Alliance says target-setting by members translating into measurable impact on emissions reduction for the first time.
The Net Zero Asset Owner Alliance (NZAOA) has called on governments to swiftly implement and intensify climate-related policy that facilitates capital flow towards the net zero transition.
The call to action follows the Alliance’s third annual progress report which demonstrated large asset owners’ continued commitment to the transition, with members total absolute financed greenhouse gas (GHG) emissions down 3.5% to 213.4 million tonnes of carbon dioxide equivalent (tCO2e) in 2022, from 221.2 mtCO2e in 2021.
“Our work is supporting governments to implement their net zero programmes by accelerating the reform of existing financial and investment policy frameworks,” said Günther Thallinger, Board Member at German insurer and asset manager Allianz and Chair of the NZAOA.
“As we head towards at least 2.4°C warming with current climate pledges, we are at a pivotal moment to strengthen efforts for system-wide transformation.
“These reductions are the result of real-world emissions reductions, allocation changes, and divestment.”
Thallinger’s comments come amid mounting pressure on governments ahead of the Global Stocktake at COP28, including a synthesis report by the United Nations Framework Convention on Climate Change, highlighting the shortcoming of policy action to date.
NZAOA’s progress report also revealed a notable rise in ambition across sector targets for hard-to-abate industries, with alliance members making “solid progress” towards achieving their 2025 emissions targets.
The NZAOA’s membership has expanded, growing by 12 to reach 86 members in August compared to a year ago, collectively managing over US$9.5 trillion in AUM. The Alliance counts French insurer AXA Group, Nordic bank Nordea and UK-based financial services company Legal & General among its membership.
Among these, 69 members have set intermediate climate targets in line with the Alliance’s Target-Setting Protocol, amounting to US$8.4 trillion in AUM, up from US$7.1 trillion the previous year.
The Alliance uses the Intergovernmental Panel on Climate Change (IPCC) 1.5°C no/low overshoot scenarios to set the ambition level for sub-portfolio and sector targets.
At the global level, IPCC 1.5°C no/low overshoot scenarios state that the global economy needs to decarbonise by 22%-32% for 2025 and 40%-60% for 2030 from 2020.
“NZAOA members must adhere to these same reductions in their own portfolio – if they do not, they will be marked as a red flag in our accountability mechanism,” a spokesperson told ESG Investor. “So far members have adhered to this percentage reduction.”
The Alliance noted that reduction requirements for members are higher than both the current trajectory of the global economy and the aggregation of nationally determined contributions (NDCs), which both result in outcomes above 2°C.
Ahead of COP28, the NZAOA has called on policymakers to implement four key actions: scale up reforms of finance and investment policy frameworks; implement overarching policies that integrate transition planning; continue efforts to reform the current multilateral financial architecture; and accelerate the implementation of holistic, long-term domestic policies that enable a just transition.
The Alliance emphasised the importance of engagement in transforming corporate actions and driving emissions reduction, reporting a 95% engagement target rate in 2022, according to the report, highlighting the effectiveness of the Alliance’s Accountability Mechanism.
Additionally, the number of members setting sub-portfolio targets – which encompass corporate debt, listed equity, and directly held real estate – rose from 41 in 2022 to 67 in 2023, suggesting a strong commitment to reducing emissions within the investment portfolios.
Once all asset classes have appropriate methodologies the sub-portfolio target will become a ‘portfolio target’ indicating that all methodologies are in place.
“Decarbonisation can come from decarbonisation in the underlying holdings, or it can be the result of shifting away from holdings that are not decarbonising to those with lower carbon footprints,” explained the NZAOA spokesperson.
The progress report also underlined the significance of climate solution investments, with US$380.6 billion invested by Alliance members in 2023, primarily directed towards the building and energy sectors.
In 2021 and 2022, the proportion of members with intermediate targets on engagement was 93% and 95%, respectively, with the number of members setting sub-portfolio targets rising from 41 in 2022 to 67 in 2023.