Published 1 year ago.
About a 5 minute read.
Investment portfolio emissions make up the lion’s share of an asset owner’s footprint. The Net-Zero Asset Owner Alliance’s newest Protocol aims to fight inertia in pro-climate financing and get investor portfolios in line with science by 2050.
The future of net-zero investing just got a little bit brighter. The UN-convened
Net-Zero Asset Owner Alliance
(NZAOA) recently updated its protocols to expand asset classes and update emissions-reduction ranges for 2030 targets for the Alliance’s 84
members — which
collectively manage $11 trillion in assets.
According to an Alliance spokesperson, 4 percent of all Alliance members'
investments are in assets and sectors that directly contribute to the net-zero
transition; but thankfully, they are committed to increasing this number over
Three target-setting protocols have been adopted since the Alliance's launch in
2019, each amended to reflect changes in science and markets. The Alliance’s
third edition of its Target-Setting
— adopted late January 2023 — now requires members to set targets on listed equity, publicly traded corporate bonds, real estate, infrastructure and private equity portfolios.
Lastly, the Protocol updates tout the principles of a just transition (ensuring
the benefits of the low-carbon transition are widely and fairly shared) while
reaching reduction targets, and prohibits the use of carbon-removal credits in
Investment portfolio emissions make up the lion’s share of an asset owner’s
footprint. The newest Protocol provides clarity and methodology for setting
short-term reduction targets on the journey toward decarbonized portfolios by
2050. Based on the IPCC's Sixth Assessment Report, the NZAOA identified two
intermediate reduction targets: 22-32 percent reductions by 2025 and 40-60
percent by 2030.
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The Alliance’s move is made to fight inertia in pro-climate financing and get
investors in line with science.
“We are observing a divergence of real-economy emission pathways and scientific
pathways for limiting temperature rise to 1.5C,”
Günther Thallinger, a Board Member at Allianz SE and a member of NZAOA’s Steering Group. “With this Protocol, the Alliance increases
expectations for its members and calls on policymakers and corporates to move in
line with science.”
Unlisted equity — otherwise known as unlisted securities, over-the-counter (OTC)
securities, private equity/securities, and direct investment equity — are assets
traded outside of the major stock exchanges. These unlisted assets are
Nonetheless, unlisted equity is an important asset class;
and up until this newest Protocol, had no clear frameworks for setting strong
decarbonization targets. The new Protocol creates methodologies for setting
intermediate targets for both direct private equity investment and private equity funds, and requires that Alliance members
start setting reduction targets for private equity next year. In addition, all
new private equity gained after 2025 is subject to previous reduction standards.
The new Target-Setting Protocol also requires carbon accounting for sovereign
debt, a significant asset class. Together with two partners — the Partnership
for Carbon Accounting Financials and
Assessing Sovereign Climate-related Opportunities and Risks
— the NZAOA will develop accounting and assessment standards for sovereign debt,
which the Alliance hopes will become a tool for alignment and understanding of
sovereign debt and climate risk.
In theory, Alliance members already consider the societal impacts of their
portfolios. But for the first time, the new Protocol implicitly asks members to
consider how their investments will impact the rest of society — particularly,
those most vulnerable to the effects of climate
and least equipped to fight it — as they meet decarbonization targets. Members
are also encouraged to focus their investments in emerging markets facing
Still, the ask for considering a ‘just transition’ and climate-vulnerable
markets is just that — an ask with no regulatory teeth. It will be up to each
individual Alliance member to honor the recommendation.
The NZAOA now prohibits its members from using carbon
to achieve their emissions-reduction targets. Instead, members are required to
make true reductions in their emissions — not offset by someone else and
credited to their business — and prioritize their investments toward emissions
reductions until at least 2030. Members are encouraged to invest in
and other negative-emission
but these investments will not be counted toward meeting decarbonization goals.
The third Protocol comes on the heels of criticism: A recent
commissioned by the Sunrise Project identified
poor public disclosures, proxy voting and bondholding practices by most of the
Alliance’s members. Though 90 percent of Alliance members disclosed net-zero
target details in 2022, a mere 26 percent of them reported scope 3
When it comes to fossil fuel
the report found that seven Alliance members manage more fossil fuel assets than
The report also found that NZAOA members’ pro-climate voting isn’t statistically
different from investors outside of the Alliance. Overall, the report recommends
that individual Alliance members do a better job of disclosing climate
and improve proxy voting performance.
“Finally, we recommend that NZAOA members reflect on how to curb new fossil
which is scientifically not Paris-aligned,” the report reads.
Meanwhile, 44 Alliance members have set detailed decarbonization targets; and 58
have published targets aligned with the Alliance
The Alliance does have an accountability
in case of severe misalignment with net-zero pathways.
Turning the massive ship of the world economy around to face science is no small
task. But for the NZAOA, the tantalizing prospect of harnessing a global economy
worth $100 trillion toward a brighter future remains central to its evolving
strategy of change. And with Alliance members managing just over 10 percent of
that $100 trillion, NZAOA is poised to be a model for scaled change.
“Alliance members — like all institutional investors — can exercise most
leverage on the real economy and therefore real-world emissions through
engagement with their investee companies,” the NZAOA spokesperson said. “The
Alliance’s theory of change aims to create ripple effects of raising climate
ambition in the financial industry and in financial regulation by demonstrating
what is possible.”
Published Feb 15, 2023 7am EST / 4am PST / 12pm GMT / 1pm CET
Christian is a writer, photographer, filmmaker, and outdoor junkie obsessed with the intersectionality between people and planet. He partners with brands and organizations with social and environmental impact at their core, assisting them in telling stories that change the world.