What is the purpose of publishing this position paper?

Net-Zero Asset Owner Alliance (‘Alliance’) members are ambitious climate leaders in the finance industry and have committed to aligning their investment portfolios with science-based 1.5°C pathways with no or limited overshoot. This is done to support actors in the real economy to take ambitious climate action that reduces real world emissions, in line with members’ fiduciary duty to manage systemic risks on behalf of their clients and beneficiaries.

The Alliance recognises that no single stakeholder can solve climate change alone. Positions are a way to make our long-term interests clearly and transparently known to our direct and indirect stakeholders, while also shaping societal discourse towards covering all relevant stakeholders. We have already outlined our position for the world’s most GHG polluting fossil fuel: thermal coal, and now this position completes the next two most polluting fossil fuels: oil and gas. Together the combustion of these three fossil fuels generates the majority of the world’s GHG emissions.

This position focuses on how Alliance members see their long-term fiduciary interests towards the oil and gas value chain and offers clear guidance on what investors should do to enable a credible and just transition to net-zero emissions by 2050. In addition, this position looks at the complete oil and gas ecosystem, beyond investors, and sets out expectations for two other key stakeholder groups: companies and policymakers. As such, the Alliance’s goal with this position is to provide a landscape of essential actions that must be mobilised across different stakeholders, while setting clear requirements for its own members.

Why does the Alliance need a specific position on the oil and gas sector, given references to oil and gas investments in the Target Setting Protocols?

Given the outsized impact that production activities and the use of oil and gas has on global emissions, it is important that the Alliance provides a comprehensive position. This position not only provides transparent guidance for actions that members can take with respect to investment decision-making and stewardship, but also outlines the expectations that the Alliance has for asset managers, companies and policymakers. This includes focusing the conversation on the equally important oil and gas demand reduction actions, which should not be overlooked by exclusively pursuing supply reduction actions from oil and gas companies. A focus on supply, on its own, could cause economic disruption and may jeopardise the action needed to protect members’ portfolios and business interests from the risks of climate change.

Given supply disruptions due to current geopolitical disruption, isn’t affordable oil and gas what the industry and consumers need?

There is no doubt that the global economy is currently dependent on oil and gas as fuels and feedstocks for a variety of critical sectors. However, the most sustainable way to protect against a volatile commodity market is to diversify away from fossil fuel-based energy. Although the immediate need is to maintain reliable and affordable energy, we must rapidly move away from finite, non-renewable resources like oil and gas. Furthermore, the combustion of fossil fuels significantly contributes to the climate crisis, which in turn threatens sustainable economic and societal development. The Alliance’s answer is to support a just transition to a decarbonised economy, in line with maximum temperature rise of 1.5°C.

Why are you focusing on both supply and demand?

As noted, the Alliance’s position reflects the delicate balance between the supply of fossil fuels, on the one hand, and society’s demand for affordable and reliable energy, on the other. We know that even relatively small changes in either total global supply or demand, without a quick rebalancing on the other side, means serious economic consequences for many stakeholders. This is also backed by climate science—virtually all credible science-based 1.5°C frameworks underscore the importance of a rapid reduction in both the supply of and demand for oil and gas. This can be achieved by, among other things, rapid deployment and investment in zero- or low-carbon alternatives. Importantly, the Alliance also asserts that it is crucial to equitably allocate the costs of decarbonisation and urges governments to accompany their use of demand-side levers (e.g., carbon pricing) with policies that help those most impacted by changes to the price and availability of energy.

On the investment side, what other expectations for members does the position introduce?

Through the position, the Alliance sets the expectation that members develop their individual policies, which reflect their direct and indirect means of influence to drive action on decarbonisation and the energy transition in line with their climate commitments and long-term, fiduciary interests. Specific guidelines listed in the paper focus on direct options for action—aligning science-based portfolio allocation and stewardship decisions with individual climate ambitions—as well as indirect options like supporting policy and regulatory efforts that address climate change.

Although the decisions on individual investments will always remain within members’ sole discretion, the Alliance sets clear guidelines on the types of investment that are incompatible with 1.5ºC-aligned pathways, particularly within private asset investment in new oil and gas infrastructure, where asset owner influence is most direct and the ability to bring the assets back in line with a 1.5°C pathway is limited. Beyond creating requirements for its membership consideration, the position addresses a call to action for all investors to do more to enable the transition from oil and gas dependency.

What is the position on investing in oil and gas infrastructure?

Members must make their own individual decisions as to their targets and investment decisions. But the position set out clear expectations with respect, in particular, to investments in assets whose purpose or emissions cannot be aligned with net-zero ambitions in line with IPCC’s no or limited overshoot scenarios, like the One Earth Climate Model or the International Energy Agency NZE2050The position advises that members should not invest in new upstream infrastructure in new oil or gas fields and that investment in oil midstream infrastructure should be limited to brownfield projects. The position does provide an exception for investments in new midstream gas infrastructure if aligned with 1.5°C no or limited overshoot pathways. As for downstream infrastructure, no investment should be made in oil-fired power generation infrastructure. Investment in refineries and petrochemicals should be limited to brown- field projects (e.g., to promote efficiency or eliminate fugitive methane emissions). No investment should be made in unabated new baseload gas-fired power generation or in infra- structure using gas as a fuel to produce hydrogen in the absence of carbon capture, utilisation and storage (CCUS). No new gas infrastructure unless it is designed with carbon reduction measures sufficient to align with 1.5°C low/no overshoot pathways.

According to the position paper, what expectations should investors set for oil and gas companies?

Expectations for companies primarily focus on actions to reduce demand for and supply of oil and gas.The position states that all oil and gas companies must set absolute and intensity-based emissions targets that cover scope 1, 2 and 3 GHG emissions, in line with science-based, limited or no overshoot 1.5°C-aligned pathways as published by the OECM and the IEA. Companies that drive the consumption of oil and gas must also commit to these science-based emissions reduction targets.

How does the position frame investor engagement with policymakers?

The Alliance strongly believes that to enable a large-scale transition away from the finite and non-renewable resources of oil and gas, governments must implement ambitious policy frameworks that provide the certainty, feasibility, and stability for businesses to make capital investment decisions that are aligned with a 1.5°C transition. Nothing short of systemic interventions will suffice. Therefore, policymakers must provide economic incentivisation by investing in zero-emission infrastructure and technologies while helping fund their research and development. Further, policy makers need to support demand reduction mechanisms like carbon pricing schemes that allow efficient markets to operate by pricing externalities appropriately. The Alliance also calls on policymakers to mandate corporate climate reporting and significantly expand their use of public/private investment partnerships (e.g. ‘blended finance’).

Is this the Alliance’s final position on oil and gas—one that members will rely on to meet net-zero emissions by 2050?

This position is expected to provide members with a strong starting point to develop and implement their individual policies for the oil and gas sector. However, the Alliance will remain responsive to the latest science and real-world developments. As such, the Alliance will consider updating the position in the future in case the position would benefit from incorporating the latest climate findings. For example, this could include the analysis of the global stocktake of the Paris Agreement due later this year, or a shift in societal real-world decarbonisation trajectory.

What happens if an Alliance member invests in oil and gas assets in a way that is contrary to the position?

The Position on Oil and Gas Sector—like all other Alliance positions incorporating requirements for members—will inform Alliance members annual reporting requirements. This means that 12 months after the passing of the position all members will be expected to have a corresponding individual policy. It remains a member’s individual decision on whether or not to follow the recommendations and expectations in the position, but if a member cannot meet these recommendations and expectations, they will be expected to explain why that is the case. This is true for both the specific elements of the position, but also for the publishing of an individual members own policy. The further evaluation of compliance and member engagement will take place according to the Alliance accountability mechanism, including the possibility of delisting in case of severe misalignment.

However, as a voluntary initiative he Alliance is not in a position to undertake alignment analysis for each individual investment of a member.

Why did your advisory members, GO and WWF, not support the paper with their logos?

The Alliance is uniquely set up to consider inputs from investors and civil society representatives. However, in the end, the Alliance is asset owner-driven, and asset owners must decide what is within their fiduciary duty and the long-term interests of their businesses, investments and clients. Although the Alliance worked rigorously with our advisory members, and the process functioned well and amicably, we could not reconcile all of the viewpoints they felt needed to be addressed in this position.

The difference between the Alliance asset owner-driven positions and the positions of the civil society advisers is analogous with the core disconnect that we are observing in real-world ambitions of meeting net zero, with the practical reality that the world is not yet moving fast enough.

How do you square the obligations set for NZAOA members by this paper with fiduciary duties and anti-trust law?

It is a foundational principle of the Alliance that asset owners must represent their fiduciary duty themselves. The Alliance has clearly signalled that its members believe climate change is existential risk to our business and financial risk to our portfolios. AOA members therefore act on climate change, which is driven largely by the combustion of fossil fuels, as fiduciaries to their clients and in the long-term interest of their businesses.

The Alliance has taken advice regarding the governance and actions of the AOA and its proposed publications. It is a foundational principle of the Alliance that Members make independent and individual decisions with regard to setting their targets and their individual investments, and Members do not, and cannot, agree investment strategies among themselves.

What economic or financial justification would there be for an NZAOA member to decide to stop investing in well run and profitable companies?

The position paper does not advise this, nor does it state positions on what specific companies’ members should or should not invest in. As noted above, it is a foundational principle of the Alliance that Members take their own investment decisions. The position does not direct members on specific allocation decisions toward companies in any given sector.

The paper does highlight several areas of investment that are likely to be incompatible with the Alliance members’ commitment to net-zero, 1.5°C portfolios. Net-zero portfolio alignment is the core commitment behind joining the Alliance.
Investment decisions are for individual members to make. Alliance positions operate under a “comply or explain” model.

By suggesting companies reduce oil and gas consumption you are threatening the security of energy supply, will destroy jobs and put pressure on household budgets. Why should any company follow that guidance?

The best available, widely accepted climate science makes it clear that the consumption of oil and gas is a primary contributor to climate change. As such, the prolonged use of oil and gas threatens the goals of the Paris Agreement and adds to the existential risks of climate change described above. All the science-based pathways highlighted in the position paper describe significant reductions in oil and gas consumption over time.

Furthermore, the position identifies and seeks to respond to many of the social and geopolitical challenges associated with a transition away from oil and gas dependency. In fact, the paper specifically identifies this important tension:

“… reducing supply of oil and gas too rapidly—i.e. without taking steps that significantly reduce demand, such as the rapid deployment of renewables—would result in severe economic disruption…”

The expectations outlined in the paper point to potential solutions to these challenges. This includes numerous ways that companies, policymakers and investors can support energy security and energy price stability through oil and gas demand reduction mechanisms.

From a company perspective specifically, the marketplace is already showing uncountable numbers of examples of businesses reducing their energy consumption or switching to alternate sources of energy as both prudent business practice and as a strategic positioning decision. Reducing demand by improving efficiencies and/or switching to alternatives is a prudent procurement strategy (energy security) and emission reduction mechanism (reducing transition risk).

What right do foreign investors have to tell US companies how they should engage with the democratic?

All investors have the right to represent their shareholder interests in the companies they invest in.

Further, the position does not tell companies how they should conduct specific lobbying activities. Rather, the position states companies making material public statements like ”We support the Paris agreement” (which reasonably constitutes material information for investment and allocations decisions, particularly for climate-concerned asset owners such as AOA members), should ensure all company actions and strategies, including lobbying, align with those statements.

It is reasonable and prudent for investors to expect that the actions of companies in which they invest are actually aligned with their statements and commitments. The position ONLY calls for lobbying alignment with stated commitments and oversight of company’s actions by their management (see “Align corporate lobbying with climate goals” in Section 2.1, Expectations of oil and gas companies and carbon-intensive sectors).

By calling for no new licenses to be issued for oil and gas projects you are going well beyond the remit of an investor organization – who are the NZAOA to interfere in those sorts of political decisions?

The position does not explicitly call for governments to stop issuing licenses for new oil and gas projects. Crucially, this suggestion is listed among several potential actions that governments can take to reduce value-chain emissions from oil and gas (see “Limits on value-chain emissions from oil and gas” in Section 2.2, Expectations of policymakers and regulators).

It is well within the remit of investors to be concerned with the regulatory environment in which they and their portfolio companies operate. This is supported from a legal and fiduciary perspective, evidenced by the findings of Freshfields’ 2021 “A Legal Framework for Impact” paper, as well as significant precedent of investor-led policy engagement. Indeed, the entirety of Section 2.2. is based on this premise. The position paper makes statements based on science and in line with members’ clear business case for climate action.

Do the requirements of this paper breach any State laws relating to ESG commitments? If they do, will you require investors to stop being members of the NZAOA if they want to continue to do business in those States?

U.S. state-level laws do not determine asset owners’ long-term interests, the full scope of the business environment they operate in, or how they should interpret and act on their long-term interests. It is an asset owner’s fiduciary duty to determine how to best act on these interests and effectively manage risks and opportunities.
Members must make their own policies and decisions. As stated throughout this document, Alliance positions operate under a “comply or explain” model.

About the UN-convened Net-Zero Asset Owner Alliance

The Net-Zero Asset Owner Alliance is a member-led initiative of 86 institutional investors (as of August 2023), with over US$11 trillion in assets under management, committed to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050. The Alliance members were the first in financial industry to set intermediate targets (aligned with the Paris Agreement schedule) and they report on their progress annually. The Alliance is convened by UNEP FI and PRI and is supported by WWF and Global Optimism.