Third party funds - in scope?

Criteria
1

Hi,
Is a wealth manager offering an investment mandate consisting of funds managed by a third party asset manager expected to set science based targets for those third party funds? Suppose the wealth manager has full discretion over fund selection in the mandate, but has no discretion over investment decisions made within those externally managed funds. Is the answer different depending on whether it is about setting targets for interim 2030 or for the 2050 Net Zero target?
Thank you!

2

Hi @username1,

Welcome to the community.

The short answer is yes, as the investment manager you should set targets for your “AUM” despite not being able to make investment decisions directly in the funds your are investing your clients funds into.

However, as you say, you have discretion over in which funds you invest, so you can naturally select funds that are in line with your targets, which is a classic inclusion/exclusion/divestment action. However, our preferred action would be that you engage with the fund managers and influence then to manage the funds in a way that is aligned with a 1.5C target.

In any case, you should set targets for the AUM where you have some influence of how the funds assets are invested or where you can influence the governance of the entities you invest in.

We don’t have a finalized guidance for net zero for financial institutions yet, but I would not expect the answer to be different for net zero targets.

3

Hi there,

Further to this, under the Sector Decarbonization Approach, would we have the ability to treat third-party managed funds as a separate asset class?

Thanks,

Livvy.

4

Hi @livvy.mortimer,

Welcome to the community. No. Third party managed funds are not a separate asset class. The asset class definition is driven by the underlying holdings in the funds. There ae some rare exceptions when the investment strategy would not be possible through disclosure of the underlying securities, do to for instance liquidity constraints.
However, for classification purposes the manager should generally not have any issue with disclosing the asset classes used in the fund to achieve its returns, thus again making the classification of the underlying assets the most important criteria for target setting.