The Institutional Investors Group on Climate Change (IIGCC) launched the ‘Net Zero Investment Framework’, to maximise investors’ contribution to the decarbonisation of the global economy and climate change.

A total of 22 asset owners, with $1.200 billion in assets, have used publication of the Framework to commit to achieve net zero alignment by 2050 or sooner. The funds in question are drawing on the Framework to deliver these commitments, alongside a number of asset managers who are already working with clients on net zero alignment.

This means 38 investors, managing $8.5 Tn in assets – including both asset owners and asset managers – are already putting the Framework to practical use. Just some of these investors include PensionDanmark, Lloyds Banking Group Pensions Trustees Limited, Bundespensionskasse AG, AXA Investment Managers, DWS, Aberdeen Standard Investments, PIMCO, Robeco and Fidelity International.

Majority of these early adopters participated in creation of the Framework and are taking the first steps to defining an industry standard approach to ‘net zero investing’.

The Framework enables investors to decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with and contributes to a 1.5°C net zero emissions future. Investors do this by developing a ‘net zero investment strategy’ built around five core components of the Framework.

These key components are: Objectives and targets, Strategic asset allocation and asset class alignment, alongside Policy advocacy and, Investor engagement activity and governance.

Asset Class Alignment is the key driver for a low carbon economy; therefore, the Net Zero Investment Framework is meant to increasing alignment of assets to net zero pathways within asset class portfolios

The ‘net zero investment strategy’ is also underpinned by three types of targets, as the main metrics to measure effective action:

  • Portfolio level targets for decarbonisation and investment in climate solutions
  • Timebound portfolio coverage targets for companies and assets to meet net zero or aligned criteria
  • Engagement coverage threshold (>70% emissions in material sectors) ensuring intensive engagement to drive the transition

The Framework is intended to provide a practical implementation guide, supporting investors in defining and delivering their own net zero investment strategy.

“As investors, we have a critical role to play in achieving net zero emissions globally. As we seek to take tangible action, this innovative framework is extremely valuable as it provides a practical means for developing net zero solutions for our clients and supporting the goals of the Paris Agreement.”

Rod Paris, CIO, Aberdeen Standard

While this process will always be heterogeneous and unique to each investor, the Framework helps inform these approaches based on best practice methodologies and metrics. An increasing number of investors are expected to use the Framework following its publication.

The investor organisations involved are divided in 4 areas of the world: Institutional Investors Group on Climate Change (IIGCC) engaging with European investors, Ceres covering North America, the Asia Investor Group on Climate Change (AIGCC) covering Asia and the Investor Group on Climate Change (IGCC) covering Australasia. Established by IIGCC at the request of European asset owner investors in August 2020, the initiative will now go global. This collaboration will increase the reach of the initiative and help address the urgency of supporting investors worldwide in driving a shift to ‘net zero investing’ across the sector as a whole.

The Paris Aligned Investment Initiative will be the global forum to support asset owners and managers in setting and delivering on net zero targets. Activity will build on existing collaboration, in providing investors with a best practice standard and consistent approach to net zero alignment across the global investment sector. Work will also continue in expanding the focus of the Framework.

Up today, 4 different asset classes are already covered by the Framework :

  • sovereign bonds,
  • listed equities
  • corporate fixed income
  • real estate

Others will follow, with two additional asset classes already identified and work getting underway:

  • infrastructure
  • private equity

This comes alongside a focus on how investors can align to adaptation and resilience goals of the Paris Agreement.

Climate crisis

The urgency of addressing the climate crisis is increasingly understood and achieving net zero emissions is key to success. Momentum is increasingly clear, with nine of the world’s 10 largest economies pledging to reach net zero emissions by mid-century. Investors have a vital contribution to make to this process but have lacked a standardized approach to convert intent into practical decisions and action. The Net Zero Investment Framework in seeking to fill this gap.

“Robeco has been using several tools to address the challenges of climate change for many years in the transition to a low-carbon economy. These range from engaging with companies it invests in to launching client solutions such as the world’s first-ever Paris-aligned fixed income strategies in our efforts to combat climate change and lower the carbon footprint of our investments.

The Net Zero Investment Framework is an important new comprehensive framework for delivering on our ambition for net zero emissions by 2050 across all our assets under management. It is the toolbox that brings together our different tools for climate action.”

Carola van Lamoen, Head of Sustainable Investing, Robeco

An analysis developed by Vivid Economics, shows net zero alignment is a “no regrets choice with scope for investors to secure notable benefits over a business-as-usual approach to investment”.This includes the opportunity for significant reductions in exposure to climate-related financial risks and helping ensure investors are best placed to benefit from opportunities that arise as decarbonization of the global economy continues to gather pace.

Most key takeaways are :

  • The Framework achieves its intended purpose: enabling investors to successfully align their portfolios with the goals of the Paris Agreement, without this needing to affect returns across investments.
  • Net zero alignment offers significant reductions in exposure to climate-related financial risks.
  • The process of alignment is achieved at manageable cost to portfolio performance (with no impact on risk-adjusted returns).
  • It enables investors to ensure they can be better positioned to benefit from the opportunities that arise through the transition to an emerging net zero economy.

The framework is avaiable here

PARIS AGREEMENT

The Principality signed the Paris Agreement at the United Nations Headquarters in New York on April 22, 2016 and undertakes to meet significant commitments to reduce its greenhouse gas emissions by 2030 before achieving to carbon neutrality in 2050.

Article: Joana Foglia – Source : IIGCC