Asset Owners on 1.5°C Pathway Despite Lack of Policy Support
Net Zero Asset Owner Alliance marks five years of decarbonisation progress with call for systemic interventions from governments.
Members of the UN-convened Net Zero Asset Owner Alliance (NZAOA) have reduced their absolute financed greenhouse gas emissions by more than 6% on average annually, bringing signatories in line with limiting global warming to 1.5°C. To make further progress, the alliance has told policymakers globally to match its efforts by implementing more robust and ambitious climate policies.
The group has published new data outlining their collective decarbonisation progress since the alliance launched in 2019, noting that 81 members (as of August) have set intermediate emissions reduction targets – representing 98% of the NZAOA’s US$ 9.5 trillion AUM.
“The alliance is doing exactly what it set out to do,” Remco Fischer, Climate Lead at the UN Environment Programme Finance Initiative (UNEP FI), told ESG Investor. “Now that the rubber has hit the road, we are showing [how] promises have led to targets and targets have led to members taking action. We’re seeing outcomes in the form of reductions in absolute financed emissions.”
Members have been consistent in their decarbonisation efforts. By 2023, financed emissions fell by 31% and 24% respectively compared to 2018 and 2019 base years.
The NZAOA’s third annual progress report, published last year, noted that members’ total absolute financed greenhouse gas (GHG) emissions were down 3.5% in 2022 compared to the previous year.
In addition to emissions reductions, the alliance has also increased investments in climate solutions from 4% of total portfolios over the last three years to 6% (US$555 billion) this year. The NZAOA has estimated that investments in climate solutions could reach US$275 trillion by 2050.
The NZAOA now involves over 80 asset owners across 19 countries.
Upon joining the alliance, members are required to set intermediate individual decarbonisation targets within 12 months. They must also annually disclose their progress towards targets and consider adopting individual investment policies that better align with the alliance’s position.
The NZAOA’s latest iteration of its target-setting protocol, published in April, expanded coverage to provided markets and introduced additional guidance on decarbonising sovereign debt.
Tackling emissions
One of the core strategies deployed by asset owners to achieve this rate of decarbonisation has been active engagement.
“Many – if not most – NZAOA members are involved in engagement initiatives like Climate Action 100+ and remain committed,” said Fischer. A number of US-based asset managers have notably exited the initiative in the wake of the anti-ESG backlash.
“As part of their target-setting under the alliance, asset owners have also set engagement goals – it’s an important part of achieving a 6% [decarbonisation average], but it’s not the only method,” Fischer added.
Members are also reallocating capital, he said. “This doesn’t mean investors are withdrawing from carbon-intensive sectors or industries, but they are, very much within those sector exposures, reallocating capital so that they are more exposed to the best climate performers and underexposed to laggards,” Fischer said.
“Ultimately, it’s this shifting in exposures – picking the winners and identifying the losers – that is proving a very strong theory of change.”
Despite progress, a new report published by the London Stock Exchange Group (LSEG) found that limited progress is being made in absolute emissions reductions in major benchmarks. The report, which was reviewed and welcomed by the NZAOA, highlighted challenges in tracking portfolio emissions year-by-year caused by short-term fluctuations.
Tracking emissions trends in key market benchmarks across widely used absolute emissions and emissions intensity metrics, LSEG found that weighted average carbon intensity fell across assessed equity and fixed income indexes. But absolute emissions increased by 2.3% per annum for equities and remained largely flat at around 0.7% for fixed income.
The report noted that the calculation of portfolio emissions remains technically challenging, with investors required to choose among multiple available metrics for measuring absolute emissions and carbon intensities.
A previous discussion paper published by the alliance encouraged signatories to establish their own emissions attribution analysis and to share knowledge on how to do so among financial institutions.
The LSEG report urged investors to consider a “dashboard of portfolio emissions metrics” instead of any single measure, as individual carbon metrics are regularly impacted by biases and short-term volatility.
Separate research from the Institute for Energy Economics and Financial Analysis (IEEFA) said asset owners urgently need access to investment products that place decarbonisation ahead of short-term financial returns. The institute called for the establishment of “systemic funds” that adopt concessionary short-term financial return expectations as a trade-off for more aggressive systemic risk reduction.
More ambition needed
The alliance also published a call to action for policymakers to drive a systematic shift to renewable energies by implementing appropriate and equitable carbon-pricing mechanisms and legislating the phase-out of all coal-fired electricity.
It follows recent scientific research published by the Institute and Faculty of Actuaries (IFoA) on climate tipping points, which warned that global warming in excess of 1.5°C is likely to lead to abrupt, irreversible, and dangerous impacts with serious implications for humanity.
In July, the alliance received expert advice from its scientific advisory board on the research, which the board argued should incentivise policymakers to take urgent action.
“Anchored in this new reality, [the call to action] is a way to reiterate the alliance’s commitment to net zero,” said Fischer. “They’re saying: “We’re committed to doing our part, and now we have evidence of that.”
The alliance has asked governments and regulators to undertake systemic interventions that will ensure an alternative, clean energy supply, design and implement equitable carbon pricing mechanisms aligned with the goals of the Paris Agreement.
It also called on them to implement clear policy frameworks and regulatory requirements for detailed and credible transition plans. In addition, the alliance has asked governments to mandate the phase-out of all unabated existing coal-fired electricity generation.
“It makes a huge difference to have an investor engaging a government on net zero when that investor has a net-zero commitment themselves,” Fischer said. “The NZAOA makes sure that it also engages a lot more specifically on policy – covering issues such as carbon pricing and blended finance.”
The NZAOA has previously emphasised the importance of taking a three-pronged approach to climate-related engagement by working with companies, asset managers and policymakers to further net zero ambitions.
“Alliance members are committed to doing their part [to address climate change], but they can’t be the only ones,” said Fischer. “The NZAOA [and other UN-convened alliances] set out to convey to the rest of the world that they understand what their responsibilities are – they want all other parts of the global system to do the same. First and foremost, this should be governments.”
The alliance will publish its latest progress report next month.
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