the fiduciary landscape across different jurisdictions presents challenges to net-zero alignment: for example, ERISA rules in the US raise concerns around the fiduciary implications of making net-zero targets for relevant assets. We have therefore excluded those assets initially, although we hope this situation may be clarified in time.

For derivatives, it is unclear how to assess net-zero alignment as there is no ‘ownership’ of the underlying. Methodologies would need to be established before any target-setting could be deemed appropriate. For some derivatives like inflation swaps, where a fixed payment is exchanged for an inflation linked payment, it is difficult to see how any sort of carbon footprint can be attached to the underlying. Given the profile of our business and particular focus on risk management, our total AUM incorporates substantial derivatives exposure. Our interim net-zero target represents 41% of total AUM, where the AUM calculation includes derivative exposures.

How Insight’s commitment applies to specific asset classes

UK government bond holdings

The vast majority of the UK sovereign bonds we hold are for liability-matching purposes for our clients. As UK pension scheme liabilities are discounted using a gilt discount rate, we are unlikely to be able to replace them with another instrument type.

However, we think it is appropriate for an institution of our size and scale in the asset class to work on behalf of our clients to engage with industry and government bodies to increase the accountability of the UK government in relation to meeting its climate change commitments. We expect to do this through direct engagement with both the Debt Management Office and the government.

To assess the UK government’s progress towards its net-zero target, Insight will:

• employ the Germanwatch CCPI scoring process, targeting an ongoing score of High or Very High
• consult the Climate Action Tracker, which provides independent scientific analysis of sovereign performance with respect to climate action, targeting ongoing alignment with a 1.5ºC temperature rise

Corporate bond and equity holdings

In setting our initial targets, we felt it was important to consider whether our clients were likely to adopt net-zero commitments. Initially, we have focused our targets only on our UK-managed corporate bond and equity mandates. Within that, we have set an initial coverage target of a minimum of 75% of these assets, covering mainly UK and European clients.

Insight has two components to the targets we have set: portfolio-level decarbonisation targets, and portfolio-level alignment and engagement targets.

Portfolio-level decarbonisation targets

Recognising that all possible metrics have advantages and disadvantages, Insight has adopted carbon intensity reduction (measured using scope 1 and 2 carbon intensity) and portfolio temperature reduction (measured using an implied temperature rise, or ITR, metric) methodologies. These use current best practice and are subject to data availability; as methodologies and data availability change, we may choose to adapt the data employed, which may lead to changes in both baselines and targets. We will monitor both metrics but it is unclear at this stage which will be the most effective primary target.

Portfolio-level alignment and engagement targets

These targets are to ensure that at least 50% of financed emissions are either net zero, aligned to a net-zero pathway, aligning to a net-zero pathway or subject of engagement with a view to moving into alignment by net zero, by 2023. This target increases to cover 70% by of financed emissions by 2025.

Alignment will be judged using one or more methodologies from the Climate Action 100+ benchmark and Institutional Investors Group on Climate Change (IIGCC) framework; Transition Pathway Initiative; and Science Based Targets initiative.

Why have you chosen these methodologies for corporate assets?

Overall, we feel looking at a blend of metrics is most likely to achieve the best end results. We firmly believe that no single metric gives a good indication of net-zero alignment.

The scope 1 and 2 carbon intensity metric is widely used and requires the fewest assumptions, and helps to monitor carbon at a portfolio level, but does not necessarily help achieve real-world carbon reduction by supporting transition stories. We have concerns that use of this metric alone could lead to unintended outcomes, such as investors selling short-dated, high carbon intensity bonds to reduce portfolio metrics, but not contributing in a meaningful way to a transition to a low-carbon world. This metric may also be distorted by sector allocations which occur during the course of active management.

Implied temperature rise (ITR) metrics are one of the methodologies recommended by the Science Based Targets initiative for financial institutions as suitable for enabling issuance with compelling transition stories to be held. While ITR scores are forward-looking, they are relatively new and rely on a number of assumptions. Best practice is not yet established so we did not feel it was appropriate to build a commitment solely around such metrics.

Alignment frameworks are similarly complex and inconsistent across providers; we continue to work to develop our own alignment methodology.

How confident are you that you can meet your targets?

Setting targets requires a leap of faith. Despite this, we feel setting goals will help focus our actions and hence our support of the net-zero pledge. While suggested frameworks exist, there are too many uncertainties to declare that we can meet the targets we have set. The three most significant assumptions we made in arriving at our net-zero targets were that:

1. The investment universe will structurally decarbonise over time. We have some ability to influence in this regard through our engagement programme with individual issuers and through collaborative initiatives. However, structural decarbonisation will also depend on factors such as governmental policy changes and the shape of the global economy. Our role as an agent for our clients is to invest according to the investment opportunity set available and the parameters that our clients set. Ultimately, it will be challenging to meet our clients’ financial objectives if the opportunity set is limited because the investment universe has not decarbonised sufficiently quickly.
2. Our clients are comfortable that we follow an investment approach with net-zero alignment as a key pillar. Our clients are primarily institutional investors with segregated mandates, where our role is to deliver outcomes in line with stated investment guidelines. In addition, some of our clients have non-discretionary mandates, where our role is limited to providing advice on how a client could meet its objectives. An essential part of our commitment to meet our net-zero targets is therefore a further commitment to engage with our clients to ensure they are comfortable with the approaches we are advocating. However, we are ultimately dependent on our clients’ agreement with net-zero alignment implementation.
3. Assets for which net-zero targets are inapplicable will be excluded from the net-zero target. Ratcheting up our interim targets to cover 100% of AUM will need us to include derivatives. However, for certain types of derivatives – such as inflation swaps – it is difficult to establish how to attach a carbon footprint, and therefore what net-zero means. Insight will collaborate with the Net Zero Asset Manager initiative to allow for this consideration.

Other factors may also challenge whether Insight can achieve these net-zero targets, including how our business evolves to incorporate clients from different regions and jurisdictions, and changes in what constitutes best-practice methodology.

How do you work with asset owners to help them achieve decarbonisation goals?

As outlined above, we see a key part of our role in the Net Zero Asset Managers initiative as working in collaboration with our asset-owner clients to achieve decarbonisation goals.

Insight has uniquely close relationships with asset owners given the nature of our business, which is to focus on long-term tailored solutions driven by our clients’ evolving needs. We work directly with most clients, helping many develop and implement their own strategies and approaches to addressing climate change. We use this client-focused engagement to evolve our thinking and practical application for clients more broadly and we work to facilitate collaboration among asset owners on related issues. Many clients we engage with influence other asset owners in turn by collaborating in groups such as the Net-Zero Asset Owner Alliance. Our engagement with companies and other issuers aims to help asset owners make an impact; input from asset-owner clients influences the nature of our engagement.

To support these activities, we seek to ensure our clients have the necessary information to help design and monitor their strategies, as well as to enable target setting, progress monitoring and fulfilment of any regulatory requirements. We provide select clients with comprehensive portfolio-level data (based on what we believe to be the most accurate data available) including reports aligned with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).

Do you have a position regarding thermal coal as part of your net-zero commitments?

As part of its net-zero commitments, Insight’s science-based position on thermal coal investments commits to ensuring any holdings related to thermal coal usage will have:

• a clear and actionable plan to exit coal, defined as accounting for less than 5% of revenue by the SBTi,
• by 2030 for developed market holdings and 2040 for emerging market holdings,
• while balancing the imperatives of a Just Transition as stated in the Paris Agreement.

This is in line with the scientific evidence requirements set by the Intergovernmental Panel on Climate Change (IPCC) to limit global warming to 1.5ºC.

Insight will look to achieve this, where possible, through effective engagement as we feel this is likely to achieve a better real-world outcome. However, the position developed also has an escalation function which may ultimately lead to divestment if coal exit strategies are not sufficiently aspirational.

Our thermal coal position is available here.

Further reading

Insight is a committed responsible investor. Asset owners are increasingly looking to drive positive change, and our partnership with clients has sharpened our focus on the need to create long-term, sustainable outcomes for the economy, the environment and society. More information on our activity can be found in our report Responsible stewardship at Insight, and on our dedicated responsible investment microsite.