Dive Brief:
- The United Nations-backed Net-Zero Asset Owners Alliance updated its target-setting guidance earlier this month, which builds regional flexibility into the framework and introduces quantitative climate solution investment targets and a new transition target category.
- The revised guidance, released March 6, now allows signatories to choose between setting sector-specific targets or transition targets, with the latter focused on increasing “portfolio coverage of transition-aligned assets in high-emitting sectors.”
- NZAOA last updated its target-setting protocols in April 2024, with that version extending coverage to include all private assets. The latest revision represents the fifth version of the protocols and also includes a phase-in schedule for when asset owners should set targets and begin reporting metrics for each asset type.
Dive Insight:
The alliance is run by the UN Environment Programme Finance Initiative and currently includes 86 global signatories with $9.2 trillion in assets under management, according to NZAOA’s website. Its membership includes six U.S.-based asset owners, including the California Public Employees Retirement System — the nation’s largest pension fund — and the New York City Employees’ Retirement System.
NZAOA signatories commit to transition their investment portfolios to net-zero greenhouse gas emissions by 2050, in line with a maximum temperature rise of 1.5 degrees Celsius, establish intermediate targets every five years and regularly report on progress. Signatories agree to set targets in at least three of four categories: engagement targets; sector or transition targets; sub-portfolio targets and climate solutions investment targets.
The latest guidance also updates key performance indicators for target-setting and clarifies the methodologies used for how asset owners track private assets, including real estate and infrastructure, according to its March 6 announcement. NZAOA said the refined guidance provides “a more actionable pathway for investors to drive the transition to meet the goals of the Paris Agreement.”
Asset owners that choose to utilize the new transition target category, in lieu of setting sector-specific targets, should have targets that cover at least 80 percent of total financed emissions in scope. That should, but is not required, to include the asset owners’ internally classified five highest emitting sectors. Fossil fuels are required to be included in transition targets.
The guidelines also walk asset owners through the process of setting targets and assessing transition plans, though NZAOA noted that it “is not establishing its own framework but is relying on other credible frameworks with a strong emphasis on a set of guiding principles.”
The guidelines also give examples of accepted metrics for asset owners to quantify their climate solutions investments, including investing a specific dollar amount in a subset of climate solutions over a defined period; targeting cumulative investments by a certain date; and investing a percentage of assets under management in solutions aligned with the relevant regional taxonomy by a certain date.
“Defining targets based on capital allocation pushes signatories to support the transition by laying out plans to invest in ambitious companies, states and/or climate solution projects, while slowly withdrawing capital from individual companies that are not acting effectively to decarbonize,” NZAOA said in a background document released the same day.
The alliance reports that 79 of its signatories have published targets, with $8.4 trillion in owned assets covered under the target-setting framework.
