UN Net-Zero Asset Owner Alliance members outline Target Setting Protocol, highlight engagement-led approach to transition.
Asset owners are making progress on decarbonising their investment portfolios, but continued active engagement across the public and private sectors remains critical, said members of the UN-convened Net-Zero Asset Owner Alliance at the Green Horizon Summit.
“We, as asset owners, think limiting global warming to 1.5 degrees is still possible. But for that, strong and consistent actions are needed by policymakers, companies and investors,” said Dr. Udo Riese, Global Head of Risk and Monitoring, Allianz Investment Management.
The Alliance published for consultation its Target Setting Protocol in October, which outlines their plans for reducing the carbon emissions in their portfolios over the next five years.
Formed of 30 of the world’s largest institutional investors, with combined assets of US$5 trillion, the Alliance is committed to reaching net-zero greenhouse gas emissions by 2050 in their investment portfolios, following scientific recommendations.
In a dedicated session, Riese outlined the four layers of the proposed protocol, starting with financing transition. “While all members are committed to invest in climate solutions, there is a huge problem of limited supply. We want to jointly grow the supply side of low- or no-carbon emission assets,” he said.
Riese identified the second layer, engagement, as a “key lever” for asset owners in tackling climate change, calling on asset owners to be “more outspoken”. The third and fourth layers are based on quantitatively based sub-portfolio emissions targets for individual asset classes and sectoral targets for specific industries.
“Concentrating on oil and gas, utilities and steel, targets will use specific KPIs based on a deep understanding of the sectors and will feed into our engagement activities, and also into financing transaction,” Riese said.
Eliminating coal investment
The Alliance’s sector-led approach includes a particular focus on eliminating investment in coal, in line with comments made by UN Secretary General António Guterres. It’s position paper on coal was published earlier this month.
“Since thermal coal-generated power is responsible for two-thirds of the emissions derived from the energy sector globally, we cannot decarbonise other sectors that have tried to electrify, including transport, if we do not first decarbonise power generation and supply,” said John Scott, Head of Sustainability Risk at Zurich Insurance Group.
Early retirement of existing coal power generation and infrastructure by 2040 globally, and earlier in OECD countries that have older coal fleets, is seen as crucial for achieving net-zero emissions globally by 2050.
“As part of our engagement work, we aim to work across the value chain to help sectors develop natural pathways, which will inevitably involve identifying ways to reduce reliance on fossil fuels,” Scott said.
For firms engaged in mining and the use of thermal coal, Scott said the Alliance expects management to develop individual transition pathways in line with net-zero targets, based on three guiding principles.
“First, other than coal plants currently under active construction, no further thermal coal plants should be financed, insured, built, developed or planned. Second, there should be an immediate cancellation of all new thermal coal projects, including thermal coal plants, coal mines and related infrastructure. Finally, there should be a phase-out of all unabated existing coal-fired electricity generation,” he explained.
Echoing Riese, Scott emphasised the importance of active engagement between asset owners and investee companies, citing the need to utilise a range of approaches. While each Alliance member will develop its own approach, policies are likely to include a combination of engagement across the whole value chain, divestment and future restrictions for misaligned entities, he said.
“One tool is a direct discussion on strategy. Another is our voting ability on boards and at AGMs. Last but not least, we can eventually divest. Our activities also include engagement with key stakeholders including policy-makers, NGOs and the companies themselves, particularly those targeted by Climate Action 100+,” said Scott.
As asset owners engage with investee companies, Scott suggested governments need to maintain the pace of public policy reform to lend further pressure for change, stressing also the consumer’s role in the transition to a zero or low-carbon economy.
“It calls for a sensible carbon pricing mechanism, tax or levy and removal of fossil fuel subsidies. Governments should focus on incentivising clean energy technologies,” he said.