NZAOA Mindful of Emissions Gap
Latest iteration of the alliance’s target-setting protocol expands coverage to private markets, providing more detail on sovereign debt.
The Net Zero Asset Owner Alliance (NZAOA) has called on governments to better align with climate science to prevent a gap between their emissions reduction target-setting and decarbonisation progress in the real economy.
“Governments plays such a huge role as enablers for the economic environment in their countries,” said Udo Riese, ESG Lead at Allianz Investment Management. “Many private sector companies want to decarbonise, but they need to have an environment in which there is a viable business case to do so.”
Riese spoke during a webinar in which the NZAOA launched the fourth iteration of its Target-setting Protocol (TSP), calling on its 89 members to submit new targets to cut their portfolio emissions by 40-60% by 2030 compared to 2019 levels.
Alongside the TSP, the alliance has published a background document which further elaborates on its approach to, and perspective of, investment portfolio decarbonisation in the next five years. The paper outlined concerns around a potential misalignment between members’ emissions reduction targets and decarbonisation progress in the real economy.
“The alliance aims to avoid a situation where members would need to shift allocations from particular economic sectors to bring their portfolios into line with the established target range,” the document read. “As investments are needed to catalyse the transition, this outcome would be highly harmful to the speed of the planetary transition to net zero as the real economy is left behind, hence limiting the real impact on global warming.”
Members have called for governments to better facilitate the climate transition, and as such, remain in sync with the NZAOA’s intended portfolio trajectories.
“Without this collective movement from policymakers and the real economy, [we] may eventually need to tolerate a ‘buffer’ or slight lag behind the scientific pathways,” the alliance said. “If not, members may be faced with a decision to exit the majority of the investable universe, which exposes them to other [investment] risks.”
In September 2023, the NZAOA published research highlighting that aligning with a 1.5°C temperature pathway could bring about investment opportunities up to US$275 trillion by 2050.
“Whenever countries introduce and implement a positive environment [for transitioning to low-carbon], the alliance is confident that increased private investment will immediately follow,” said Riese.
Upon joining the NZAOA, members are required to set intermediate individual decarbonisation targets within 12 months. In addition, they must annually disclose their progress towards those targets and consider adopting individual investment policies that better align with the alliance’s position.
From public to private
The TSP has been expanded to cover all private markets – including private debt funds, directly held private debt and real estate debt, and residential mortgage loans.
The NZAOA said the expansion aimed to address concerns that increased climate scrutiny of large, publicly-traded companies could result in corporates selling brown assets to the less transparent and scrutinised private market.
“With the introduction of new asset classes under the TSP, there’s now no place to hide for companies,” said Jean-Francois Coppenolle, Director of Responsible Investment at insurance firm Abeille Assurance. “High-emitting companies should develop transition plans if they want to attract capital from [alliance] members – irrespective of the asset class they use to try to finance their operations or capital expenditure.”
The NZAOA previously issued a call to action to private markets-focused asset managers, urging them to raise their climate ambition. Members will also continue to explore the development of secondary methodologies that demarcate sovereign debt portfolios, such as setting boundary scores.
In addition, the NZAOA intends to draw on the work of the Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) project, which was established to create a database on sovereign exposure to climate risks and opportunities. The ASCOR database gathers additional information that will lend itself to the creation of a scorecard in the TSP, promoting further avenues for engagement with governments on their climate commitments and progress.
“Sovereigns form a very large component of many of our [members’] portfolios,” said David Land, Head of Investment Strategy at pensions insurance specialist Rothesay. “They report emissions aggregated at the highest level – if those are not declining, then it’s probably too soon to celebrate reductions for financed emissions in our portfolios.”
In 2022, sovereign bonds represented almost 40% of the US$100 trillion global bond market, according to the World Bank.
Alliance members have reiterated their commitment not to use carbon removals for their own decarbonisation target achievement between now and 2030. However, they have been encouraged to contribute to a liquid and well-regulated carbon removal certificate market during this time – including investing in projects and technologies demonstrating durable carbon avoidance and removal.
The NZAOA’s third annual progress report, published last year, noted that members’ total absolute finance greenhouse gas (GHG) emissions were down 3.5% in 2022 compared to the previous year.
Over the past two years, the alliance also published guidance on proxy voting, engagement and lobbying.
“We have witnessed significant shifts in capital flows towards sustainable investments, reflecting a growing recognition of the transition to a low-carbon economy,” said Jesica Andrews, Head of Climate Accountability at the UN Environment Programme Finance Initiative. “The acceleration of green finance is not merely a trend, but a fundamental restructuring of global capital markets towards sustainability. It is a transition of opportunity.”
The post NZAOA Mindful of Emissions Gap appeared first on ESG Investor.