Second iteration of net zero framework slated for mid-2024 launch; investor network puts nature on its long-term agenda.
The Institutional Investors Group on Climate Change’s (IIGCC) next version of its Net Zero Investment Framework (NZIF) will fine-tune existing guidance, expand into new asset classes, and offer a more interactive experience to users.
“As we have progressed with the framework, we’ve started to think about reimagining the format,” Mahesh Roy, IIGCC’s Investor Strategies Programme Director, told ESG Investor.
“How do we deliver the NZIF to members and how do we best update it?”
The NZIF was launched in 2021 to guide investors looking to align their investment portfolios with net zero. It so far includes guidance for listed equities, corporate and sovereign bonds, real estate, infrastructure, and private equity. Asset owners that have signed up to the IIGCC’s Paris Aligned Investment Initiative group are expected to utilise the NZIF. The Net Zero Asset Managers initiative (NZAM) also recommends its members use the IIGCC’s framework.
Roy said he envisages NZIF 2.0 becoming a more interactive online platform for investors, which will eventually integrate all tools and guidance into one place and better support investors with the implementation phase of their net zero commitments.
“As ever, the NZIF will remain investor-led, which means we will continue to adopt our usual consultative approach with members,” he said.
Prior to NZIF 2.0, the IIGCC will be publishing guidance for new asset classes.
“The first cab off the rank will be our climate solutions guidance, which will be out next month,” said Roy.
It will cover listed assets and outline how investors can increase allocations to climate solutions throughout their portfolios.
Further guidance will also be introduced for derivatives and hedge funds. Roy acknowledged that this has been a “complex area”, but that the review of consultation responses is well underway, with the finalised guidance expected in the coming months.
Roy said the IIGCC is targeting a mid-2024 launch for NZIF 2.0 but will have “a clearer picture on timings” in January.
Keeping up to date
The IIGCC will be revisiting existing asset class guidance prior to the finalisation of NZIF 2.0, according to Roy.
In particular, it will be focused on revising the framework’s sovereign bond guidance, which Roy said “was built on the best available thinking and data at the time, but it wasn’t sufficient to make a tangible difference to members’ investment strategies”.
The NZIF’s existing asset alignment and climate solutions assessment criteria for sovereign bonds includes consideration of past and future expected greenhouse gas emission performance against a net zero pathway, as well as national and international policy positions and allocations to verified green or climate bonds.
This guidance has been “superseded” by work from the likes of the Assessing Sovereign Climate-related Opportunities and Risk (ASCOR), and therefore needs to be looked at again, Roy noted.
Launched in 2021, ASCOR has been developing a free and publicly available tool that helps investors to assess countries on their climate-related performance and improve their understanding of climate risks to their sovereign debt portfolios.
The ASCOR framework, which is backed by an investor coalition collectively managing US$5 trillion in assets, is currently composed of three pillars: opportunities to finance the transition, climate policies, and emissions pathways.
A public consultation ran from February to April this year, with ASCOR set to publish updates to its framework in the next few months.
The IIGCC has set up a working group to assess the new landscape of data sources and alignment criteria for sovereign debt so that the NZIF can be updated accordingly.
“It’s about ensuring investors can get good data, understand country pathways and engage with sovereigns on climate finance,” Roy said.
The IIGCC is further considering “cross-cutting themes”, he added, such as the just transition and passive and index investing.
“We’re hoping to introduce guidance that will allow investors to conduct analysis and incorporate just transition metrics into their targets, initially starting with different country decarbonisation pathways, i.e., fair share for emerging markets, and also new aspects like understanding community engagement by companies,” he said.
For passive and index investing, Roy said some investors admitted reluctance to set decarbonisation targets in this area “because they can’t influence what’s in an index”.
“We would like to find a way to encourage investors to engage with companies in those benchmarks, and with the benchmark administrators and product providers.
“There are some levers that can be pulled, including active ownership and policy advocacy, that we hope will help investors feel more comfortable about setting decarbonisation targets against them.”
In May, the IIGCC issued a set of five principles to evaluate and enhance the quality of net zero benchmarks, following engagements with providers, including Bloomberg, FTSE Russell and MSCI.
It recommended the prioritisation of real-world emissions reductions, ensuring transparency of benchmark rules, incorporating a sectoral and regional-based approach, prioritising publicly available data, and facilitating engagement to improve issuer behaviour.
Beyond NZIF 2.0
In the longer term, the IIGCC will be focused on how nature-related themes and metrics can be incorporated into the NZIF.
“A few of our members are already very advanced when it comes to setting biodiversity and nature targets, but the feedback we’re getting is that it would be useful to include some climate-adjacent themes into the NZIF,” Roy told ESG Investor.
As it is a climate-focused network, the IIGCC will be considering how nature can be integrated into climate-related metrics. For instance, a variety of natural habitats provides carbon sinks, and the removal or degradation of these puts more carbon in the atmosphere. This concept could eventually be integrated into the NZIF through land use change analysis and targets, said Roy.
“Themes like water stress, whilst not net zero-related, have a climate adaptation and resilience aspect that is ultimately related to how an asset is dealing with climate change,” he added.
High-impact industries like agriculture and forestry will likely be the focus of this work, said Roy, acknowledging that data availability will be challenging, due to the fact many companies in these sectors are privately owned.
“But we expect to increasingly gain access to private markets data as a result of our recent private equity guidance, and we will have better engagement with companies that are engaging with their supply chains via Nature Action 100, so I think there are realistic targets that can be built into NZIF in the long term,” said Roy.