25 January 2022
The UN-Convened Net-Zero Asset Owner Alliance releases the second edition of its Target Setting Protocol, which guides its 69 asset owner members in setting further ambitious climate targets that align with the very latest IPCC pathways to keep global warming below 1.5°C. The growth in scope of the Protocol and its alignment is bolstered for the first time by a list of key climate-related considerations that members can ask of asset managers and companies.
The focus of the Protocol is set around portfolio emissions, also known as Scope 3 emissions (or ‘financed emissions’), which typically represent the vast majority of an asset owner’s emissions (95-97%) in their respective portfolios.
Significantly, the recommended decarbonization range for absolute emissions reductions for the period 2020 to 2025 should range between 22% to 32% (as outlined in the criteria in the Annex). To date, 30 members have already set 2025 targets.
Overall absolute emissions reductions for the period 2020 to 2030 should range between 49% to 65% or beyond, following the same approach. This extends the ambition of the inaugural Protocol (published January 2021), reflecting the speed at which all parts of the economy need to decarbonize.
The Protocol also provides comprehensive guidelines that draw on strategies such as engagement and investment opportunities to support the real-world transition and benchmark progress.
Guenther Thallinger, Board Member Allianz SE & Chair UN-convened Net-Zero Asset Owner Alliance said:
“This advanced guidance will help investors already committed to net-zero to take the urgent shorter-term action that climate science demands.
“Where the first edition of this Protocol focused on 2020 to 2025, today’s ambition towards 2030 stresses the need for powerful, credible and rapid action to achieve a net-zero emissions world. Action is needed now, and every company is challenged to follow the lead of Alliance members and adjust business models, develop plans for the transition to a low-carbon, climate-resilient future, and then implement those plans.
“The Alliance Commitment requires its members to publish interim targets on a five-year cycle. Targets must be ambitious enough to signal an Alliance member’s expectations while considering that the real economy is only just beginning its net-zero transition.”
Expansions and emissions
The Protocol has expanded its scrutiny over assets classes and sub-portfolio targets. Previously, Alliance members needed to set targets across listed equity, publicly traded corporate bonds and real estate assets. It covers a new asset class – infrastructure – both equity and debt. The Alliance recommends that members initially set emissions reduction targets on infrastructure assets in carbon-intensive sectors and where they have more than 20% ownership or a board seat.
The target setting scheme for infrastructure is in line with the carbon accounting framework for project finance laid out by PCAF (Partnership for Carbon Accounting Financials). The addition of infrastructure is clear evidence of the will to advance the Protocol annually by adding additional asset classes.
New expectations on asset managers
The Protocol also calls on asset managers to publicly commit to supporting the transition and moreover, to commit their entire portfolios to 1.5°C degree alignment and net-zero by 2050, preferably through the Net-Zero Asset Managers Initiative.
The Alliance also encourages a variety of systematic engagement approaches, with the Protocol including a list of key climate-related asks of managers such as publishing their approach to integrating climate risk and opportunities (both transition and physical) and explaining how limitations are addressed.
Protocol’s four-part target setting structure
The Protocol considers the complexities of asset ownership and proposes a four-part target setting structure, based on Engagement targets, Sub-portfolio targets, Sector targets, and Financing Transition targets.
Engagement targets track activities and progress with individual corporates and asset managers through the engagement KPI framework. Meanwhile, Sector targets link portfolio-level reductions to sector requirements, and therefore real-world outcomes. They are intensity-based and reflect the specifics of each sector. Alliance members aim to have sector targets in place by 2025 (for 2030 targets) covering at least 70% of total financed emissions.
The inaugural Protocol covered most high-emitting sectors, including Energy, Transport and Steel, but it is significant that the number of the carbon-intensive sectors covered has now doubled in size from 7 to 14. Notably, new areas covered include Agriculture, Chemicals, Water and other carbon-intensive materials production such as Concrete and Aluminium.
Financing Transition targets are also highlighted, in order to enlarge the scale, pace and geographic reach of net-zero compatible technologies. The Protocol calls for public finance institutions like DFIs, policymakers and other stakeholders to work on blended finance, de-risking mechanisms and enlarging the supply side of climate solutions.