NZAOA Broadens Protocol Scope, Includes Just Transition

Despite deepening requirements for members and clarifying its position on carbon removals, the alliance has been challenged to do better by utilising sector-specific, Scope 3 data. 

The UN-convened Net Zero Asset Owner Alliance’s (NZAOA) third edition of its Target Setting Protocol will lead to “deeper insights on emissions reductions”, incorporating just transition principles and setting clear parameters on investee companies’ usage of carbon removals.  

The protocol outlines how the 84 alliance members, with a collective US$11 trillion in assets, can align their sub-portfolio decarbonisation targets with net zero. Members are expected to target a 22-32% reduction in sub-portfolio emissions by 2025 and a 40-60% reduction by 2030.  

“We see that members are setting targets which are ambitious and increasingly cover a greater portion of their portfolio,” Claudia Bolli, Head of Responsible Investment at Swiss Re Group Asset Management, told ESG Investor.  

“[Members] are also engaging the rest of the ecosystem, including asset managers and data and service providers. In our progress report this year [following the new protocol], we hope to have deeper insights on emissions reductions that can be shared ahead of COP28 and the global stocktake of the Paris Agreement,” said Bolli. 

Bolli was co-lead author of the protocol report, alongside Udo Riese, Global Head of Sustainable Investing at Allianz Investment Management. 

The latest edition of the protocol for members includes targets on private assets and outlines ways to report on sovereign bond emissions. For the latter, NZAOA collaborated with the Partnership for Carbon Accounting Financials (PCAF) and the upcoming Assessing Sovereign Climate-related Opportunities and Risks (ASCOR) when developing their accounting and assessment standards respectively.  

From 2023 onwards, members are also being asked to set decarbonisation targets on new commercial real estate loans, reporting on progress from 2024. 

Following its ‘Net in Net Zero’ paper, which said members should prioritise real-time emissions reductions over carbon removals, the protocol stated that carbon removals to achieve short-term reduction targets will not be counted.  

“The alliance encourages investors to invest in and support credible, high-quality carbon removals, we simply do not allow them for consideration of decarbonisation target achievement at this time,” said Allianz IM’s Riese. 

“Investments in high-quality carbon removals will encourage demand and the development of the market. However, scientifically speaking, there is quite a lot of decarbonisation that can be achieved without the use of carbon credits,” he added.  

Members must further give “due consideration” to societal impacts when aligning their portfolios with net zero, including looking into how the benefits of the low-carbon transition can be widely shared, the protocol said. In particular, asset owners have been asked to focus their climate solution investments in emerging markets. 

Going forward, there is room for improvement, noted Riese.  

“Sovereign debt is an area that is quite challenging, and the alliance is working on ‘tackling’ this. Sector target-setting also remains low and we expect further advancements, especially as disclosure requirements provide for more sector-specific data availability,” he said. 

Standing up to scrutiny 

NZAOA members have been criticised on their climate-related follow through in a new report.  

The analysis, conducted by the University of Edinburgh and SDG Labs and commissioned by the Sunrise Project, noted shortcomings in the public disclosures, proxy voting and bondholding behaviours of 74 NZAOA members. 

Although 90% of assessed members disclosed details on their net zero targets in 2022, just 26% disclosed information on Scope 3 emissions, the report said. 

“Corporate data on Scope 3 emissions remains somewhat unreliable, with estimation methods and reported data that can differ significantly,” said Bolli.  

“Alliance members are strongly recommended to track Scope 3 emissions of portfolio companies but are not yet expected to set targets until interpretation of these emissions in a portfolio context becomes clearer and data becomes more reliable.  

“For priority sectors, however, alliance members should set targets on all three emission scopes of the portfolio companies as soon as feasible.” 

The report also noted that seven NZAOA members own more fossil fuel company bonds than Vanguard, an asset manager it said is “an average market benchmark with no climate considerations”. Seventy-five percent have some exposure to fossil fuel bonds, it added.  

“This report reveals that even so-called climate leaders are failing to deny debt and close the backdoor route for fossil fuel investments,” said Alice Delemare Tangpuori, Coordinator of the Toxic Bonds Campaign. 

“All investors, starting with members of the NZAOA, must immediately stop buying new bonds, as a priority, and divest from any company that is expanding fossil fuels.” 

Swiss Re’s Bolli said that the alliance does not and cannot comment on any individual member’s specific investments, but nonetheless reiterated that NZAOA advises an “orderly phase-out of fossil fuels” in line with science-based scenarios, such as the International Energy Agency’s net zero by 2050 pathway, with divestment reserved as a last resort if engagement and escalation fail.  

In 2022, NZAOA introduced a member-led process to review members’ published and report targets on an anonymised basis. “This process foresees certain escalation steps and can, in an extreme case, lead to a delisting of members,” the alliance said. 

Riese said NZAOA “welcomes evaluation of its work” and is currently reviewing and discussing the report among its membership.

“The alliance working track leads and secretariat are always considering additional ways to raise the level of ambition and accountability among members, while appreciating that the specific context each asset owner operates in will shape their individual climate action. This report is seen as an opportunity to do just that,” he said. 

NZAOA aims to grow its member base to 200 or US$25 trillion in cumulative assets by 2025. 

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