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Asset Owners Outline Progress Toward Net Zero

Paris Aligned Asset Owners commit to maintain “high ambition” and drive innovative solutions needed for global low-carbon transition.

Big strides towards net zero have been made by pension funds and other heavyweight institutional investors managing more than US$3.3 trillion – but there remains a long way to go.

That’s the verdict of the inaugural progress report of the 57-member Paris Aligned Asset Owners (PAAO) initiative, founded in March 2021 in response to the climate accord signed in the French capital.

Wide-ranging commitments including the decarbonising of portfolios, the publication of science-based action plans and targets and engagement with investee firms and policymakers have met with some success, according to the report.

In addition, 13 member institutions have issued their initial target disclosures, including Sweden’s AP7, Lloyds Banking Group Pensions Trustees Limited and Ilmarinen of Finland.

The report’s findings “showcase innovation and best practice amongst asset owners for turning net zero commitments into action,” it said, adding: “New targets mean 40 asset owners have disclosed initial targets since March 2021.”

But the group acknowledged asset owners are still at a relatively early stage in their implementation of net zero investment strategies.

“Whilst we are encouraged by the progress made to date, we know that more is needed. If we are to collectively deliver against the Paris Agreement goals, and act in the best interests of beneficiaries, asset owners must continue to collaborate to maintain the high ambition expected of us and drive the innovative, practical solutions required for the global transition.”

In its recent annual assessment of the world’s largest pension funds, the Thinking Ahead Institute said, “Whilst most of the industry is managing climate-related risk in portfolios, the shift to real-world impact is in its embryonic stages.”

Improved tools and products

The PAAO was formed out of the Paris Aligned Investment Initiative, established as a collaborative investor-led forum to support institutional investors to align their portfolios and investment activities to the goals of the Paris Agreement. Since 2021, PAAO has been a partner to the UN Climate Champion’s Race to Zero campaign and a member of the Glasgow Finance Alliance for Net Zero.

PAAO signatories draw on the Net Zero Investment Framework to set targets and devise a net zero investment strategy. The framework was developed initially by the Institutional Investors Group on Climate Change (IIGCC) and is used by asset managers and owners.

The 57 signatories, from Europe, North America and Australasia, have made ten commitments covering all aspects of the transition towards net zero by 2050.

The first commitment is to transitioning portfolios to achieve net zero emissions by 2050 or sooner. To this end, the report noted that signatories are already setting multiple types of targets, with the two portfolio-level targets most common; the first being a decarbonisation reference target, with five-year interim milestones, and the second being a qualitative goal to increase investment in climate solutions, where possible. In the former category 95% of signatories had set such a target while in the latter, 98% declared such a goal. Further, 55% of signatories have set a quantitative target for increasing investment in climate solutions, typically expressed as a proportion of total AUM; while 45% have set a portfolio coverage target to increase the proportion of assets classified as net zero, ‘aligned’ or ‘aligning’ to a net zero pathway.

The second commitment relates to achieving real-economy emissions reductions. In terms of progress towards this, the report noted: “Signatories have started to develop comprehensive net zero strategies that define the actions that will be taken to achieve targets. Some common actions include industry collaboration, such as with index providers and investment consultants, to develop new or improved tools and products for net zero.”

Significant progress was noted in relation to the third commitment, which is to set goals and targets to establish the scope and ambition of asset owners’ net zero investment strategies, to be updated every five years. According to the report, 70% of signatories have set short-term targets for 2025 or sooner, with others setting targets for 2030 in addition to or in place of 2025 targets.

Furthermore: “98% of Paris Aligned Asset Owners that have disclosed targets have established either a quantitative target or qualitative goal for increasing investments in climate solutions.” Despite the absence of an industry standard that can be applied across an investment portfolio, signatories have measured their current allocation and set quantitative targets ranging from 6%-25% of AUM by 2030.

A fourth commitment, on limiting the use of carbon offsets within net zero strategies, has led to discussion around the role for investors and companies in the use of such offsets, while a fifth, to engage in direct advocacy, contributed to the 2022 Global Investor Statement to governments on the climate crisis, which received support from more than 600 investors.

Escalating engagement

In terms of engagement with portfolio companies, the PAAO reported: “Many signatories have established engagement and stewardship policies and either carry out engagements with companies directly or instruct external managers to engage on their behalf. A number of signatories have indicated that they are or have already updated their stewardship policies and practices to incorporate their net zero strategies more explicitly.”

It said that there had been an “unprecedented change in stewardship practices” with more specific, time-bound objective setting combined with escalation “starting to become the norm”.

As an example, the report cited the decision of a number of PAAO members to take German car manufacturer Volkswagen to court in response to its refusal to discuss or disclose its climate lobbying activities.

“Looking ahead, we hope to see more asset owners taking meaningful steps towards supporting the net zero transition, including working collaboratively with asset managers to drive innovation across the industry,” said IIGCC CEO Stephanie Pfeifer.

Separately, the UN-convened Net-Zero Asset Owner Alliance, representing asset owners worth XXX in AUM, has signed up two new members, taking its total to 80. They are the University Pension Plan of Ontario and Germany insurer Provinzial Versicherung.

 

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