Fund Solutions

Shortcomings in Scope 3 Data Limit Asset Owner Ambition

NZAOA’s updated target-setting protocol commits members to halving portfolio emissions by 2030 and expands across asset classes. 

Limited data on Scope 3 emissions continues to pose a problem for asset owners attempting to decarbonise their portfolios in line with Paris Agreement objectives, according to Udo Riese, Global Head of Risk and Monitoring at Allianz Investment Management (AIM).

Riese was speaking during a webinar launching the UN-convened Net Zero Asset Owner Alliance’s (NZAOA) second edition of its Target-setting Protocol report, which outlines members’ portfolio decarbonisation commitments between now and 2030. Since launch, NZAOA has grown to 69 members managing US$10.4 trillion. Members include Japan-based Dai-ichi Life Insurance, the Church of England Pensions Board and Aviva.

“We are far away from covering all our Scope 3 emissions, and Alliance members are a little shy of asking other companies to do something that we cannot do ourselves,” he said. “Some members of the Alliance still struggle to understand and report their own Scope 3 emissions fully.”

Asset owners are currently focused on pushing for investee companies to be as transparent as possible about their Scope 3 emissions, while understanding that the data is not yet there for a number of asset classes, such as covered bonds, Riese added.

In 2021, Scope ESG, the sustainability analytics arm of Scope Ratings, assessed the emissions disclosures of 2,000 of the world’s largest companies. Findings showed that more than three-quarters of firms were not disclosing any information on Scope 3 emissions, meaning investors had no visibility of the emissions generated along their entire value chain.

Scope 3 emissions, which refer to financed or portfolio emissions for investors and financial institutions, are typically only required on a best-efforts basis in the climate disclosure requirements of countries adopting the recommendations of the Task Force on Climate-related Financial Disclosures.

“The Alliance is more likely to tackle Scope 3 emissions by sector, targeting those that are most relevant, such as the automotive industry and oil and gas majors. Having a more granular look at different sectors to decide where transparency on Scope 3 emissions is the way to go for now”, Riese said, adding that wider Scope 3 emissions will be addressed over time as data and reporting capabilities improve.

Other panellists, including Thomas Liesch, Climate Integration Lead at Allianz and Co-Lead for the Policy Track of the NZAOA, further cited members’ continued “focus on climate-related engagement efforts with asset managers” and climate policy advocacy.

“Asset owners also have policy advocacy in their toolbox. We don’t have it as part of the formal target setting requirements, but we believe it’s necessary that asset owners and asset managers speak up on climate-related matters,” Liesch said.

Gaining speed

NZAOA’s updated target-setting protocol includes a commitment from members to at least halve their portfolio emissions by 2030, cutting emissions by between 49-65% from a 2020 baseline.

The Alliance has also updated its current 2020-2025 target, shifting from 16-29% to a range of 22-32% emissions reductions by the end of the five-year period.

“The requirement for Alliance members to halve portfolio emissions by 2030 is ambitious, but also much needed – in order to get there, these groups will need to significantly increase the pace of change and tap into outside expertise to bolt on extra resource for delivery and implementation,” said Caroline Clarke, Commercial Director of Financial Services at Carbon Intelligence.

Further, the number of high-emitting sectors covered by the protocol has now doubled, including carbon-intensive sectors such as chemicals, concrete and agriculture.

Previously, NZAOA members were required to set decarbonisation targets across listed equity, publicly-traded corporate bonds and real estate assets. Volume Two asks members to set targets for infrastructure, across both equity and debt. Members should look to initially set emissions reduction targets on infrastructure assets in the most carbon intensive sectors or where they have more than 20% ownership, the report noted.

This is in line with the Partnership for Carbon Accounting Financials (PCAF), which expanded its scope for measuring financed emissions in November 2021. PCAF is an industry-led initiative working to support financial institutions measuring and disclosing the emissions associated with their financial activities.

“The expansion of asset classes to include infrastructure this year will be very useful to asset managers and owners alike, who have often been baffled with how to approach the decarbonisation of this asset class. The same stands for private equity which is slated for next year as well as private debt which hasn’t yet got a deadline, but which is a sizeable market and needs to be addressed,” Clarke noted.

NZAOA has previously called for asset owners to invest in CO2 removal (CDR) and negative emissions solutions and asked governments to back its emission reduction targets with “effective, robust, reliable and fit-for-purpose carbon pricing instruments”.

The Alliance is a member organisation of the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of 160 finance sector firms, responsible for US$70 trillion in assets, focused on achieving net zero emissions by 2050 at the latest.

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