Institutional investors develop first framework for net zero investing

Climate change protest

The first ever practical blueprint for “net zero investing” has been issued by Institutional Investors Group on Climate Change (IIGCC), to help investors maximise the contribution they make in tackling climate change.

The framework has been developed with over 70 global investors, representing more than USD16 trillion in assets, through the IIGCC. It provides a comprehensive set of recommended actions, metrics and methodologies, which following finalisation, will seek to enable both asset owners and asset managers to effectively become ‘net zero investors’.

Its primary objective is to ensure investors can decarbonise investment portfolios and increase investment in climate solutions, in a way that is consistent with a 1.5°C net zero emissions future. An ‘investment strategy’ led approach, supported by concrete targets set at portfolio and asset level – combined with smart capital allocation, and engagement and advocacy activity – ensure investors can maximise their impact in driving real-world decarbonisation. Four different asset classes – sovereign bonds, listed equities and corporate fixed income and real estate – are covered by the framework, with others to follow.

“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, Institutional Investors Group on Climate Change. “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 initial framework has been published for consultation. Input from a wide range of stakeholders will be sought in helping validate and strengthen the work to date by investors.

Five investors will also be putting the framework to the test, by modelling its impact across performance of their real-word portfolios collectively valued at USD1.3 trillion. The results of this analysis will be launched with the final framework, 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,” adds Adam Matthews, director of Ethics and Engagement, Investment Team, Church of England Pensions Board and co-chair, IIGCC, Paris Aligned Investor Initiative (PAII). “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 is intended to be adopted and implemented by investors following its finalisation. More detail on this process will be shared in coming months and will help build momentum in the run-up to the UN COP 26 climate talks, being held in Glasgow next year. The Net Zero Investment Framework incorporates definitions used in the EU Taxonomy, which was formally adopted by the European Parliament in June. More than 25 methodologies and tools, to support alignment with the Paris Agreement and net zero emissions, have also been analysed and reviewed in its formulation, with those considered best fit approaches included in the framework.

Five core components help define a ‘net zero investment strategy’ as set out in the framework, covering: objectives and targets, strategic asset allocation and asset class alignment, alongside policy advocacy, investor engagement activity and governance. Taken in combination, they enable investors adopting the framework to be aligned with, and more fully contribute to, delivery of the Paris Agreement.

“The transition to net zero is fundamentally an investment transition: shifting capital from high carbon to low carbon alternatives,” adds Keith Skeoch, CEO, Standard Life Aberdeen. “This innovative framework provides investors with a roadmap to help accelerate this capital shift and support the goals of the Paris Agreement.”

“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, Brunel Pension Partnership. “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.”

“We are proud to have supported IIGCC in this vital piece of work,” explains Antonio Lorenzo, chief executive of Scottish Widows and group director of Insurance and Wealth. “There are many notable examples in the financial industry of investors seeking to incorporate sustainability into their investment strategies, and for those who are seeking to align their portfolios to the goals of Paris Agreement this initiative helps provide a roadmap of how they can begin this journey.”

“APG invests EUR512 billion on behalf of its pension fund clients, including ABP,” explains Claudia Kruse, Managing Director Global Responsible Investment & Governance at APG Asset Management. “In order for us to be able to implement ABP’s net zero carbon ambition and for the industry as a whole to play its role in delivering the Paris agreement, we need to establish the Net Zero Investment Framework as a global industry standard.”

“We are very pleased to be participating in and supporting the important work of the IIGCC to help maximise the contribution that the investment community is making towards the decarbonisation of the global economy,” says Michael Eakins, chief investment officer, Phoenix Group. “As a leading retirement and savings business, Phoenix Group has committed to fostering responsible investment across its investments portfolios. We work closely with our asset management partners, including Aberdeen Standard Investments, to achieve this for our business and for our customers who are investing for their future. This project has given us valuable insights into what the net zero journey for our investment portfolios could look like, and recommends a Framework that will help everyone make the progress that is vital.”

“The next decade is absolutely critical to achieving the Paris Agreement goals and avoiding catastrophic climate change,” adds Vicki Bakhshi, director, Responsible Investment at BMO Global Asset Management. “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. We are proud to be involved in the framework issued today and to play our part in the wider investor movement towards making finance a force for good.”

The focus on real-world decarbonisation throughout the framework overcomes limitations of other approaches – based only on portfolio emissions reduction or portfolio temperature targets – which leave room for investors to technically meet targets while selling the problem to someone else. This falls short in delivering additional meaningful long-term emission reductions.

Nonetheless, the consultation highlights a range of outstanding sectoral challenges and complexities in managing a portfolio towards net zero and assessing alignment of assets. Given these limitations, the framework makes clear it does not resolve every issue, nor cover all asset classes. Additional work is planned to make further progress on these topics.

The framework is a key output of IIGCC’s overarching Paris Aligned Investing Initiative (PAII). Established at the request of European asset owners, it includes an asset owner steering committee and four issue specific working groups, each with their own dedicated investor leads. PAII looks to establish key definitions and concepts relating to the alignment of investment strategies to the Paris Agreement, including the key goal of reducing emissions in line with pathways consistent with global net zero emissions by 2050.