Big investors to trial ‘net zero’ tools to decarbonise their portfolios
A coalition of more than 70 pension funds and investment managers representing assets of $16tn have designed a “net zero” framework to help strip out damaging carbon emissions across their portfolios by 2050.
Efforts by large investors to tackle climate change have been hampered by a lack of consensus on the best way to limit the increase in global temperatures to 1.5C above pre-industrial levels, a goal agreed at the 2015 Paris conference.
But a blueprint published on Wednesday by the Institutional Investors Group on Climate Change provides pension funds with a set of tools to help them decarbonise their portfolios. It also aims to encourage greater investment in renewable energy projects, low-carbon buildings and energy efficient technologies
“Countries, cities and companies around the globe are committing to achieve the goal of net zero emissions and investors need to show similar leadership,” said Stephanie Pfeifer, IIGCC chief executive.
The framework proposes that institutional investors set rigorous top-down and bottom-up targets to limit emissions at an overall portfolio level as well as for their holdings by asset class in equities, bonds and real estate. Private equity and infrastructure are to be added at a later date.
The framework’s impact on performance will be tested by five investors: APG of the Netherlands, Brunel Pensions Partnership, the Church of England Pensions Board, PKA of Denmark and Phoenix Group. Results of this analysis will be published later this year.
Adam Matthews, director of ethics and engagement at the Church of England Pensions Board, said setting a long-term net zero target was “the easy part” for investors.
“The challenge is to have a credible and transparent framework that enables a fund to convert intent into practical decisions and action,” he said.
The IIGCC has invited members and other interested parties to provide feedback and answers to a questionnaire on its website as part of a consultation that ends on September 25.
Laura Chappell, chief executive of Brunel Pension Partnership, said the framework was a big step forward. “It answers the fundamental and urgent question of what a Paris-aligned portfolio actually looks like.”
Sceptics question whether such initiatives possess real teeth and encourage pension funds to cut holdings in fossil fuel companies.
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“However, divestment is relevant as a tool where a company’s exposure to climate risks poses an unacceptable financial threat or if efforts at engagement are unsuccessful or if businesses pursue activities that are no longer permissible within net zero pathways,” said Mr Matthews.
Other investors contributing to the development of the framework include Legal & General Investment Management, Allianz Global Investors, JPMorgan Asset Management, UBS Asset Management and Standard Life Aberdeen.
Nest, the £22bn UK government-backed workplace pension scheme that announced plans last month to achieve a net-zero carbon position by 2050 at the latest, has also contributed to the IIGCC framework.