Investors working to align their activities with the goals of the Paris Agreement can draw on comprehensive new guidance from today, with the launch of an in-depth net zero investment framework that aims to provide a practical blueprint for investors seeking to maximise their contribution to tackling climate change.
The framework was developed by the Institutional Investors Group on Climate Change (IIGCC) working with 70 global investors worth more than $16tr in assets. It contains detailed guidance on reaching Paris Agreement alignment across four asset classes - sovereign bonds, listed equities, corporate fixed income and real estate - and consists of recommendations, metrics, and methodologies.
"Countries, cities and companies around the globe are committing to achieve the goal of net zero emissions and investors need to show similar leadership," explains Stephanie Pfeifer, CEO at the IIGCC. "The willingness is there, but until now the investment sector has lacked a framework enabling it to deliver on this ambition. As we work towards investors adopting the framework before the end of the year, the race is now on in the run-up to COP26 for asset owners and managers to show they will be net zero investors."
The framework lays the groundwork for an investment strategy-led approach to decarbonisation, backed by concrete targets set at portfolio and asset level, alongside smart capital allocation and advocacy work. It is open for consultation, with the IIGCC seeking input from a wide range of stakeholders. It is also being trialled by a group of five major investors, including Brunel, APG, and the Church of England Pensions Board, who will apply it to real-world portfolios representing $1.3tr in assets. All will model its impact on the performance of their portfolios, testing its efficacy in helping them decarbonise their investment portfolios and increase investment in climate solutions. The results of this analysis will be launched alongside the final post-consultation framework, the IIGCC said, expected before the end of 2020.
"Setting a long-term net zero target is the easy part; the challenge is to have a credible and transparent framework that enables your fund to convert intent into practical decisions and action," says Adam Matthews, director of ethics and engagement at the Church of England Pensions Board. "The Church of England Pension fund, which serves the interests of 40,000 future beneficiaries, is globally invested across multiple asset classes and this framework provides us with a basis to deliver our commitment to be net zero aligned."
The Framework incorporates definitions used in the EU Taxonomy's climate mitigation standards, which were adopted by the European Parliament in June to support alignment with the Paris Agreement. Doing so gives a sense of the scale of the challenge facing investors - and the urgent need for change. "The PAII [Paris Aligned Investor Initiative] working group estimated that in 2015 around three per cent of global equities may have complied with EU Taxonomy climate mitigation standards," the analysis finds. "In 2050, a ballpark estimate suggests 25 per cent of global equities will need to do so."
In seeking to spur this shift, the framework outlines five core components that define a 'net zero investment strategy': objectives and targets; strategic asset allocation and asset class alignment; policy advocacy; investor engagement activity; and governance. Each is explored in detail in the framework, and each analysis is accompanied by a series of questions for exploration in the consultation.
For example, in the context of targets and objectives, the framework makes several suggestions for targets at both portfolio-level - for example, an emissions intensity reduction goal or an allocation to climate solutions as a percentage of revenue goal - and asset class-level, such as a five-year goal for increasing the percentage of AUM invested in net zero assets or a minimum coverage threshold to ensure at least 70 per cent of emissions in material sectors are net zero aligned.
It then asks questions such as "do you agree with the combination of targets that are proposed to guide investor alignment with net zero global emissions by 2050?" and "what threshold for percentage of AUM in material sectors to be aligned, transitioning or subject of engagement do you consider to be feasible to achieve while achieving a sufficiently ambitious level of action?"
As these examples suggest, the framework prioritises engagement with concrete decarbonisation projects, aiming to overcome the limitations of approaches based solely on portfolio emissions reductions or portfolio temperature targets, which can see investors technically meeting goals while shifting the problem of decarbonising carbon intensive industries on to someone else.
"Investors need to play a central role if the world is to meet the Paris commitment of limiting climate change to below two degrees," says Laura Chappell, CEO of the Brunel Pension Partnership, which is one of the firms trialling the framework against their portfolio. "The net zero investment framework is of critical importance because it answers the fundamental and urgent question of what a Paris-aligned portfolio actually looks like. For Brunel, the initiative is a core component in how we seek to deliver on the Paris-aligned ambitions we laid out earlier this year, since it helps us to evaluate our portfolios and those of our clients. It is a major step forward for the industry."
The framework is the most substantive output yet from IIGCC's Paris Aligned Investing Initiative (PAII), which was established in 2019 to establish key definitions and concepts relating to the alignment of investment strategies to the Paris Agreement. The PAII consists of an asset owner steering committee and four issue specific working groups, each with their own dedicated investor leads, including representatives of DWS, PIMCO, Aberdeen Standard, Scottish Widows, and BMO Global Asset Management.
It comes at a time when investors are ever more attuned to the risks and opportunities associated with the net zero transition. BP's share price notably went up yesterday as it announced a sweeping net zero strategy that will see it slash oil and gas production 40 per cent by 2030.
As Vicki Bakhshi, director for responsible investment at BMO, observes "the next decade is absolutely critical to achieving the Paris Agreement goals and avoiding catastrophic climate change. Investors need to play their part, and for our efforts to be effective, it's vital that we have a shared understanding of what Paris alignment means, and are able to articulate that to our clients."
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