What is the aim of the Target Setting Protocol?

The Alliance Target Setting Protocol (TSP) sets out the Alliance’s approach to target setting that is based on science. Through the TSP, the Alliance aims to be transparent and proactive in explaining its role and how it is addressing limitations of investor action and portfolio decarbonisation. The Alliance’s open approach to communication also means that it seeks to learn from and build on external feedback received through public dialogue. The Protocol also provides necessary guidance on Alliance requirements, which will guide and support members in implementing Alliance-wide approaches.

What is new in third edition of the Target Setting Protocol (TSP V3)? 

While the first edition of the Protocol focused on intermediate target setting for the target year 2025, the second edition outlined the ambition towards 2030. This third version reflects the latest science, expands methodological coverage across asset classes for target setting, and provides further details for some of the Alliance’s four target types as well as adds chapters on carbon removals and just transition.

  • Latest science: TSP V3 bases its requirements for Alliance members on the climate modelling published in the Intergovernmental Panel for Climate Change (IPCC)’s latest Assessment Report (AR6), released in April 2022. Based on IPCC’s no and low overshoot 1.5°C scenarios (c1 category), the Alliance identified a global average absolute emissions reduction requirement in the range of -22% to -32% by 2025 (SR1.5) and -40% to -60% by 2030 (AR6). The outgoing range for target year 2025 was developed in 2020 and is therefore still based on IPCC’s Special Report 1.5°C, which was released in 2018.
  • Expansion of methodological coverage: In addition to asset classes covered in previous editions of the Protocol, TSP3 introduces overarching principles for target setting in private assets, a reporting framework for sovereign debt accounting in line with latest guidance by the Partnership for Carbon Accounting and Financials (PCAF); and carbon accounting and target setting for direct commercial real estate mortgage loans. With increased portfolio coverage, a larger share of members’ assets under management is encompassed by concrete decarbonisation targets.
  • Added granularity: TSP V3 includes updated language to clarify engagement target setting and elaborates on recommended metrics for setting sector targets.
Net Zero GHG emissions by 2050 is more ambitious than the IPCC scenarios which see only CO2 reaching net-zero by 2050. Is the Alliance over-committed?

 IPCC scenarios have CO2 (the dominant gas) reaching net-zero by 2050, and other gases (methane, nitrous oxide, etc.) reaching net-zero by the end of the century in roughly half of the scenarios and after 2100 in the remainder. The Alliance Commitment brings all Greenhouse Gas types (inclusive of CO2, methane, nitrous oxide) to neutrality in 2050. This is slightly more ambitious than the IPCC scenarios; however, the majority of emissions in a financial portfolio will be related to CO2 or methane for the Oil and Gas sector (for which emission reductions pathways are even more ambitious than for CO2). Data remains rarely disaggregated between GHG types and is often reported as CO2 equivalent (CO2e), which is still mostly comprised of just CO2. For these reasons, the Alliance has maintained the ‘letter’ of the commitment and for the current period advocates for rapid decarbonisation across all GHGs inclusive of CO2, methane, nitrous oxide and others towards 2050.

The 2030 decarbonisation range for sub-portfolio targets has contracted to 40-60% CO2e (2019 as baseline) compared to the 49-65% range published in last year’s edition of the TSP. Why is this the case?

The Alliance has, since its inception, derived its decarbonisation ranges using IPCC’s CO2 pathways.[1] In the first two years, the scenarios from the IPCC Special Report on 1.5C (SR1.5) were used. Since the Alliance is guided by the latest climate science, the IPCC’s Sixth Assessment Report (AR6)—published in April 2022—was analysed for TSP V3. AR6 builds on an updated set of scenarios, to obtain an updated emission reduction range for the 2020-2030 period. Compared to previous IPCC assessment reports (e.g. SR1.5), the new AR6 net-zero scenarios with no or limited overshoot see less reductions as feasible in the 2020s. The IPCC’s interquartile range and thus the Alliance’s decarbonisation range for sub-portfolio targets mirrors this.

Why does the alliance not require members to include Scope 3 emissions in their target setting?

Corporate data on Scope 3 emissions remains somewhat unreliable, with several data providers estimating Scope 3 emissions with a wide range of outcomes. Therefore, the Alliance members are strongly recommended to track Scope 3 emissions but are not yet expected to set targets until interpretation of these emissions in a portfolio context becomes clearer and data becomes more reliable. To ensure that members have better and comparable Scope 3 data for the next target setting period, the Alliance will work to clarify the definition of Scope 3 emissions and provide open-source data for the largest oil and gas companies in the coming years. See page 16 of Protocol for detailed language.

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

Does the protocol require members to track all greenhouse gases (GHGs)?

Alliance members should report on a carbon dioxide equivalent (CO2e) basis. Wherever disaggregation is available for non-CO2 GHGs, Alliance members should report on a disaggregated basis.

When will Alliance members cover sovereign debt as part of their sub-portfolio target-setting?

Sovereign debt is a significant asset class for many asset owners and should, therefore, be considered in investment portfolio climate targets. However, investing in sovereign debt is different from investing in corporations or real estate through debt or equity. For example, there are often regulatory requirements to investing in local sovereign debt.

The Alliance has joined forces with partners in two projects to develop the accounting and target-setting standards: PCAF for carbon footprint accounting and ASCOR for assessment methodology. Once finalised, the ASCOR project will provide a tool that gives investors a common understanding of sovereign exposure to climate risk and of how governments plan to transition to a low-carbon economy. The next stages in the ASCOR project include:

  • Complete development stage of indicators and metrics by Q4 2022.
  • Pilot indicators and metrics on 20 countries and engagement with key stakeholders and issuers to ensure the framework’s usability. Results of assessment expected by Q1 2023.
  • Once launched, the ASCOR tool will publish its analysis as well as the underlying data and indicators, which will enable investors to make regular assessments of all sovereign issuers.
Are members taking account of and using carbon removal to achieve their targets?

The Alliance’s approach to carbon removal is based on two principles:

  • the prioritisation of deep and rapid decarbonisation across all sectors, particularly the carbon-intensive industries, and
  • tracking progress against net-zero goals and ensuring accountability such that the employment of carbon removals does not deter or detract from decarbonisation efforts and/or ambition on a wider scale.

Therefore, Alliance members shall not use carbon removals for their own sub-portfolio or sector target achievement at this time or at any time before 2030 (when the current Protocol comes to term). Alliance members shall encourage investee companies to prioritise abatement. Nevertheless, members are highly encouraged to contribute to a liquid and well-regulated carbon removal certificate market before 2030 as such a market is important for accelerating decarbonisation.

Does the Protocol take account of social inequalities in its decarbonisation framework?

A transition which would put livelihoods and living standards at risk is unlikely to succeed: as such, a just transition is an important aspect of achieving global net-zero GHG emissions. The Alliance Commitment and Protocol prescribe that all Alliance members shall steer their portfolios to align with science-based transition pathways to a net-zero economy, with due consideration for societal impacts. As part of the Alliance’s work on financing the transition, special attention is given to closing the financing gap in emerging markets, for which both public and private investment are needed.

What does the Protocol say about fossil fuel financing?

The Protocol addresses fossil fuels through two types of targets: sub-portfolio targets applied to the infrastructure asset class and sector targets.

Sub-portfolio targets, particularly Infrastructure: Members shall not provide new finance to infrastructure assets whose purpose or emissions cannot be aligned with the Alliance’s net-zero ambitions which are guided by 1.5C no/low overshoot science-based net-zero scenarios. This recommendation holds especially for investments in coal, oil and gas:

  • For coal, Alliance members shall follow the Alliance’s position paper regarding thermal coal.
  • For oil and gas, members shall not finance assets which are not aligned with science-based or government-issued regional/national 1.5°C pathways. Members shall especially not finance upstream greenfield oil projects beyond those already committed by the end of 2021. Further guidance or modifications on oil and gas will be given in a forthcoming position paper.

Sector targets in the utilities and energy sectors should reflect the scientific consensus[2] to withdraw financing from new coal related assets and new Oil and Gas fields and respectively refrain from investing in, or providing finance to, assets that support the expansion of coal, oil, or gas production and to scale down production as indicated in the scenarios.

The Alliance has also developed a position paper on Thermal Coal and is pursuing a position paper on Oil and Gas.

Is limiting temperature rise to 1.5°C still achievable?

It should be noted that 1.5°C refers to warming in the year 2100 compared to pre-industrial times. The IPCC reports evaluate different potential pathways (scenarios) how this could be achieved. Very few of these scenarios never overshoot 1.5°C during the 21st century; most of them overshoot to a limited or greater extent. The Alliance’s ambition is to limit warming to 1.5°C by 2100 along pathways with no or limited overshoot.

Since the world has already warmed to more than 1.2°C, leading climate scientists are deeply concerned that an overshoot (lasting at least several decades) is increasingly likely and would commence in the next 20 years. Jim Skea, IPCC WG III co-chair, has described this as “almost inevitable” and 500 academics have signed a public letter in support of this.

This new reality should be a spur for more rather than less urgency. Preventing every tenth of a degree of additional warming would prevent more catastrophic impacts of climate change and save lives. That is why the Alliance’s Commitment remains unchanged; members will set and deliver on intermediate decarbonisation targets, aligned with the IPCC’s 1.5°C pathways with no or limited overshoot.

Note on terminology

Throughout the Protocol, the Alliance uses the following terminology to define requirements for members:

  • Shall means that a process is binding for the purpose of the Alliance but remains subject to the unilateral decision of the member concerned. If the member concerned does not follow the guidance, an explanation to the Alliance is required;
  • Should means that a process is strongly recommended.

[1] IPCC uses ranges of both 95/5th and 75/25th percentiles throughout its reports.

[2] As derived from the IPCC’s 1.5°C scenarios with no or limited overshoot, International Energy Agency’s Net-zero Emissions by 2050 Scenario, and the One Earth Climate Model.