Net Zero Strategy for Asset Managers

The Net Zero Asset Managers initiative was launched in December 2020 with the objective of achieving net zero by 2050 for the asset management industry and limiting global warming to 1.5 °C. Net Zero Asset Managers is an international group of asset managers and a formal partner of the UNFCCC Race to Zero campaign. The initiative is governed by the six investors/founding partners responsible for its execution.

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The initiative focuses on accelerating the efforts of asset managers to combat climate change and ultimately achieve their net-zero goal through adopting energy transition and decarbonization strategies for their invested assets. The key steps asset managers are to follow under this initiative are illustrated below:

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Investors have been driving climate action in recent years. More than 270 investors are signatories to the Net Zero Asset Managers initiative. These investors and the companies they have invested in should work together to achieve such commitments in their business operations and supply chains. When an asset manager joins this initiative, it is required to disclose its net-zero targets within a year. Twenty-four managers have committed 100% of their assets under management to net-zero targets, 19 managers have committed 75% and 30 managers have committed at least 50%. To accelerate the alignment of assets with net-zero goals, managers use three methodologies, validated by the Net Zero Asset Managers initiative:

  1. Paris Aligned Investment Initiative Net Zero Investment Framework
  2. Science-Based Targets initiative for Financial Institutions 
  3. Net-Zero Asset Owner Alliance Target-Setting Protocol 

A. Paris Aligned Investment Initiative Net Zero Investment Framework

The initiative was launched by the Institutional Investors Group on Climate Change (IIGCC) in Europe in May 2019 to help investors align their goals with the Paris Agreement. Under this framework, four investors came together initially to implement net-zero commitments and launch the Paris Aligned Investment Initiative as a global effort.

Members of the IIGCC provided key inputs to develop the draft of the Net Zero Investment Framework 1.0. The framework helps investors align their portfolios towards net-zero emissions. It focuses on objectives such as the decarbonization of investment portfolios and increased investment in climate solutions. The net-zero investment initiative includes the following five elements; these are part of the investment strategy and help achieve the Paris Agreement-aligned goals.

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B. Science-Based Targets initiative for Financial Institutions

The Science Based Targets initiative (SBTi) framework supports financial institutions in addressing climate change by providing resources to implement science-based projects. It is a target-setting framework for financial institutions that includes target-validation criteria and recommendations, target-setting methods, and an open-source tool for target-setting. The framework is relevant for financial institutions holding asset classes such as real estate, mortgages, electricity generation project finance, corporate and consumer loans, bonds, and equity.

Financial institutions impact asset managers through investment and lending activities. Therefore, the SBTi has selected three methods that link the investment and lending activities of portfolios with climate change-related initiatives:

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In addition to adopting these approaches, financial institutions are required to set targets for reducing Scope 1 and 2 emissions well below 2°C (ideally, at 1.5°C) and for reducing Scope 3 emissions.

C. Net-Zero Asset Owner Alliance Target-Setting Protocol 

The protocol encourages members to include science-based ranges, targets and methodologies in their planning to achieve the net-zero commitment. It also includes the commitment to accelerate decarbonisation, aiming to achieve 1.5°C through engagement with corporates and policymakers. A four-part target-setting approach is recommended:

  1. Engagement targets: These track the activities and progress of asset managers; members of the alliance engage with a minimum of 20 companies in their portfolios for 65% of owned emissions. The companies need to define an engagement target to align the members to achieve global temperature reduction to 1.5°C. 
  2. Sector targets: Sector-specific targets for high-emitting sectors reflect the specifics of a sector, its energy transition-related trade-offs with other sectors in the global economy and the role it is expected to play in the transition to a net-zero economy.
  3. Portfolio targets: One of the targets can be adjusting portfolios to include companies that are low emitters and those that reduce their carbon emissions over time
  4. Financing transition targets: – The Partnership for Carbon Accounting Financials (PCAF) reporting standard is designed to help investors measure financed emissions, support activities to enable greater transparency, build solutions or report on climate solutions.

Conclusion 

Asset managers are committing to make their assets net zero. It is also necessary to educate their clients on climate risk. It would be difficult for an asset manager to commit 100% of assets under management to net-zero targets at the outset. However, asset managers are adopting methods to achieve this. One method is taking a top-down emission-reduction approach, where it targets reducing 50% of carbon emissions by 2030. The second is the accountability mechanism through which decarbonisation is achieved. Another is the bottom-up portfolio coverage approach, where 90% of assets are aligned with a net-zero pathway. Some asset managers have already begun client engagement programmes to increase climate-related discussion, and many asset owners with a sustainable background have been able to include a large portion of assets under management in their initial targets. Asset managers are a powerful segment; they hold two-thirds of global assets that could contribute towards net-zero emissions to limit the global temperature increase to 1.5°C.

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