NZIF 2.0 Balances Ambition with Flexibility – IIGCC
Implementation guidance aims to support a wide variety of net zero strategies.
Updated guidance published by the Institutional Investors Group on Climate Change (IIGCC) seeks to ensure investors have the flexibility they need to effectively apply net zero strategies across all asset classes they invest in.
The IIGCC this week hosted a webinar reflecting on its implementation guidance, which was updated in January to complement the second iteration of its Net Zero Investment Framework (NZIF 2.0).
“We recognise investment strategies can vary, and this will result in different targets being set,” said Freddie Turner, Programme Manager at the IIGCC.
“NZIF and the implementation guidance allow for that flexibility when setting the targets – for instance, one strategy may be to focus on high emitting assets in a portfolio, whereas another may be to focus on the value chain of these assets.”
The implementation guidance is split into six sections, including recommendations for attribution analysis and re-baselining, advice on engagement thresholds, clarifications on the integration of Scope 3 emissions into objectives and targets, a five-step approach for asset alignment targets, and alignment dataset mapping.
“An alignment target, for example, can be used to guide the net zero strategy on a more granular basis – the idea being that, as one scales up the number of assets meeting the alignment criteria, the more the overall portfolio is aligned with real economy decarbonisation goals,” said Turner.
The IIGCC updated the NZIF last year.
One of its more significant updates was the repositioning of its Portfolio Decarbonisation Reference Objective, in acknowledgement that a focus on financed emissions can dissuade investment in climate solutions.
The framework now places greater emphasis on financing reduced emissions over reducing financed emissions.
In addition, NZIF 2.0 introduced new guidance for sovereign bonds, real estate, and private debt, along with updated guidance for infrastructure and private equity.
NZIF 2.0 has also outlined new emissions performance criteria for listed equities and corporate fixed income.
NZIF, which was first launched in 2021, is utilised by signatories of the Paris Aligned Asset Owners and the Net Zero Asset Owner Alliance.
“As investors have started setting net zero targets, there has definitely been a primary focus on equities and corporate fixed income, but we are gradually seeing more and more targets being set for the likes of real estate, private markets and sovereign bonds,” said Turner.
The implementation guidance does not yet stretch to the NZIF’s climate solutions objective, Turner said, noting that this will be an area of focus over the course of 2025.
Pulling every lever
Engagement can serve as a “key lever of influence” to support the transition of assets, said Turner.
“The [NZIF’s] engagement threshold was designed to focus investors’ stewardship resources on emissions-intensive assets, with the aim of translating the power of investor stewardship into increased alignment and ultimately a reduction in portfolio emissions alongside real economy decarbonisation,” he said.
The framework recommends that investors clearly set out what their own definition of engagement is, including the baseline engagement level, as well as their enhanced engagement strategy and how this applies to companies included in the engagement threshold target.
Investors should also consider how they engage under initiatives such as Climate Action 100+, Turner added.
In 2022 the IIGCC introduced the Net Zero Stewardship Toolkit – a systematic framework consisting of six key steps that codifies best engagement practice for investors. This toolkit was created in partnership with UK pension scheme Railpen.
“With the development of this implementation guidance paired with the NZIF 2.0, the IIGCC hopes we will start to see an increase in strategies and targets being set for a wider variety of asset classes,” said Turner.
“As such, we want the NZIF to be as flexible as possible, so investors can take the guidance as they see fit for their investment strategy – it’s very much an ‘implement or explain’ type of document.”
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