Leading investors pushing toward net-zero carbon investment strategies
In the wake of the Paris Agreement, a number of investors have made commitments to align their portfolios to net zero carbon goals. Several methodologies have emerged in the recent years to support investors in this process, yet none of them is gathering a broad consensus, making these commitments easier said than fulfilled.
Last April, ‘The Net Zero Asset Owners Alliance’, a coalition of 29 asset owners that committed to fully decarbonize their portfolios by 2050, issued a call expressing the need for convergence in the approaches and development of robust measurement methodologies. (see our article in the May Newsletter).
Lately, two other leading coalitions of investors have unveiled new frameworks, that could prove to be important milestones in investors’ response to these challenges.
First, the Paris Aligned Investment Initiative (PAII), a working group of more than 70 investors (managing 16 trillion dollars in assets) led by the Institutional Investors Group on Climate Change (IIGCC), released in early August the ‘Net Zero Investment Framework’.
This framework is designed as a toolkit that provides investors with practical guidance to decarbonize their portfolios and increase investments in climate solutions. Governance (policy and targets setting) and strategic allocation assessment constitute the first pillars of the framework. Then, four asset classes are covered by the framework at this stage: listed equities, corporate fixed income, sovereign bonds and real estate. It goes beyond existing approaches, most of which consisting in setting portfolio emission reduction targets. The PAII refers in the framework to more than 25 existing methodologies, such as the Transition Pathway Initiative for corporate investments, GermanWatch’s Climate Change Performance Index (on Sovereign bonds) or the Carbon Risk Real Estate Monitor (CRREM). Not only does it mention these methodologies, but also describes their content and how they should be used, thus helping investors to find their way through the various existing approaches, depending on asset classes for instance.
The framework is open for consultation until 25 September 2020 and will be tested by five investors: APG of the Netherlands, Brunel Pensions Partnership, the Church of England Pensions Board, PKA of Denmark and Phoenix Group. An updated version is expected to be published before the end of 2020, taking into account feedbacks received during the consultation period.
The PAII also identifies several challenges that investors face when developing a net zero investment strategy that the framework does not resolve such as the treatment of scope 3 emissions. A later phase it will look at addressing these challenges and extending the framework to two additional asset classes: infrastructure and private equity.
The other recent initiative comes from the Climate Action 100+ (CA 100+). Launched in December 2017, this group gathers investors (collectively managing ~ 47 trillion dollars in assets), that have committed to engage with the world’s largest corporate greenhouse gas emitters to improve their climate performance. To bolster the engagement of its members, the Climate Action 100+ just announced it has developed together with EY Consulting and NGOs a method for assessing companies’ efforts in the transition to net-zero emission. This Net-Zero Company Benchmark uses 30 indicators to assess companies, including the definition of decarbonization strategy and the setting of science-based targets. Results of this assessment of CA 100+ targeted companies will be published from next spring. It could become a powerful tool to support investors in their engagement approaches in the next annual general meetings’ (AGM) season.