Net Zero Investing Tests Positive for Returns

IIGCC launches investment framework used by investors with US$8.5 trillion in AUM.

Testing of a newly launched Net Zero Investment Framework has shown that investors aligning their portfolios with the goals of the Paris Agreement don’t have to compromise on financial returns while they can reduce climate-related risks.

Speaking at the Institutional Investors Group on Climate Change (IIGCC) press conference on the framework’s launch, Craig Mackenzie, Head of Strategic Asset Allocation for Global Strategy at Aberdeen Standard Investments, said much can be accomplished by switching from laggards to leaders.

“We can achieve really quite significant carbon reductions and carbon trajectory reductions and similarly increase climate solution allocations without significantly disturbing the financial characteristics of the portfolios.

“We can achieve 50% reduction in carbon intensity in an equity portfolio and a doubling of climate solution allocations while leaving the tracking error of the portfolio only at maybe 20 basis points,” Mackenzie said.

Altogether 35 asset managers and asset owners, managing US$8.5 trillion in assets are already using the framework, including Scottish Widows, the Environment Agency Pension Fund and NN Group.

Additionally, 21 asset owners, with US$1.2 trillion in assets, have committed to achieve net zero alignment by 2050 or sooner and to follow suit with the publication of the framework.

The framework, part of the IIGCC’s Paris Aligned Investment Initiative (PAII), was originally developed in 2019 and seeks to provide a basis for a broad range of asset owners and asset managers to define strategies aligned with the Paris Agreement goals.

It is built around five core components: governance and strategy, portfolio reference targets, strategic asset allocation, asset level assessment and targets and implementing alignment.

Five investors have been working together to test the framework’s recommendations on real-world portfolios since it was published under consultation in August 2020.

Alongside the launch of the framework, the IIGCC published the portfolio testing results in a separate report.

One of the key findings is that investors can start acting on their strategies as “the framework succeeds in channelling capital towards Paris-aligned activities and mitigating climate-related risks for investors, and the cost of alignment can be small”, the report noted.

Another finding showed that “for equities and corporate bonds, climate impacts can be highly company-specific, and investors benefit from taking a company-specific approach to alignment”.

The framework will be updated taking into account feedback received during the consultation and lessons from the portfolio testing phase. It currently covers four asset classes – sovereign bonds, listed equities and corporate fixed income and real estate.

Future outputs of the PAII will cover private equity and infrastructure, and recommendations with regard to aligning to the adaptation and resilience goals of the Paris Agreement.

Patricia Espinosa, Executive Secretary of the United Nations Framework Convention on Climate Change, said: “Investing in a net zero future is key to tackling the climate crisis and unlocking truly sustainable growth. The race to a net zero future is on and the benefits it offers are critically important.”

UK Minister for Pensions and Financial Inclusion Guy Opperman commented: “In the run-up to COP26, more countries than ever are signing up for net zero. This creates huge opportunities, but also risks, for institutional investors such as pension schemes.

“I therefore welcome both the ambition and hugely practical guidance contained in this framework, which will help even more institutional investors aim for net zero.”

Stephanie Pfeifer, CEO of the IIGCC, said: “This new swathe of net zero commitments from asset owners demonstrates the growing determination from investors to make important decisions to support a net zero and resilient future.”

The IIGCC works in a global collaboration with the Asia Investor Group on Climate Change (AIGCC in Asia), Ceres (in North America), and the Investor Group on Climate Change (IGCC in Australia and New Zealand).


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