Fund Solutions

Asset Owners Embrace Sector-Specific Net Zero Pathways

One Earth Climate Model generates targets across Scope 1, 2 and 3 emissions. 

Members of the UN-convened Net Zero Asset Owners Alliance (NZAOA) are using a new data model to inform their portfolio decarbonisation targets and assessments of investee companies’ alignment with a 1.5°C limit to climate change.  

A new report – ‘Limit Global Warming to 1.5°C: Sectoral Pathways and Key Performance Indicators’ – outlines the findings of the One Earth Climate Model (OECM), which was developed by the University of Technology Sydney’s Institute for Sustainable Futures. The model has mapped out the remaining carbon budgets for 12 carbon-intensive industries up to 2050.  

The budgets were calculated according to the first part of the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment reports, which estimated a 67% chance that limiting additional global emissions to 400 gigatonnes of CO2 (compared to 2020 levels) will ensure the world stays below 1.5°C of warming.   

The carbon-intensive sectors covered by the OECM include chemicals, steel, power and gas utilities, and agriculture.  

Members of the NZAOA have already started using the model to “set targets and steer investment portfolios,” the report said. 

“The OECM model provides very granular sector-specific net zero pathways,” said Günther Thallinger, NZAOA Chair. 

“For asset owners committed to net zero portfolio alignment, sector pathway information is of utmost importance for investment portfolio steering. Asset owners’ investee companies are assessed against these pathways. Furthermore, the OECM pathways need to be the basis for discussions with policymakers on the development of industry sectors.” 

Sector-specific decarbonisation pathways are helpful to asset owners when tailoring engagement efforts with companies on their emissions reductions, said Quinn Liu, Senior ESG Analyst at Denmark-based pension provider Danica Pension, speaking during a webinar launching the report on Wednesday. 

“To decarbonise our portfolio, every sector has a role to play, but their roles are not the same,” she said. 

Guidance on Scope 3 net zero pathways 

The OECM has split the carbon budget data into direct and indirect Scopes 1-3 emissions, outlining the required decarbonisation rate for each scope for each sector at key points on the way to 2050.  

In 2019, coal companies produced 14,864 metric tonnes of CO2 (Mt/CO2), according to the OECM. As well as identifying the rate of decarbonisation needed across Scopes 1 and 2 , the report noted that Scope 3 emissions (which reached 12,432 Mt/CO2 equivalent in 2019) need to be cut by 49% by 2025 to reach 6,317 Mt/CO2 eq, and 79% by 2030 (2,635 Mt/CO2 eq), if net zero is to be reached by 2050.  

This breakdown between scopes gives asset owners clear pathways against which investee companies’ climate transition strategies can be assessed.  

“The OECM not only aligns with the needed 1.5°C trajectory, but also provides the necessary granularity and sectoral breakdowns directly applicable to the sector classifications used by the financial sector,” said Peter Sandahl, Head of Sustainability, Nordea Life & Pensions. 

Members of the NZAOA have previously said that limited data on Scope 3 emissions has made decarbonising their portfolios more challenging. 

Three-quarters of the largest 2,000 companies globally (by market capitalisation) did not disclose any information on Scope 3 emissions, according to 2021 research by Scope ESG, the sustainability analytics arm of Scope Ratings. 

NZAOA members have committed to reducing their portfolio emissions by 22-32% by 2025, with all new members expected to set decarbonisation targets within that range during their first 12 months of membership. Further, NZAOA’s latest target-setting report noted that members will reduce their portfolio emissions by between 49-65% by 2030 from a 2020 baseline. 

As of 2022, NZAOA has 71 institutional investor members collectively managing US$10.4 trillion in assets. 

In April, the NZAOA also called for asset owners to take a multi-pronged approach to climate engagement to ensure companies are decarbonising in line with their net zero targets. Engaging with policymakers, asset managers, and value chains will bolster efforts to limit global warming to 1.5°C, the report noted. 

“Investors beyond members of the NZAOA should apply [the OECM] widely,” said Margaret Kuhlow, Global Finance Practice Leader at the World Wide Fund for Nature.  

“For regulators, this is a critical opportunity to ensure reporting requirements align with these science-based scenarios, and provide forward-looking data aligned with global ambition to limit warming to 1.5°C, for instance through the EFRAG and ISSB reporting standards.”  

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