Asset Owners Commit to Net Zero, Urging Audit Action

Paris Aligned Asset Owners group swells ranks as investors ramp up pressure on corporates and governments to align with Paris ahead of COP26.

Asset owners and investment consultants have increased commitments to eliminating carbon emissions from portfolios by 2050, with institutional investors also calling for greater support from governments ahead of COP26 for Paris-aligned accounting practices to improve transparency into investee firms.

The Paris Aligned Asset Owners group now boasts 40 members with a combined total of more than US$2.35 trillion in assets under management after signing up a raft of new members from across Europe and Australia.

Twelve new asset owners have joined the 28 existing signatories to the Paris Aligned Investment Initiative’s Net Zero Asset Owner Commitment. They include HESTA, the first Australian superannuation fund to join, as well as UK-based schemes Railpen, Tesco Pension Investment and London Pensions Fund Authority, and several European asset owners, including Denmark’s AP Pension, the Church Pension Fund of Finland, Elo Mutual Pension Insurance Company and PenSam.

The new signatories have committed to achieving net zero portfolio emissions by 2050, increasing their investment in climate solutions, setting interim targets and undertaking advocacy and engagement in line with net zero goals.

To align their portfolios with the goals of the Paris agreement, they will adopt the Net Zero Investment Framework, which supports the development of net zero investment strategies via five core components including governance and strategy, objectives and targets and investor engagement.

The framework currently covers listed equity and corporate fixed income, real estate and sovereign bonds, but work is being undertaken to cover investments in infrastructure, private equity, hedge funds and derivatives.

Supporting transition

Sandra Metoyer, Head of Responsible Investments at AP Pension (€23 billion AUM), said signing up to the group was the right move to make as a responsible investor. “It is essential that we incorporate considerations for climate-related risks and opportunities in our investment strategy,” Metoyer said. “This benefits not only our clients that we invest on behalf of, but also supports a transition towards a low carbon economy.”

John Chilman, Chief Executive of Railpen (£32 billion in AUM), added: “Railpen takes great pride in driving climate activism in the pensions space. Our net zero commitments are tangible, clearly defined, and integral to delivering on our purpose of securing our members future. Meeting our target will be achieved primarily through emissions reductions, portfolio net zero alignment tracking and reporting, strong governance practices, purposeful stewardship and thoughtful policy interventions, in line with Railpen’s long-standing expertise and heritage.”

Earlier this week, the Race to Zero campaign announced that more than half of the sectors of the global economy had made commitments to half their emissions by 2030, with at least 20% of major firms in each sector setting industry-specific goals in line with 2050 net-zero emissions strategies.

The campaign now includes the investment consulting industry, following the launch of the Net Zero Investment Consultants Initiative (NZICI), endorsed by Race to Zero and supported by the Principles for Responsible Investment. NZICI includes 12 investment consulting firms which advise asset owners worth US$10 trillion. Founding signatories have committed to nine specific action points as part of efforts to support net zero greenhouse gas emissions by 2050 or sooner.

Net-zero accounting and auditing

It has emerged that a separate group of asset owners and managers, including Sarasin and Partners, Brunel Pension Partnership, Environment Agency Pension Fund and PKA (Danish Labour Market Pension Fund) wrote to COP26 President-Designate Alok Sharma last week to urge governments to set a timeline for the introduction of net-zero accounting and auditing.

Noting the Paris Agreement’s call for finance flows consistent with pathways towards climate-resilient development, the group said companies need to produce accounts that consider the global transition onto a 1.5 degrees Celsius pathway.

The investors, representing just over US$2.5 trillion in assets under management, also sought requirements for auditors to monitor and report on compliance, adding that mandatory net-zero accounting would bolster Task Force for Climate-related Financial Disclosures (TCFD) reporting.

The letter said governments should require directors to adopt 2050 net-zero-aligned assumptions and estimates in their accounts on a comply-or-explain basis. Auditors should likewise be required to test accounts against net-zero-aligned assumptions or estimates and alert shareholders where the assumptions fall short.

“We do not have years to wait for companies to voluntarily review and revise their financial statements,” the letter said.

“Ensuring all companies’ financial statements are aligned with delivering a stable planet is clearly supportive of the UK’s efforts to be a leader in green finance, including plans to make TCFD reporting mandatory. Conversely, permitting companies to draw up accounts that ignore the climate crisis undermines these vital policy goals,” it added.

Appetite for action

Asset owners are increasingly focused on accounting practices in the engagement with companies on climate risks. Railpen’s voting policy document for the 2021-2022 AGM season outlines expectations that investee companies – especially those in highly carbon-intensive sectors – incorporate “material information” about climate-related issues in their financial statements, not just narrative reporting.

The also document warns of the possibility of AGM votes against the audit committee chair or auditors in the event of inconsistencies between narrative reporting and financial disclosures.

“In order to achieve the net zero or other climate goal that they set for themselves, we think firms need to allocate capital in a way that is consistent with that ambition,” said Caroline Escott, Senior Investment Manager at RPMI Railpen, in an interview with ESG Investor.

In a further sign of growing asset owner appetite for driving real-world change through their investment strategies, four UK-based pension schemes signed up this week to the Impact Investing Principles for Pensions, developed by the Impacting Investing Institute in partnership with Pensions for Purpose.

The Paris Aligned Investment Initiative is a collaborative investor-led global forum established to help investment institutions to align their portfolios to the goals of the Paris Agreement.

It was formed in May 2019 by the Institutional Investors Group on Climate Change (IIGCC) and is now supported by four regional investor networks – AIGCC (Asia), Ceres (North America), IIGCC (Europe) and IGCC (Australasia) – and is included in the UN’s Race to Zero campaign.

The initiative’s Net Zero Asset Owner Commitment was developed specifically for asset owners looking to use the Net Zero Investment Framework. In total, 128 investors representing US$34 trillion in assets have engaged in the development of the framework.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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