1.5°C alignment also requires asset owners to engage with corporate value chains, policymakers and asset managers, says new paper.
Asset owners need to take a multi-pronged approach to climate engagement to ensure investee companies are decarbonising in line with their net zero portfolio targets, according to a new paper by the UN-convened Net Zero Asset Owner Alliance (NZAOA).
Investors have been increasingly engaging with companies on their climate-related performance and commitments through dialogue and proxy voting. However, NZAOA members have warned that corporate engagement becomes less effective when the business case for requested action is “impractical, uneconomic, or uncertain”, which is more often the case for companies in hard-to-abate sectors.
Relying on corporate engagement alone will not deliver outcomes that meet 1.5°C investor ambitions, the report said.
The alliance has therefore outlined three key areas of focus for investors to expand their climate engagement efforts.
The first is sector and value chain engagement, with the paper noting that asset owners need to better identify collaborative opportunities to reduce emissions across value chains, as well as the regulatory and policy hurdles slowing down net zero alignment.
“This type of engagement drives a level of accountability that is not always possible when engaging a single company, and it also addresses the scalability issues of corporate engagement by facilitating collaborative outreach and action from investors,” the report said.
Asset owners can also use their direct and indirect influence to engage with policymakers to develop and implement climate-focused policies, the paper said. This can be an effective way for investors to force companies to consider climate – i.e. through mandatory reporting.
Finally, the paper noted that asset owners must be engaging with their asset managers to ensure their engagement priorities are aligned.
NZAOA members “urge asset managers to re-examine their fiduciary duties and increase the ambition of their stewardship activities to reflect the existential risk of climate change to asset owners’ fundamental businesses”.
Günther Thallinger, Allianz SE Board Member and NZAOA Chair, said: “It’s high time to change the rules of the game. As asset owners, we need to look towards ways we can undertake impactful engagement to directly influence asset managers, stakeholders across entire sectors, and policymakers. Regardless of how ambitious investor commitments are, companies still operate within policy and economic frameworks. Systemic change to these frameworks is needed urgently to align with a 1.5°C future.”
This new paper follows the NZAOA’s first progress report, which highlighted that sector-specific corporate decarbonisation targets for hard-to-abate industries, such as oil and gas, utilities and transportation, have been set by only a small number of members.
As of this year, NZAOA has 71 institutional investor members collectively managing US$10.4 trillion in assets. Members include Allianz, Caisse de dépôt et placement du Québec (CDPQ) and Swiss Re.
In line with the group’s ‘Inaugural 2025 Target Setting Protocol’ report, members committed to publishing 2025 decarbonisation targets within a 16-29% emissions reduction range, which has since been increased to 25-30% by 2025. All new members have 12 months from joining to set their own targets.
Every five years the alliance will set new, more ambitious decarbonisation targets to ensure portfolios reach net zero by 2050.
NZAOA has previously published a position paper encouraging asset owners to invest in carbon dioxide removal and negative emissions solutions, as well as a discussion paper calling on governments to back members’ net-zero carbon emission reduction targets with robust and fit-for-purpose carbon pricing instruments.