By Jesica Andrews, Director, Investment Leadership Programme, PRI-UNEPFI 

Jesica Andrews

Last January, the UN-Convened Net Zero Asset Owner Alliance released the first-ever detailed Protocol for investors in establishing short-term, net zero targets. The 2021 Inaugural Protocol set out i) a quantifiable range based on no/low overshoot pathways for asset classes (or a ‘sub-portfolio target’) ii) sector targets on seven hard-to-abate sectors, iii) engagement targets with corporates and asset managers and iv) financing transition objectives. The Protocol recommends Alliance members set four of the four target types (but requires a combination of three target types). Since its release, asset managers have also begun to utilise the approach, driving consistency and rigour across the financial system. Importantly, the Protocol recommends asset owners in the Alliance set short term five-year targets, which makes a distant sounding “2050” relevant today.

This January, the Protocol has been enhanced in its second edition to include an increased decarbonisation range exclusively based on no/low overshoot scenarios. The range for emissions reductions for the period 2020 to 2025 should now range between 22% to 32% (up from 16% to 29% in the first Protocol), while that overall emissions reductions for the period 2020 to 2030 should range between 49% to 65%. This represents a significant departure from the trajectory of global economy emissions.

It also doubles the sectors covered from seven hard-to-abate sectors to 14 sectors, now covering all major sectors in the global economy. Notably, new sectors include agriculture, chemicals, and other carbon-intensive materials production such as concrete and aluminium.

Finally, it includes infrastructure as the newest asset class. The infrastructure methodology is now available alongside public equity, publicly traded corporate bonds and real estate, meaning sub-portfolio targets (subject to the 22% to 32% reduction range for 2025) now cover a majority of asset classes in a typical asset owner’s portfolio. More difficult asset classes – and they are difficult – such as private equity, and sovereign debt, are under development.

It’s not about a net zero portfolio today, it’s about net zero economies in 2050

It’s not terribly challenging to obtain a low-emission, and possibly even, net zero portfolio in five years – if you leave out the tricky sectors or start excluding them now. If a portfolio is comprised of just tech stocks and solar energy companies, an investor might even have a net zero portfolio today. That’s not, however, the approach the Alliance is taking. The Alliance wants to drive real world change, and so working with the hard-to-abate sectors through financing, engagement and sector targets is extremely important.

The triangulation between financing transition objectives, sectoral, and engagement targets means that asset owners are putting to work all the levers at their disposal. Through their mandates to asset managers and their ownership in corporations they are increasing the requirements on companies with respect to carbon emissions. Financing objectives mean that investors are providing required CAPEX where it is needed to transition a business, financing energy efficiency upgrades for commercial buildings is one obvious example. Finally, the importance of which cannot be understated: sector targets.

Sector targets mean that the assets they hold in a given sector are beginning to align with what climate science requires of that particular sector. This ensures that a portfolio doesn’t experience carbon emission reductions simply as a result of transitioning to lower emitting sectors (as described above) but requires that investments in both high and low emitting sectors begin to adjust in line with what the science tells us is required. It is also the foundation of any credible calculation of the often-discussed, but not-so-clearly-understood Implied Temperature Rise metric. For large global-diversified investors, with massive capital, their portfolios will necessarily be representative of all the sectors in a global economy, and after all it’s the global economy which we need to transition to net zero.

Time to implement

Core to this is the need for real accountability on the road to net zero. Setting nebulous targets for the far future is simply not good enough. Goals need to be ambitious but realistic and set on a timeframe to 2025 or (as we approach it) 2030, to ensure that both investors and corporates are incentivised to take meaningful action sooner rather than later. Indeed, the messaging on how corporates and investors can transition to net zero can be complex and difficult to translate into practical action, but the changes to the Protocol have been designed with asset owners to offer the maximum clarity, empowering them to take action towards net zero which will yield meaningful results on a tight timeframe. Indeed, the first iteration of the Protocol was described as the “gold standard” for net zero target setting by UN Secretary General António Guterres for the strength of the recommendations it makes. Many of the asset owners in the Alliance have already set 2025 targets, those who joined in the last year will do so very soon. Now it is up for asset owners, asset managers and the companies they engage with, to implement.



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